Contributed by Kyle J. Ortiz
In Levin v. Miller, a recent decision out of the Seventh Circuit, Judge Easterbrook clarified the types of claims that the Federal Deposit Insurance Corporation may assert under section 1821(d)(2)(A)(i) of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 after it takes over a failed bank. Section 1821(d)(2)(A)(i) grants the FDIC “all rights, titles, powers, and privileges of the insured depository institution, and of any stockholder, member, accountholder, depositor, officer, or director of such institution with respect to the institution and the assets of the institution” (emphasis added). Judge Easterbrook, consistent with the FDIC’s own interpretation, held that section 1821(d)(2)(A)(i) applies only to derivative stockholder claims. The most interesting part of the decision, however, was Judge Hamilton’s concurrence. In his concurrence, Judge Hamilton strongly advocated – on public policy grounds – for a broader interpretation of section 1821(d)(2)(A)(i) that encompasses direct claims by stockholders against a failed bank in addition to derivative claims.
In Levin v. Miller, the trustee of a bank holding company, which filed for bankruptcy following the FDIC’s takeover of its two subsidiary banks, brought an action alleging several claims against certain directors and officers of the holding company. These directors and officers also were directors and officers at the banks. The FDIC intervened and asserted that most of the trustee’s claims belonged to the FDIC under section 1821(d)(2)(A)(i) and any assets collected by the trustee from the directors and officers would no longer be available to satisfy any claims the FDIC may have against the directors and officers. Certain of the trustee’s claims alleged that the directors and officers breached their fiduciary duties to the holding company by not implementing sufficient financial controls that would have protected the holding company from errors the directors and officers made in their roles at the banks. Another claim alleged that the directors and officers allowed the holding company to pay dividends that left the holding company undercapitalized when the financial crisis struck in 2008. The final claim asserted that the directors and officers breached their duties of care and loyalty by giving in to pressure by the FDIC to have the holding company infuse new capital into the banks, prior to the FDIC’s takeover of the banks, when the directors and officers should have known doing so was “throwing good money after bad.”
Judge Easterbrook’s Opinion
Judge Easterbrook held that the claims asserting breaches of fiduciary duties were derivative claims because they related to actions taken by the directors and officers in their roles at the banks which caused the value of the holding company’s shares in the banks to dramatically decline. The claims asserting undercapitalization and a breach of the duties of care and loyalty, on the other hand, related to acts that allegedly injured the holding company in its own right as opposed to injuring it through causing a decline in the value of its shares in the banks. Thus, these claims were more properly classified as direct claims against the officers and directors.
Judge Easterbrook, in determining which of the various claims brought by the trustee more properly belonged to the FDIC, asked the parties at oral arguments whether section 1821(d)(2)(A)(i) should be “understood not simply to allocate claims between the FDIC and other entities, but to transfer to the FDIC all claims held by any stockholder of a failed bank – even claims that . . . do not depend on an injury to the failed bank.” None of the parties advocated for such an interpretation, and thus, noting that section 1821(d)(2)(A)(i) transfers only those stockholder claims “with respect to . . . the assets of the institution” to the FDIC, Judge Easterbrook held that section 1821(d)(2)(A)(i) should be understood to transfer to the FDIC only those stockholder claims that investors would, but for 1821(d)(2)(A)(i), “pursue derivatively on behalf of the failed bank.” Judge Easterbrook also noted that no federal court has read the statute to include all claims held by stockholders of a failed bank and that the FDIC’s own reading of the statute is that section 1821(d)(2)(A)(i) applies only to derivative claims. Judge Easterbrook also postulated that transferring direct claims to the FDIC might raise questions as to “whether [the holding company] and similarly situated stockholders would be entitled to compensation for a taking” under the Takings Clause of the Fifth Amendment. However, because Judge Easterbrook held that section 1821(d)(2)(A)(i) applied only to derivative claims, he did not have to grapple with that question. As the concurrence made evident, however, if Judge Hamilton ever gets his way, judges may have to tackle that question in the future.
Judge Hamilton’s Concurrence
In his impassioned concurrence / lobbying effort, Judge Hamilton (although agreeing with Judge Easterbrook’s decision based on current law and the FDIC’s interpretation of the statute) strongly advocated – on public policy grounds – for section 1821(d)(2)(A)(i) to be interpreted more broadly to include not just derivative claims of stockholders, but also direct claims. Judge Hamilton was disturbed that holding companies like the holding company could use “the direct/derivative dichotomy . . . in ways that could allow those who ran the banks into the ground to take for themselves some of the modest sums available (particularly with regard to director and officer liability insurance proceeds) to reimburse the FDIC for a portion of the socialized losses they inflicted.” Judge Hamilton stated that to the extent such a “result is not contrary to federal law, it should be.”
Judge Hamilton went on to note that there are several ways to achieve a “more just result.” One possible solution would be for the FDIC to modify its interpretation of the ambiguous language of section 1821(d)(2)(A)(i) to encompass direct claims. Judge Hamilton believes the FDIC has room to modify its interpretation because “the statutory language is not precise and could be interpreted, for sound policy reasons, more broadly.” For instance, Judge Hamilton noted that section 1821(d)(2)(A)(i) would grant the FDIC derivative stockholder claims even if it did not include any reference to stockholders because such claims are encompassed in the FDIC’s right to step into the shoes of a failed depository institution. Thus, the inclusion of stockholder could be construed as granting something broader than derivative claims because those are already captured in the statute by virtue of the FDIC assuming all rights and privileges of a failed depository institution. Judge Hamilton conceded that a reinterpretation by the FDIC would require courts to uphold the broader interpretation and that the broader interpretation, as Judge Easterbrook noted in the opinion, might raise Fifth Amendment takings concerns. Thus, Judge Hamilton stated that an “even better” solution would be for Congress to amend the statute to clarify that it applies to direct stockholder claims. Judge Hamilton stated that such a statutory fix “would surely withstand any challenges by parties like [the holding company] under the Takings Clause of the Fifth Amendment.”
Under the current statute, and the FDIC’s interpretation of the same, the FDIC’s powers under section 1821(d)(2)(A)(i) are limited to derivative stockholder claims, but as Judge Hamilton points out, the statute doesn’t necessarily require such limiting. It will be interesting to see if Judge Hamilton’s statements will open the door to a broader interpretation of the statute by the FDIC in the future.
More from the Bankruptcy Blog
Copyright © 2020 Weil, Gotshal & Manges LLP, All Rights Reserved. The contents of this website may contain attorney advertising under the laws of various states. Prior results do not guarantee a similar outcome. Weil, Gotshal & Manges LLP is headquartered in New York and has office locations in Beijing, Boston, Dallas, Frankfurt, Hong Kong, Houston, London, Miami, Munich, New York, Paris, Princeton, Shanghai, Silicon Valley, and Washington, D.C.