Farnik v. Federal Deposit Insurance , 707 F.3d 717 ( 2013 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 11-1601
R OBERT F ARNIK, et al.,
Plaintiffs-Appellants,
v.
F EDERAL D EPOSIT INSURANCE C ORPORATION,
Defendant-Appellee.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 10 C 3087—William T. Hart, Judge.
A RGUED A PRIL 11, 2012—D ECIDED F EBRUARY 5, 2013
Before W OOD , W ILLIAMS, and T INDER, Circuit Judges.
W ILLIAMS, Circuit Judge. A group of borrowers sued
their lender, Interstate Bank, in state court and alleged
that the bank deceived them by failing to base their
interest rates on an index rate as promised. After the
state shut the lender down, the bank’s successor, MB
Financial Bank, sought to be replaced as defendant by
the lender’s receiver, the Federal Deposit Insurance
Corporation. After the state court granted the substitu-
2 No. 11-1601
tion request, the FDIC removed the case to federal
court and moved to dismiss the complaint due to the
borrowers’ failure to state a plausible claim for relief.
The district court granted that motion.
The FDIC asserts for the first time on appeal that no
court has jurisdiction over this matter due to the bor-
rowers’ failure to exhaust their administrative remedies
under the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989. In response, the Appellants
argue that the exhaustion requirement does not apply
because they always intended to sue their lender’s suc-
cessor rather than the FDIC or, in the alternative, be-
cause MB Financial assumed its predecessor’s liabilities.
Despite the Appellants’ contentions, their claims relate
to the lender’s alleged acts and omissions, not the suc-
cessor’s, and there is no evidence to support their as-
sumption of liability argument. Because the Appellants
failed to exhaust their administrative remedies, we
direct the district court to dismiss their case for lack of
jurisdiction.
I. BACKGROUND
Between 2005 and 2007, Appellants Robert Farnik and
2412 W. North Avenue Corporation (“North Inc.”), along
with other parties who have since dropped out of this
litigation, obtained or guaranteed secured loans from
Interstate Bank, also known as InBank. Their promissory
notes established that InBank would calculate the annual
interest rates on their loans by adding a predetermined
amount—usually one percentage point—to a variable
index rate known as the “Interstate Bank Base Lending
No. 11-1601 3
Rate” (“InBank index rate”). The promissory notes
also provided that InBank could set this index rate at
“its sole discretion” and change it up to once per day.
The bank, however, advised the borrowers that it
would set the rate “at or around the U.S. prime rate.”
When the borrowers compared loan statements from
2008, they concluded that the InBank index rate was
neither consistent across customers on any given day—
as they believed it would be based on their promissory
notes—nor set close to the U.S. prime rate.
In August 2009, three borrowers sued InBank in the
Circuit Court of Cook County, alleging that the InBank
index rate “was an illusory contrivance, which did not
in fact exist and varied between bank customers.” Ac-
cording to the Plaintiffs, InBank breached its loan agree-
ments with them and violated various state laws by
pretending to apply a standard index rate. The month
after the Plaintiffs filed their lawsuit, the Illinois Depart-
ment of Financial and Professional Regulation took pos-
session and control of InBank and appointed the
Federal Deposit Insurance Corporation as its receiver.
That month, MB Financial Bank, N.A., purchased certain
InBank accounts, including the ones involved in this
litigation. In October 2009, before InBank, MB Financial,
or the FDIC made an appearance, the circuit court
granted the Plaintiffs leave to amend their com-
plaint. While the Plaintiffs sought numerous extensions
of their amendment deadline, MB Financial filed its
appearance in the case as successor in interest to InBank.
In March 2010, the Plaintiffs filed an amended class
action complaint against MB Financial, as successor in
4 No. 11-1601
interest to InBank, over the allegedly illusory index rate.
The complaint states causes of action for violations of
the Illinois Interest Act, 815 ILCS 205/1 et seq., and the
Illinois Consumer Fraud and Deceptive Practices Act,
815 ILCS 505/1 et seq., as well as for contract reforma-
tion and fraud. MB Financial then responded with a
motion to substitute the FDIC as defendant because
the FDIC had agreed to indemnify it for any of InBank’s
liabilities that it had not assumed, and MB Financial
had not assumed liabilities for “claims based on any
action or inaction prior to the Bank Closing of the Failed
Bank” or “claims based on any malfeasance, misfeasance
or nonfeasance of the Failed Bank.” MB Financial
attached to its motion a letter from the FDIC’s regional
counsel to MB Financial confirming indemnification in
this matter. Farnik and North Inc. contend that they
objected to the motion to substitute, though there are no
details about that objection in the record. The state
court granted the motion, and the FDIC removed the
case to federal court in May 2010. See 12 U.S.C.
