By: Scott J. Kennelly and Jacy C. Owens
When an institution acquires a failed bank from the FDIC as Receiver and then faces litigation arising from the failed bank’s loans, FDIC “special powers” can often be asserted by the institution, as assignee of the FDIC as Receiver , to bar certain claims or defenses brought by the borrowers. In November 2012, the United States Court of Appeals for the Eleventh Circuit decided a case that added another possible weapon to the arsenal of acquiring institutions.
In Iberiabank v. Beneva 41-I, LLC , Iberiabank sought to avoid a termination provision in a sublease with Beneva that it acquired from the FDIC as Receiver for Orion Bank. The provision allowed Beneva to terminate the lease if “(i) Orion is sold and/or transferred to another banking institution, or (ii) Orion sells and/or transfers all or substantially all of its assets.” When IBERIABANK acquired the assets of Orion, Beneva informed Iberiabank that it was exercising its right to terminate the lease.
The acquiring institution (Iberiabank) brought a declaratory action in the United States District Court for the Middle District of Florida to prevent the termination, arguing that under 12 U.S.C. § 1821(e)(13)(A), the termination clause was unenforceable. Section 1821(e)(13)(A) provides that the FDIC may enforce the contracts of the failed institution “notwithstanding any provision of the contract providing for termination, default, acceleration, or exercise of the rights upon, or solely by reason of, insolvency or the appointment of or the exercise of rights or powers by a conservator or receiver.”
The trial court found in favor of Iberiabank, on the basis that Iberiabank, as the FDIC’s successor, could enforce the sublease under Section 1821(e)(13)(A). Although the Eleventh Circuit affirmed, it did not agree that Iberiabank itself had the authority to enforce the contract; rather, it found that the FDIC as Receiver enforced the lease when it transferred Orion Bank’s assets to Iberiabank. Therefore, the clause could not be used to terminate Iberiabank’s lease because it was the FDIC’s assignee.
The Eleventh Circuit court held that to find otherwise would have reduced Orion’s assets, contravening the purposes of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) . The court also rejected Beneva’s argument that the termination clause in question did not qualify as the type of ipso facto clause barred by the statute. The Eleventh Circuit held, as a matter of first impression, that although the termination provision in the sublease did not include the statutory language of Section 1821(e)(13)(A) and the termination clause applied in contexts outside of receivership, it was nonetheless an ipso facto clause falling within the purview of the statute. Any other reading would render the provision “toothless,” as savvy parties could simply draft around the statute.
Ultimately, this decision could give acquiring lenders another argument in litigation arising from contracts executed by the failed bank.