Tuesday, August 20, 2013

FYI: 1st Cir Holds FIRREA Bars Consumers' Allegations Against Transferee Bank

The U.S. Court of Appeals for the First Circuit recently affirmed a district court's entry of summary judgment in favor of a failed institution's successor in interest, ruling that a borrowers' claims alleging violations of state consumer protection laws by the failed institution were jurisdictionally barred by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), and that a transfer of a mortgage, authorized by federal law, obviates the need for the specific written assignment that state law would otherwise require.


A copy of the opinion is available at:  http://media.ca1.uscourts.gov/pdf.opinions/12-2485P-01A.pdf


A bank extended a variable rate loan to the plaintiff borrowers secured the plaintiffs' residence. The bank was subsequently closed by the Office of Thrift Supervision, and the FDIC was appointed its receiver.  The FDIC sold the originating bank's loans and mortgages, including the plaintiffs' loan, to the defendant. 


Following the defendant's assumption of these loans, the plaintiffs defaulted, and the defendant initiated foreclosure proceedings culminating in the judicial sale of the subject property. 


The plaintiffs filed this action seeking money damages and injunctive relief against the defendant, alleging violations of state consumer protection laws by the originating bank and that the foreclosure was unlawful based upon the improper assignment of the mortgage.  The district court granted defendant's summary judgment motion as to these claims. 


Plaintiffs appealed the ruling, maintaining that the loan violated state consumer protection laws, and that the foreclosure sale was invalid because the defendant did not have a specific written assignment of the mortgage as required by state law.


In first addressing the state consumer protection law claims, the Court determined that summary judgment was appropriate based upon the jurisdictional bar under FIRREA.


As you may recall, FIRREA sets forth a detailed claims-processing regime. See 12 U.S.C. § 1821(d)(3)-(13). This regime affords "a streamlined method for resolving most claims against failed institutions in a prompt, orderly fashion, without lengthy litigation." Marquis v. FDIC, 965 F.2d 1148, 1152 (1st Cir. 1992).  The FDIC, once ensconced as receiver, must publish a notice requiring claims to be filed with it by a specified date. 12 U.S.C. § 1821(d)(3)(B)(i). 


The FDIC has 180 days within which to approve or disallow a filed claim. Id.§ 1821(d)(5)(A)(i). Disappointed claimants may either pursue an administrative review process or seek judicial review in an appropriate federal district court. Id. § 1821(d)(6)(A).


This claims-processing regime is not optional: participation in it is "mandatory for all parties asserting claims against failed institutions." Marquis, 965 F.2d at 1151. The failure to pursue an administrative claim is fatal. See id. at 1152-53.


FIRREA provides:


          "[N]o court shall have jurisdiction over –

(i)       any claim or action for payment from, or any action seeking a determination of rights with respect to, the assets of any depository institution for which the [FDIC] has been appointed receiver, including assets which the [FDIC] may acquire from itself as such receiver; or

(ii)      any claim relating to any act or omission of [the failed] institution or the [FDIC] as receiver. 

Id. § 1821(d)(13)(D). 


Thus, as noted by the Court, FIRREA "strip[s] the federal district courts of subject-matter jurisdiction whenever a plaintiff tries to pursue a covered claim without going through the claims-processing regime." See Acosta-Ramírez v. Banco Popular de P.R., 712 F.3d 14, 19-20 (1st Cir. 2013); Simon v. FDIC, 48 F.3d 53, 56- 57 (1st Cir. 1995).


In the matter before the Court, the FDIC had properly followed all the notice requirements provided by FIRREA, but the plaintiffs failed to file any claim before the deadline.  Rejecting the borrowers' arguments, the Court held that:  (1) "no principled basis for the plaintiffs' implication that the jurisdictional bar exists only during the currency of a receivership;"  (2) FIRREA explicitly bars jurisdiction over "any claim relating to any act or omission" of the failed financial institution, including consumer claims; (3) FIRREA only requires that the FDIC mail notice to known creditors or claimants, which it did here;  and  (4) FIRREA creates a pathway for the holder of an inchoate claim to introduce it into the claims-processing regime, but the borrowers did not invoke this remedy either.


Accordingly, the Court held that because the plaintiffs did not comply with the requirements of the claims-processing regime, the jurisdictional bar erected by section 1821(d)(13)(D) pretermits their consumer protection claims.


The Court then turned to plaintiffs' claim that the foreclosure sale was unlawful because defendant did not possess a written assignment of the mortgage at the time of foreclosure, and therefore allegedly could not validly exercise the power of sale contained in the mortgage. 


The Court held that this claim was also barred under FIRREA.  The Court noted that the plaintiffs' mortgage was assigned to the defendant under FIRREA, which specifically authorizes the FDIC to transfer assets of a failed financial institution "without…assignment."  12 U.S.C. § 1821(d)(2)(G)(i)(II).  The Court determined that requiring additional compliance with state laws requiring a written assignment, as argued by plaintiffs, "would require us to turn the Supremacy Clause upside down," holding that "a transfer of a mortgage, authorized by federal law, obviates the need for the specific written assignment that state law would otherwise require." 


Accordingly, the Court affirmed the lower court's judgment in favor of the defendant. 




Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
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Chicago, Illinois 60602
Direct: (312) 551-9320
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Email: RWutscher@mwbllp.com


Admitted to practice law in Illinois


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