§ 1819(b)(2)(A) (any civil suit in which the FDIC is a
party “shall be deemed to arise under the laws of the
United States”). The FDIC then filed a motion to
dismiss, which the district court granted with prejudice
as to the individual plaintiffs after finding that the com-
plaint failed to state any plausible claim for relief.
More than eight months after the FDIC’s substitution
as defendant, more than seven months after removal
to federal court, and nearly six months after the FDIC
filed its motion to dismiss (and perhaps coincidentally,
on the day the district court granted the motion to
No. 11-1601 5
dismiss, although it is unclear from the record which
came first), the Plaintiffs filed a motion to further
amend their complaint. In it, they asked to substitute
MB Financial as defendant, which would enable them
to seek to enjoin MB Financial from proceeding with
pending foreclosure actions in state court. They also
argued that their amended class action complaint stated
no claims against the FDIC. The district court denied
the motion as moot but allowed the Plaintiffs to resub-
mit it once they filed a motion for reconsideration of
the order granting the motion to dismiss. The court
eventually denied the resubmitted motion to amend,
finding that amendment would be futile because the
proposed second amended complaint stated no claims
against the FDIC, and substituting MB Financial as de-
fendant would strip the court of jurisdiction. The court
also determined that the claims included in the
proposed second amended complaint either failed to
state a plausible claim for relief or were based on
InBank’s pre-receivership conduct rather than MB Fi-
nancial’s independent actions.
The borrowers filed a timely appeal of the district
court’s decisions granting the motion to dismiss and
denying the motion to amend. The FDIC argued for the
first time on appeal that the courts lack subject matter
jurisdiction because the Plaintiffs failed to exhaust
their administrative remedies.
II. ANALYSIS
Under the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (“FIRREA”), Pub. L. 101-73, 103
6 No. 11-1601
Stat. 183 (1989), the FDIC has statutory authority to
administer claims against a depository institution for
which the FDIC is receiver. See 12 U.S.C. § 1821(d)(3)-
(d)(13). Courts lack jurisdiction to hear such claims
unless plaintiffs first present them to the FDIC. Id.§ 1821(d)(13)(D)(ii) (limiting judicial review of claims
“relating to any act or omission [of a failed bank or
the FDIC] as receiver”); id. § 1821(d)(6)(A) (allowing
judicial review of claims that have exhausted the ad-
ministrative claim procedure).1
The party asserting federal jurisdiction bears the
burden of demonstrating its existence. Hart v. FedEx
Ground Package Sys., Inc., 457 F.3d 675, 679 (7th Cir. 2006).
1
This court recently noted that failure to comply with FIRREA’s
claims processing rules (e.g., filing deadlines) does not neces-
sarily raise a jurisdictional issue. Campbell v. FDIC, 676 F.3d
615, 618 (7th Cir. 2012) (“[I]t is our belief that in light of the
Supreme Court’s more recent decisions, the proper characteriza-
tion of FIRREA’s rules for claims submission [is] as claims
processing rules.” (internal citations omitted)). Unlike the
plaintiff in Campbell, however, Farnik and North Inc. do not
allege that they are entitled to an extension of the claim
filing deadline or a favorable outcome from another discretion-
ary decision in the claims process. Rather, they completely
bypassed the administrative process that grants judicial review
of FIRREA claims, which presents a jurisdictional issue. See
Henderson ex rel. Henderson v. Shinseki, 131 S. Ct. 1197, 1202 (2011)
(“We have urged that a rule should not be referred to as
jurisdictional unless it governs a court’s adjudicatory
capacity . . . .”); 12 U.S.C. § 1821(d)(13)(D) (“No court shall
have jurisdiction . . . .”).
No. 11-1601 7
Ordinarily, in a case such as this, that burden falls to
the party who removed the case to federal court.
