The 2008 credit market collapse and ensuing foreclosure crisis are fading to the dark recesses of our memories. Likewise, claims against banks that arose years ago as the housing market cleared are also resolving. One enduring defense, however, is the Financial Institutions Reform, Recovery and Enforcement Act of 1989 or “FIRREA.” Under FIRREA, “no court shall have jurisdiction over . . . any claim relating to any act or omission of a bank” under control of the FDIC. This is an affirmative defense in litigation that Congress created in response to the savings and loan crisis of the 1980s. It enables the Federal Deposit Insurance Corporation (FDIC) to wind up the affairs of failed financial institutions. Specifically, FIRREA allows successor banks to avoid liability for the wrongful acts of lending institutions they buy out of receivership.
Here’s how the FIRREA defense works. The defense arises when a bank is sued over the assets, such as a loan, of a bank that it acquired out of receivership from the FDIC. Receivership is akin to bankruptcy in that it provides an orderly process to honor the debts and obligations of a failed bank while minimizing the impact on the bank’s stakeholders (i.e., creditors, customers, and employees). This process helps prevent runs on banks and public panic when a lender cannot meet its obligations. Typically, when a bank or other insured lending institution fails, the FDIC steps in to operate the bank and insure its deposit. In that case, the FDIC also is entitled to receive loan payments made to failed lenders by its customers. The FDIC however does not operate failed banks permanently; it seeks to sell the loans and deposits to other solvent banks. Those banks “stand in the shoes” of the FDIC and receive protections under FIRREA against future claims by the failed lender’s customers.
FIRREA sets out a mandatory administrative process that customers must follow to assert claims against failed banks and the entities that purchase their assets from the FDIC. This administrative process allows the FDIC to quickly resolve such claims without unduly burdening the courts. See 12 U.S.C. §§ 1821(d)(3)-(13). Examples of claims include promises of loan modifications made by the failed lender that were not completed prior to receivership; claims for partially disbursed loan proceeds; and, false or mistaken credit reports to the bureaus. Therefore, under FIRREA if a borrower’s claim arises out of the acts of a lender in or that was in FDIC receivership, the borrower/claimant must first exhaust the FIRREA procedure. Borrowers that sue in court without first allowing FDIC review, should quickly meet a motion to dismiss. As recent cases show, the act remains quite relevant today.
A leading case on FIRREA is Rundgren v. Washington Mutual Bank, FA, 760 F.3d 1056 (9th Cir. 2014). In Rundgren, the Ninth Circuit affirmed dismissal against JPMorgan Chase Bank, and held that “a claimant cannot circumvent the exhaustion requirement by suing the purchasing bank based on the conduct of the failed institution.” In that case, the Rundgrens attempted to refinance a loan with Washington Mutual (WaMu) on their home in Hawaii. When their refinancing failed and they faced foreclosure, they sued WaMu and alleged that WaMu falsified their loan application, highly exaggerated their income and assets without their knowledge, misled them as to the terms of the note, secured a false appraisal, and rushed them through the signing process, among other things. But WaMu had been acquired by Chase after the Office of Thrift Supervision seized its assets and placed WaMu into the receivership with the FDIC. The court held there was no jurisdiction to sue Chase because the Rundgrens had not exhausted the FDIC claims process against WaMu. As such, the Ninth Circuit affirmed the dismissal, and Chase was free to foreclose.
Other circuits, including the Seventh Circuit and the District of Columbia Circuit, have similarly held that the application of the FIRREA administrative exhaustion requirement is based on the entity responsible for the wrongdoing, not the entity named as the defendant. Westberg v. FDIC, 741 F.3d 1301, 1306 (D.C. Cir. 2014); Farnik v. FDIC, 707 F.3d 717, 723 (7th Cir. 2013); Vill. of Oakwood v. State Bank & Trust Co., 539 F.3d 373, 386 (6th Cir. 2008); Am. First Fed., Inc. v. Lake Forest Park, Inc., 198 F.3d 1259, 1263 n.3 (11th Cir. 1999); see also Aber-Shukofsky v. JP Morgan Chase & Co., 755 F. Supp. 2d 441, 450 (E.D.N.Y. 2010); Constas v. JP Morgan Chase Bank, N.A., No. 3:11cv0032, 2012 U.S. Dist. LEXIS 85339, at *12-13 (D. Conn. June 20, 2012).
Attempts to avoid FIRREA’s broad administrative review requirements by alleging claims based only upon the successor entity’s wrongful conduct also have failed. See Lazarre v. JPMorgan Chase Bank, N.A., 780 F.Supp. 2d 1320, 1325 (S.D. Fla. 2011). In Lazarre, a consumer sued Chase for Fair Credit Reporting Act (FCRA) violations after Chase acquired WaMu. The consumer alleged that an identity thief had improperly opened a WaMu account in his name. After buying WaMu’s assets from the FDIC, Chase reported the fraudulent activity to a consumer reporting agency and, as a result, others banks closed the consumer’s accounts. The consumer filed a lawsuit against Chase but without first pursuing FIRREA remedies. He alleged that Chase had violated the FCRA by mishandling the fraud claim and reporting to the consumer reporting agency—events that occurred after Chase acquired the account from WaMu. Chase moved to dismiss. The consumer argued that because his claims arose from Chase’s failures and not WaMu’s, FIRREA did not apply. The Lazarre court disagreed and held that Chase’s alleged failures related to WaMu’s initial act—WaMu’s opening of the account. Therefore, the Lazarre court found FIRREA applied and dismissed the claim for lack of subject jurisdiction.
Despite FIRREA’s broad reach, the particular facts of each case are still important to determine the scope of the defense. Courts have held that only claims against depository institutions for which the FDIC has been appointed receiver can be processed by the administrative system set forth in FIRREA and thus subject to the FIRREA defense. In Am. Nat’l Ins. Co. v. FDIC, 642 F.3d 1137, 1143 (DC Cir. 2011), the DC Circuit found that claims that a third-party bank pressured the FDIC to acquire WaMu, a failed bank, were actually claims against the third party—not the FDIC as receiver or the failed bank, and therefore, were not subject to FIRREA’s administrative process. The court stated, “[w]here a claim is functionally, albeit not formally, against a depository institution for which the FDIC is receiver,” it falls under FIRREA.