WBK Industry News - Litigation Developments

8th Circuit Upholds FDIC’s Broad Discretionary Powers to Dispose of Failed Bank’s Assets and Defendant’s Guaranty to Pay Debts of Company

The U.S. Court of Appeals for the Eighth Circuit recently affirmed a district court’s determination that the FDIC acted within its authority when it sold and re-assigned the assets of a failed bank, including a company’s outstanding debt that was guaranteed by the defendant.  The Eighth Circuit panel upheld the district court’s order that the defendant pay the debt of the company in accordance with the guaranty.

The defendant in this case signed a general guaranty for a company that he owned in part with his friend and financial advisor.  However, this friend allegedly failed to inform the defendant that the guaranty would obligate him to pay millions of dollars in debt from loans that his friend had obtained on the company’s behalf.  The guaranty listed a bank as the lender and guaranteed all of the company’s present and future debts, including “without limitation, all principal, accrued interest, attorney’s fees and collection costs.”  Subsequently, the company failed and defaulted on its loans and interest payments, as did the bank listed on the guaranty.  The FDIC stepped in to take over the bank’s assets and created an entity, which the FDIC owned jointly with a private investment company.  The FDIC then sold the bank’s assets to this newly-created entity and the entity obtained a consent judgment against the company in state court for $15.7 million plus interest.  The entity later sold the company’s debt to the plaintiff in this case.

The plaintiff subsequently filed suit in federal district court against the defendant, claiming a breach of the guaranty, in order to collect the growing debt of the failed company which approached $22 million.  The district court found the defendant liable for the debt.  On appeal, the defendant argued that the bank’s successor in interest did not have a valid assignment of the company’s debt to enforce the guaranty, that his friend acted without his authority in delivering the guaranty to the bank, and that he was defrauded by his friend.

On the first issue, the defendant claimed that the plaintiff lacked the right to enforce the consent judgment because the assignment of the company’s debt from the FDIC to the newly-created entity was invalid, and thus, the bank’s successor in interest lacked a proper chain of title to the debt.  The defendant also argued that the FDIC exceeded its statutory authority by creating and co-owning the entity, and by entering into structured transactions between the entity and private investors.  The Eighth Circuit panel, however, concluded that the FDIC was granted broad discretion by Congress under FIRREA to act as a receiver for failed institutions, to dispose of a failed institution’s assets and, thus, was also authorized to assume a failed bank’s right to collect debt.  The panel also determined that the FDIC acted within its incidental powers when it created the entity and sold the bank’s assets to it.  Therefore, the panel found that the district court properly determined that the assignment of rights from the FDIC to the entity was valid and, accordingly, that the plaintiff could enforce the consent judgment.

Regarding the defendant’s other two arguments, the panel concluded that the district court did not clearly err, based on the facts in the record, in determining that the defendant’s friend acted with implied actual authority in delivering the guaranty to the bank on the defendant’s behalf.  Finally, the panel also found that the district court’s finding was not clearly erroneous when it rejected the defendant’s fraud in the factum defense since the record did not indicate any evidence that the friend concealed or otherwise misrepresented the guaranty to the defendant.