Although the FDIC removed this matter, neither it nor
the Appellants now believes the federal courts have
subject matter jurisdiction. The FDIC argues that no
court may hear Farnik and North Inc.’s claims due to
their failure to comply with FIRREA’s judicial review
requirements. The Appellants, who are an Illinois
resident and an Illinois corporation, argue that because
MB Financial, an Illinois bank, is the proper defendant
and none of the claims arise under federal law, there is
no basis for federal jurisdiction and the case belongs
in state court. To reach the Appellants’ desired out-
come—remand to state court—we would need to first
find that jurisdiction was proper upon removal. See In re
Burlington N. Santa Fe. Ry. Co., 606 F.3d 379, 380 (7th
Cir. 2010) (“The well-established general rule is that
jurisdiction is determined at the time of removal, and
nothing filed after removal affects jurisdiction.”). We
would then need to find that the district court erred
when it denied Farnik and North Inc.’s motion for leave
to amend the amended class action complaint, which
was essentially a motion to remand. See Schillinger v.
Union Pacific R.R. Co., 425 F.3d 330, 333 (7th Cir. 2005)
(“[A]n amendment that is made for legitimate purposes
may be a proper ground for a remand to state court.”).
Thus, it is the Appellants who are asserting federal juris-
diction—albeit temporarily—and who bear the burden of
proving its existence here.
We review the legal question of subject matter juris-
diction and “a district court’s decisions regarding the
8 No. 11-1601
propriety of removal” de novo. Alexander v. Mount
Sinai Hosp. Med. Ctr., 484 F.3d 889, 891 (7th Cir. 2007).
To determine whether jurisdiction exists, we look
beyond the jurisdictional allegations of the com-
plaint and consider any evidence submitted on the
issue. Alicea-Hernandez v. Catholic Bishop of Chi., 320
F.3d 698, 701 (7th Cir. 2003).
Farnik and North Inc. acknowledge that they did not
first present their claims to the FDIC. They argue, how-
ever, that they were not required to do so because
their claims are actually against MB Financial, rather
than either InBank or the FDIC.2 This argument takes two
2
The Appellants have not asserted that they were exempt
from the administrative claims process because they filed the
initial complaint before InBank failed, although the FDIC
argued that FIRREA’s administrative exhaustion requirement
applies to pre-receivership claims in its brief. While there is
no Seventh Circuit precedent on this issue, other circuits
have interpreted FIRREA as allowing courts to maintain
jurisdiction over pre-receivership claims and as requiring
such claims to go through the administrative claims process
through a provision mandating that courts grant requests for
stays made by the receiver. See 12 U.S.C. § 1821(d)(12) (requiring
courts to grant a 90-day stay “in any judicial action or pro-
ceeding to which such institution is or becomes a party” (empha-
sis added)); Marquis v. FDIC, 965 F.2d 1148, 1154 (1st Cir. 1992)
(interpreting FIRREA as “permit[ting] federal courts to
retain subject matter jurisdiction in circumstances where a
bank’s failure (and the FDIC’s appointment as receiver) post-
dates the institution of a suit against the bank”); see also
(continued...)
No. 11-1601 9
forms: first, that their claims relate to MB Financial’s
independent conduct and second, that MB Financial
assumed liability for these claims against InBank. Neither
of these arguments has merit.
A. The Appellants’ Claims Are Based on InBank’s Pre-
Receivership Conduct
The Appellants argue that MB Financial is the proper
defendant because it was named as the sole defendant
in their class action complaint, the FDIC moved to sub-
stitute itself as defendant,3 and the Appellants have
never conceded that the FDIC was the proper party.
Yet none of these facts—which each prioritize form
(i.e., the defendant named on the complaint) over
function (i.e., the independent actions of the alleged
wrongdoer)—is determinative of whether the claims in the
complaint are against MB Financial for InBank’s acts
or omissions.
(...continued)
Glover v. FDIC, 698 F.3d 139, 151 (3d Cir. 2012) (holding, in the
alternative, that “when a bank fails after a claim is filed in
federal court, the jurisdictional bar does not apply” to require
dismissal of the claim, but FIRREA instead allows for a stay to
permit the administrative process to take place); Brady Dev. Co.
v. Resolution Trust Corp., 14 F.3d 998, 1006 (4th Cir. 1993)
(“Pending actions are to be stayed until the outcome of the
administrative process.”). Since the Appellants have not made
this argument, however, we need not resolve the issue.
3
It appears from the record that MB Financial moved to
substitute the FDIC as defendant.
10 No. 11-1601
Courts lack authority to review FIRREA claims
“relating to any act or omission” of a failed bank or of
the FDIC as receiver of a failed bank unless they are
first subjected to FIRREA’s administrative claims pro-
cess. 12 U.S.C. § 1821(d)(13)(D)(ii). Although this circuit
has not had an opportunity to consider how this judicial
review provision applies to third-party successor banks,
other circuits that have done so have interpreted it as
focusing on the substance of a claim rather than its
form. For example, in American National Insurance Co. v.
