Bank of Manhattan v. FDIC

The Federal Deposit Insurance Corporation, in its role as a receiver of a closed bank, will face consequences when breaching underlying asset contractual obligations.

In 2007, Professional Business Bank (“PBB”) sold a fifty percent participation interest loan it had made to Al’s Garden Art, Inc. to First Heritage Bank (“Heritage”). Two contractual agreements were made during this transaction. First, Heritage was not allowed to transfer its interest in the loan without written consent from PBB. Second, PBB had a right of refusal in the agreement and it had the option to repurchase the loan from Heritage if there was any “bona fide third-party offer.” One year after the agreement, Heritage closed down and the Federal Deposit Insurance Corporation (“FDIC”) acted as the receiver for all of Heritage’s assets. Six months after the seizure, the FDIC sold Heritage’s interests in Al’s Garden Art, Inc. without first seeking approval from PBB. On appeal, the Ninth Circuit reviewed whether the FDIC, “in its role of receiver of a closed bank, may breach underlying asset contractual obligations without consequence.” FDIC argued that the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”) “frees the agency from complying with any pre-receivership contractual provisions related to the transfer of a failed bank’s assets.” The panel found that even though the FIRREA grants more power to the FDIC than it would to other banks, it does not authorize the FDIC to have the ability to breach contracts without consequence. The panel determined that when the FDIC breaks a contract, it places them in a better position, giving them more power than any other financial institution. Therefore, the panel determined that the district court did not err in rejecting the FDIC’s claim. AFFIRMED.