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From Banking and Finance Law Daily, July 18, 2016

FDIC’s exit from suit does not end federal court jurisdiction

By Richard A. Roth, J.D.

Federal court jurisdiction over a suit to collect a loan guarantee filed by the Federal Deposit Insurance Corporation as a failed bank’s receiver does not end when the receivership assigns its interest in the loan to a buyer, the U.S. Court of Appeals for the Seventh Circuit has decided. The court also determined that the FDIC had not released an individual from his obligation under a guarantee of $900,000 of the $9 million loan (Bank of Commerce v. Hoffman, July 15, 2016, Manion, D.).

Jurisdiction. When the FDIC, as receiver for Country Bank, filed suit to collect the guarantee, it relied on 12 U.S.C. §1819(b)(2)(A) to establish federal court jurisdiction. This provision says that any suit to which the FDIC is a party is deemed to arise under the laws of the United States. However, the receivership sold the loan to Bank of Commerce while the suit was in progress, which gave rise to the question of whether federal court jurisdiction continued when the FDIC no longer was a party.

Noting that the question had not previously been decided in the circuit, the court determined that federal court jurisdiction continued. The court relied on a decision analyzing diversity jurisdiction to determine that if federal question jurisdiction existed when a suit was filed, it would not be eliminated by later events.

Ambiguous release. The guarantor maintained that a release of his obligations under a $157,000 loan from Country Bank to himself and his wife also released him from his obligations under the $900,000 guarantee of a separate loan. The $157,000 loan was secured by three lots in a residential subdivision, and the release was in exchange for a surrender of those three lots to the FDIC.

Applying Illinois law, which governed the dispute, the court first decided that the release was ambiguous. Explicit language in the release said that it released the guarantor from "any and all liabilities . . . of whatsoever kind or nature, whether known or unknown . . ." If that was read in isolation it could release the guarantor from his obligations under the unrelated $900,000 guarantee, the court conceded.

However, the release also included language releasing the guarantor from liability under "the Loan Documents or the Properties," the court pointed out. That made the release ambiguous, which allowed the consideration of extrinsic evidence of the release’s meaning.

Release interpretation. The guarantor’s own testimony proved the bank’s case, the court then said. He admitted that when he was negotiating the release, he asked if he also could be released from the guarantee and that his request was denied. His litigation claim that he believed the release also applied to the guarantee "contradicts his testimony, strains credibility, and is insufficient to create a genuine factual issue," the court said.

Illinois principles of contract interpretation gave the same result, the court added. State law said the general release was to be interpreted in light of the specific language in order to reach a fair and equitable result.

The cases are No. 15-3326 and No. 15-3327.

Attorneys: Paul J. Richards (Kavanagh Grumley & Gorbold LLC) for Bank of Commerce and Federal Deposit Insurance Corp. Jennifer L. Kincaid (McGehee, Olson, Pepping, Balk & Kincaid, Ltd.) for Kenneth E. Hoffman, Jr.

Companies: Bank of Commerce; Country Bank; Fyre Lake Ventures LLC

MainStory: TopStory IllinoisNews IndianaNews Receiverships WisconsinNews

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