FDIC, the D.C. Circuit found that claims that a third-
party bank pressured the FDIC to acquire Washington
Mutual, a failed bank, were actually claims against the
third party, not the FDIC as receiver or the failed bank,
and as such were not subject to FIRREA’s administra-
tive process. 642 F.3d 1137, 1144 (D.C. Cir. 2011). That
court held that “[w]here a claim is functionally, albeit not
formally, against a depository institution for which the
FDIC is receiver,” it falls under FIRREA. Id. In Benson v.
JPMorgan Chase Bank, N.A., the Ninth Circuit held that
“[l]itigants cannot avoid FIRREA’s administrative re-
quirements through strategic pleading,” so “a claim
asserted against a purchasing bank based on the
conduct of a failed bank must be exhausted under
FIRREA.” 673 F.3d 1207, 1209 (9th Cir. 2012). In Benson,
a group of investors claimed that a failed bank, again
Washington Mutual, aided and abetted a Ponzi scheme
that defrauded them. They alleged that JPMorgan Chase,
Washington Mutual’s successor in interest, was liable
for Washington Mutual’s conduct because it assumed
Washington Mutual’s liabilities from the FDIC and be-
No. 11-1601 11
cause it continued Washington Mutual’s wrongdoing. The
Ninth Circuit, however, determined that the plaintiffs
had not adequately pled a claim based on JPMorgan’s
own conduct and found the claims jurisdictionally
barred due to the plaintiffs’ failure to exhaust their ad-
ministrative remedies. Other circuits have adopted
similar analyses. E.g., Vill. of Oakwood v. State Bank & Trust
Co., 539 F.3d 373, 386 (6th Cir. 2008); Am. First Fed., Inc. v.
Lake Forest Park, Inc., 198 F.3d 1259, 1263 n.3 (11th Cir.
1999). Recognizing that strategic case captioning would
allow creditors to completely bypass FIRREA’s admin-
istrative process, we join our sister circuits and hold
that the FIRREA administrative exhaustion requirement
is based not on the entity named as defendant but on
the actor responsible for the alleged wrongdoing.
Turning then to Farnik and North Inc.’s claims, we find
that they clearly relate to InBank’s acts and omissions
and are subject to FIRREA’s administrative claims pro-
cess. The amended class action complaint, which
names MB Financial as defendant in its capacity as suc-
cessor in interest to InBank, makes no effort to
differentiate the actions of the two banks. The factual
allegations address InBank’s conduct: unilaterally prepar-
ing the loan agreements, setting the values of the
InBank index rate, representing the interest charges as a
standard variable rate, concealing the true nature of
the interest rates, providing loan closing services, and
computing and charging interest based on an illusory
index rate. So, too, are the legal allegations: violating
the Illinois Interest Act by charging and collecting
interest based on an illusory rate and providing false
12 No. 11-1601
loan statements, deceiving borrowers about the nature
of the index rate in violation of the Illinois Consumer
Fraud and Deceptive Practices Act, rendering a
contract unenforceable by unilaterally inserting a “vague
and confusing boilerplate provision” to circumvent
state interest rate laws, and committing fraud by failing
to disclose interest rates and the methods of calculating
costs and interest.
Farnik and North Inc.’s belated attempt to amend their
complaint also falls short. Their primary reason for re-
questing leave is to add MB Financial as a defendant
to seek to enjoin it from proceeding with foreclosure
actions.4 Yet nothing in the proposed second amended
complaint identifies how MB Financial’s foreclosure
pursuits result from its own wrongdoing. Rather, the
Appellants state that foreclosure is “an attempt to
collect upon the illegally imposed interest and other
fees,” clearly relating back to InBank’s conduct.
Regardless of whether the Appellants name InBank,
the FDIC, or MB Financial as defendant, their claims
are only exempt from FIRREA’s jurisdictional bar if they
identify MB Financial’s independent wrongdoing as the
basis for relief. Since they fail to do so, we find that
the FDIC, as InBank’s receiver, is the proper defendant
in this matter and that the Appellants’ claims are sub-
ject to the administrative exhaustion requirement.
4
Farnik and North Inc. also seek to add a cause of action for
breach of contract. That proposed claim, however, specifically
states that “InBank failed to follow the [l]oan [c]ontracts”
(emphasis added).
No. 11-1601 13
B. There Is No Evidence That the FDIC Transferred
Liability for These Claims to MB Financial
The Appellants argue in the alternative that they were
not required to exhaust their administrative remedies
because MB Financial assumed liability for these claims.
