Pitfalls for landlords in dealing with the FDIC. The recent occurrence of bank failures have left landlords unsettled. What happens when the Federal Deposit Insurance Corporation ("FDIC") becomes receiver of such failed institution? While there are some parallels to the bankruptcy process, the receivership of a failed financial institution is different in a number of respects. The FDIC's role in a receivership is to value and market a failed financial institution, close it and pay insured depositors and, if possible, provide for succession of the financial institution. Many times the FDIC arranges for a healthy bank to acquire all or a portion of the failed financial institution's assets and liabilities which generally include all of the insured deposits of the failed institution. The FDIC then liquidates any remaining assets and distributes the proceeds first to the cost of the administration of the receivership, then to the FDIC or reimbursement of any insurance claims paid and, to the extent there are any remaining proceeds, then to the creditors with admissible claims.
These concepts are similar to bankruptcy, however, the Federal Deposit Insurance Act (the "Act") grants the FDIC substantially broader powers than those of the bankruptcy trustee. Some of the substantial differences include:
Proceedings. FDIC receivership is not a court proceeding, unlike a bankruptcy. The FDIC administers and disposes of the failed financial institution's assets without notice to creditors and without any hearing. A court's review of the FDIC's action is available in only limited circumstances.
Stay of proceedings. Judicial actions and proceedings against a failed financial institution are not automatic, unlike bankruptcy. In a receivership, the FDIC must request a stay, and the court handling the proceeding usually grants it for 90 days.
Cancellation of leases and contracts. In a bankruptcy reorganization, the bankruptcy trustee has a limited amount of time to reject or to accept leases and other executory contracts (contract where performance is due to some extent on both sides). In a receivership, the FDIC may repudiate any contract (not just executory contracts) within a "reasonable" period of time. If the FDIC deems the contract burdensome and its rejection would promote orderly administration of the receivership, then the FDIC can reject the contract. Timing for "reasonableness" will vary with the circumstances, but it is generally accepted in published decisions that 90 to 180 days is reasonable. Although the FDIC will be liable as receiver for damages, those damages are limited to direct damages regardless of the provisions of the lease and/or contract. For a rejection of the lease, the landlord may only claim rent due as of the date of the receivership and the rent accruing thereafter until rejection. Conversely, in bankruptcy law the landlord is generally allowed to claim for all past due rent and prospective rent up to the an amount equal to one year.
Priority. A debtor's obligation in bankruptcy under a lease that arises post-petition must be paid current by the bankruptcy trustee and, therefore, payments such as rent have priority over other pre-petition unsecured claims. The FDIC in receivership can prioritize administrative payments, so rental payments due post-receivership and prior to rejection may be an administrative expense. The FDIC usually determines those administration expenses of the receiver that are necessary and appropriate to facilitate the smooth and orderly liquidation.
Claims. In a bankruptcy, the judge applies the statute and rules to the interests of all of the parties including the interests of the bankruptcy estate, the debtor and the creditors. Conversely, the FDIC (which creates and enforces the rules that govern the Act) is not subject to judicial supervision, and, except in limited circumstances, the FDIC's decisions are not reviewable by any court. For processing a claim, there will be a notice of the receivership, a period for filing the claims and a period for FDIC review. If the claim is not proven to the satisfaction of the FDIC, the claim is disallowed. Any claims following the bar date set by the FDIC are similarly disallowed. If any claims are disallowed, it is necessary to seek administrative review within 60 days after the notice of disallowance. This administrative review, however, requires the FDIC's consent. There may be other avenues such as alternative dispute resolution if established by the FDIC or filing suit in United States District Court.
Lease assignees. The FDIC has the authority to transfer any leases of the failed institution without any approval or consent or notice. This differs from the requirements in bankruptcy where an unexpired lease requires "adequate assurance" that the assignee will perform, and all past payment defaults must be cured. In a receivership the FDIC can assign the lease without disclosing the terms of the assignment and the landlord has no notice or opportunity to object to such assignment. In addition, there are no cure requirements for the assignee. The FDIC could assign a lease that is in default to a successor financial institution and the Landlord has no recourse against the FDIC or failed financial institution and is left to pursue its remedies against the new tenant.
Since many of the creditor protections in bankruptcy proceedings do not exist in FDIC receiverships, landlords of banks should pay close attention to the tenant's payment of rent and the status of the financial institution. Relying on receipt of notice from the FDIC or tenant is not advisable. Following the commencement of the FDIC receivership, landlords should immediately seek to clarify whether the FDIC will consider post-receivership rent as an administrative priority. In all cases, the landlord should promptly file its claim to initiate the FDIC review period.
This article is intended for general information purposes only and shall not be construed as legal advice or legal opinions on any specific facts or circumstances.