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 to claims in a financial crisis however, as the latest spike in foreclosures taught us, is the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) of 1989. Under FIRREA, “no court shall have jurisdiction over…any claim relating to any act or omission of a bank” under control of the FDIC. See 12 U.S.C. § 1821(d)(13)(D). This is an affirmative defense in litigation that Congress created in response to the savings and loan crisis of the 1980s that allows successor banks to avoid liability for the wrongful acts of lending institutions they buy out of FDIC receivership. As recent cases show, FIRREA remains relevant today.
FIRREA sets out a mandatory administrative process for claims against failed banks and the entity that purchases its assets from the Federal Deposit Insurance Corporation (FDIC). This administrative process allows the FDIC to quickly resolve many claims against a failed financial institution without unduly burdening the courts. See 12 U.S.C. §§ 1821(d)(3)-(13). Therefore, under FIRREA if a borrower’s claim arises out of the acts of a lender in FDIC receivership, the borrower/claimant must first exhaust the FIRREA procedure. Borrowers that sue in court without first exhausting FDIC review should quickly meet a motion to dismiss.
A leading case on FIRREA is Rundgren v. Washington Mutual Bank, FA, 760 F.3d 1056 (9th Cir. 2014), in which the Ninth Circuit affirmed dismissal and held that “a claimant cannot circumvent the exhaustion requirement by suing the purchasing bank based on the conduct of the failed institution.” Id. at 1064. 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); 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 have also failed. See Lazarre v. JPMorgan Chase Bank, N.A., 780 F.Supp. 2d 1320, 1325 (S.D. Fla. 2011). In Lazarre, a consumer sued JPMorgan Chase Bank, N.A. (Chase) for Fair Credit Reporting Act (FCRA) violations after Chase acquired Washington Mutual (WaMu). The consumer alleged that an identity thief had improperly opened a WaMu account in his name. Id. at 1322. After buying WaMu’s assets from the FDIC, Chase reported the fraudulent activity to a consumer reporting agency and, as a result, other banks closed the consumer’s accounts. Id. 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. Id. at 1323. Chase moved to dismiss. The consumer argued that because his claims arose from Chase’s failures and not WaMu’s, FIRREA did not apply. Id. at 1325-26. The Lazarre court held however that Chase’s alleged failures related to WaMu’s initial act — WaMu’s opening of the account — thus FIRREA applied and the claim must be dismissed for lack of subject jurisdiction. Id. at 1326–27.
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 (D.C. Cir. 2011), for example, WaMu bondholders alleged that Chase pressured the federal government to seize WaMu and sell its most valuable assets at a drastically undervalued price. The American National court ruled that FIRREA did not apply, because the plaintiffs alleged Chase’s misconduct gave rise to the claim — conduct that was unrelated to its acquisition of WaMu’s assets.
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