This argument also lacks merit.
When the FDIC steps in as receiver of a failed bank, it
takes over the bank’s assets and operations, collects all
monies and obligations due the failed bank, preserves
and conserves its assets, and performs all functions of
the institution consistent with receivership. 12 U.S.C.
§ 1821(d)(2)(B). The FDIC has two primary options as
receiver of a failed bank: liquidate the bank’s assets or
enter into a purchase and assumption transaction
with another bank. E.g., FDIC v. Bierman, 2 F.3d 1424, 1438
(7th Cir. 1993); FDIC v. Wright, 942 F.2d 1089, 1090 n.1
(7th Cir. 1991). In the latter, the FDIC sells the failed
bank’s assets to a healthy bank, which agrees to pay the
failed bank’s depositors. Wright, 942 F.2d at 1090 n.1.
The FDIC then pays the successor bank the difference
between the value of the assets and what it owes deposi-
tors. Id.A purchase and assumption agreement may also
address which of the failed bank’s liabilities the healthy
bank will assume. But “[a]bsent an express transfer
of liability by [the receiver] and an express assumption
of liability by [the successor], FIRREA directs that [the
receiver] is the proper successor to the liability . . . .” Payne
v. Sec. Sav. & Loan Ass’n, F.A., 924 F.2d 109, 111-12
(7th Cir. 1991). This allows the receiver to “absorb
14 No. 11-1601
liabilities itself and guarantee potential purchasers that
the assets they buy are not encumbered by additional
financial obligations.” Id.In this matter, the only evidence in the record regarding
the assumption of InBank’s liabilities is the March 2010
letter from the FDIC to MB Financial in which the
FDIC agreed that “MB Financial did not assume liability
for claims of this type” and that MB Financial had “com-
plied with all conditions precedent for indemnification.”
In that letter, which MB Financial attached to the motion
to substitute and included with the notice of removal,
the FDIC agreed to indemnify MB Financial, to sub-
stitute in the matter as the correct party in interest, and
to assume the defense. On appeal, Farnik and North
Inc. challenge the FDIC’s reliance on this docu-
ment, arguing that whether the FDIC indemnified
MB Financial is not the same as whether it assumed re-
sponsibility for InBank’s liabilities. The Appellants also
contend that the actual assumption agreement is not in
the record and that they should have an opportunity
to pursue their theory that the FDIC sold InBank’s lia-
bilities to MB Financial.
While the Appellants are correct that the assumption
agreement is not in the record, they have done nothing
to counter the evidence that is there. The March 2010
letter clearly communicates the FDIC’s understanding
that “MB Financial did not assume liability for claims
of this type.” The reasonable interpretation of this letter
is that the two parties to the purchase and assumption
agreement—the FDIC and MB Financial—agree that
No. 11-1601 15
liability for these claims did not pass to MB Financial
but remained with the FDIC, which would substitute in
the matter as “the correct party in interest.” Because this
is a jurisdictional issue, we can look to evidence beyond
the pleadings to determine whether the FDIC is the
proper defendant. See Alicea-Hernandez, 320 F.3d at 701.
The Appellants, however, have offered nothing more
than speculation and their conclusory interpretation of
an agreement to which they were not parties and of
which they have not contended they were beneficiaries.5
See McLean Cnty. Bank v. Brokaw, 519 N.E.2d 453, 456
(Ill. 1988) (“The function of the court is to effectuate, if
ascertainable, the intent of the parties to the contract.”).
In the absence of any evidence that the FDIC intended
to transfer—and MB Financial intended to assume—
liability for these claims, we credit the March 2010
letter and conclude that liability for these claims remains
with the FDIC as InBank’s receiver. See, e.g., Payne, 924
F.2d at 111-12. And since the Appellants did not adminis-
tratively exhaust those claims, the federal courts lack
subject matter jurisdiction.
5
Even prior to this appeal, Farnik and North Inc. had
numerous opportunities to present evidence regarding the
FDIC’s assumption—or alleged lack thereof—of InBank’s
liabilities: in response to the motion to substitute, after
removal to federal court, and following the motion to dis-
miss. And, of course, they could have explored this in the
administrative process, had they availed themselves of it.
16 No. 11-1601
III. CONCLUSION
For the reasons set forth above, we V ACATE the
district court’s order granting the motion to dismiss
and R EMAND this case with instructions to dismiss for lack
of subject matter jurisdiction.
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