|Can a bank come back from the dead?|
United Western challenges OTS and FDIC
Can directors and shareholders successfully sue to get their bank back once an institution’s doors are closed by its regulator? We are about to find out as the directors and shareholders for United Western Bank, a federal savings bank headquartered in Denver Colo., have filed suit in federal court in Washington, D.C., to reverse the Office of Thrift Supervision’s decision in January to close the bank and appoint the FDIC as the receiver. While the case is still in its early stages, the United Western litigation provides a good reminder for practitioners to review the basics of how a bank is closed and what legal recourse is available when the FDIC is asked to step in.
Who do you sue?
While it is the FDIC that is the most public face of the government whenever a bank fails, it is the bank’s chartering authority that ultimately decides when to close an institution. The FDIC’s formal role doesn’t start until after the bank is closed; as insurer it pays off depositors and, in its legally distinct capacity as receiver, it marshals the bank’s assets and pays claims against the bank.
The good news is that federal statutes (and some state statutes as well) provide the constitutionally-necessary mechanism for challenging a decision to close an institution. For example, both the National Bank Act and the Home Owners’ Loan Act provide a 30-day window to file suit to remove the FDIC once it is appointed as receiver. A lawsuit seeking to remove the FDIC as receiver substantively challenges the regulator’s decision to close the bank. United Western’s complaint, for example, argues that the OTS’s institutional bias against the bank’s business plan and the agency’s preference for a traditional community banking model caused the OTS to arbitrarily reject the bank’s recapitalization plan, causing the institution to be shuttered unnecessarily.
The bad news is that, if history is any indication, most legal challenges to the closing of an institution fall short of the mark. Chartering authorities are granted broad discretion when making a determination that the grounds for closing a bank exist. It is that grant of discretion which makes a closing challenge so hard to win; courts usually defer to the expertise of the chartering authority when making the judgment call that a troubled institution is beyond saving or presents a danger to depositors.
Moreover, even if the challenge is successful, at the end of the day there may be no bank to return to shareholders. In most instances the FDIC arranges for the assumption of the banks deposits and the purchase of the bank’s assets on the same day as the failure. While a court may entertain a challenge to the closing, it lacks the jurisdiction to halt the FDIC from selling the bank’s assets while the suit is pending. 12 U.S.C. § 1821(j). A return to status quo would require the court to “unscramble the egg” and unwind the transaction put together by the FDIC—a potentially disruptive result.
To read the Digital Magazine version of this article, with graphics, click here.
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