Banking Law Roundup


No. 88    Perspectives on Developments in the Law from The Sharp Law Firm, P.C.   April 2013

Not All Check Signers Are Fiduciaries, Court Says                      

            Not everyone authorized to sign a check is a fiduciary for purposes of the Uniform Fiduciaries Act (760 ILCS 65), the Seventh Circuit U.S. Court of Appeals ruled last month.

            The act frequently makes payees liable to organizational payors when a fiduciary uses the payor’s account to pay a personal debt in breach of the fiduciary’s duties to the organization.  However, the court in West Bend Mut. Ins. Co. v. Belmont State Corp., __ F.3d __, 2013 WL 1110855 (7th Cir. 2013), rejected the idea that everyone who signs checks is necessarily a fiduciary under the act, reasoning that a fiduciary for purposes of the act “is a person with discretion to act on a principal’s interest.” 

            In West Bend, the signer was no longer an investor or a manager of the organization.  If he cut the checks without authority, “he was a thief or embezzler” but not necessarily a fiduciary, the court said.

Guarantor Sanctioned for Contest of Forbearance Agreement                    

            The Seventh Circuit U.S. Court of Appeals has joined other courts in finding forbearance agreements enforceable (see Sharp Thinking No. 43 (March 2011); No. 76 (Nov. 2012)), and has even sanctioned a defendant for appealing from a judgment upon the agreement and an underlying guaranty.

            In Harris N.A. v. Hershey, __ F.3d __, 2013 WL 1276515 (7th Cir. 2013), the court rejected arguments that the plaintiff’s claims were barred by fraud in the inducement, duress, violation of the duty of good faith and fair dealing, and violation of the Illinois Credit Agreement Act (815 ILCS 160).  It said the guarantor engaged in “obfuscation and confusion” in making its appeal, for which the court would impose sanctions under Federal Rule of Appellate Procedure 38. 

Lender Owes No Evaluation Duty to Mortgagor

            A mortgage lender owes borrowers no duty to correctly evaluate their mortgage application, a panel of the Seventh Circuit Court of Appeals has held. 

            Interpreting Indiana law, but giving no hint that it varied from generally-applicable law, the court said a mortgage contract “does not, on its own, create a confidential relationship between a creditor and a debtor.”  Jackson v. Bank of Am. Corp., __ F.3d __, 2013 WL 1274534 (7th Cir. 2013).   

            Noting that the papers at issue were similar to “untold numbers of other mortgage refinancing contracts”, the court also rejected a claim that the contract was unconscionable.

FIRREA Bars Suit Against Failed Bank’s Successor           

            A borrower may not sue a failed bank’s successor for alleged interest rate violations by the failed bank, the Seventh Circuit held recently.

            Interpreting the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), the court rejected an attempt to impose upon MB Financial liability for alleged acts and omissions of the InBank before it was shut down by the Federal Deposit Insurance Corp. (FDIC) and state officials.  Farnik v. FDIC, 707 F.3d 717 (7th Cir. 2013).

            Under FIRREA, courts lack authority to adjudicate claims against institutions for which the FDIC is the receiver unless the claims are first submitted to FDIC or unless they identify the successor bank’s independent wrongdoing as the basis for relief, the court said.  Noting that plaintiffs’ attacks on the interest rates arose from the alleged wrong-doing of the failed bank before the FDIC receivership, and that there was no evidence FDIC had transferred liability for such claims to the successor bank, the court remanded the appeal with instructions for the District Court to dismiss the case for lack of subject matter jurisdiction.

Suit Against FDIC Is Barred, Court Holds    

            A demand that the FDIC compensate bank owners for requiring capital infusion into a failing bank was a claim for money damages not permitted by the federal Administrative Procedure Act (“APA”), the Seventh Circuit held recently.

            Ruling in Veluchamy v. FDIC, 706 F.3d 810 (7th Cir. 2013), the court also held that FIRREA barred a claim against the FDIC for refusing to allow the bank to redeem the notes through which the capital was raised. 

            In Veluchamy, bank owners claimed that FDIC misled them into believing a $30 million capital infusion would be sufficient, and then shut the bank down when they failed to comply with a later demand for an additional $70 million.  They first demanded that FDIC in its corporate capacity compensate them for the $30 million they had infused.  Ruling that this demand was in essence one for money damages, the court held it to be jurisdictionally barred under § 702 of the APA (5 U.S.C. § 702) which does not permit suits for money damages. 

            The court also ruled that the owners’ claims against FDIC as receiver were barred because they were not really claims against the failed bank.  Rather, the court said, in contesting FDIC’s refusal to allow the bank to redeem the notes owners were challenging FDIC’s actions as a bank regulator.  “[T]he real target of Appellants’ claim, dressed in FIRREA clothing, is the FDIC-as-regulator, not the Bank”, the court said, holding that the relevant portion of FIRREA only permitted claims premised on the depository institution’s actions or inactions.  Moreover, “it is also hard to see how responsible bank regulators could approve the retirement of capital by a critically undercapitalized bank on the brink of collapse so that the FDIC, taxpayers, and those with legitimate claims against the Bank would be left picking up the extra tab”, it said.

                                                                         John T. Hundley,, 618-242-0246

1115 Harrison, P.O. Box 906, Mt. Vernon, IL 62864 • Telephone 618-242-0246 • Facsimile 618-242-1170 •
Business Transactions • Litigation • Financial Law • Problem Finances • Real Estate • Corporate • Commercial Disputes • Creditors’ Rights •
Arbitration • Administrative Law • Employment Matters • Estate Planning • Probate • Family Matters