By:      Diana M. Eng

The Ninth Circuit Court of Appeals recently issued an opinion affirming the dismissal of claims by borrowers Todd and Michele Rundgren (“Borrowers”) against JPMorgan Chase, N.A. (“JPM”) for the alleged fraudulent conduct of now-defunct Washington Mutual Bank, F.A. (“WaMu”).  Rundgren v. Washington Mutual Bank, FA et al., No. 12-15368 (9th Cir. July 29, 2014).  The Ninth Circuit found that the district court properly determined that it lacked subject matter jurisdiction over Borrowers’ claims related to WaMu’s pre-failure conduct due to Borrowers’ failure to exhaust the administrative claims process mandated by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”).

FIRREA provides a comprehensive claims process that allows the Federal Deposit Insurance Corporation (“FDIC”), as Receiver, to determine claims against failed banks.  See id., at 6 (citing 12 U.S.C. § 1821(d)(3)-(10)).  Further, FIRREA unequivocally strips courts of jurisdiction over claims that have not been exhausted through this administrative claims process.  Specifically, section 1821(d)(13)(D) of FIRREA provides that “no court shall have jurisdiction over—(i) any claim or action for payment from, or any action seeking a determination of rights with respect to, the assets of any depository institution for which the [FDIC] has been appointed receiver . . . ; or (ii) any claim relating to any act or omission of such institution . . . .” (Emphases added).

In Rundgren, Borrowers refinanced their mortgage on their Hawaiian property with WaMu in 2008 for approximately $3,000,000.  Later that year, WaMu was seized by the Office of Thrift Supervision, and the FDIC was appointed Receiver.  The FDIC then transferred substantially all of WaMu’s assets, including the Rundgrens’ mortgage, to JPM pursuant to a Purchase and Assumption Agreement (“P&A”); the FDIC retained most liabilities associated with those assets under the P&A.  Since Borrowers defaulted on their mortgage, JPM accelerated the payments and notified them that a non-judicial foreclosure sale was scheduled for August 26, 2009.

Borrowers filed suit in Hawaii state court against WaMu and JPM, alleging that WaMu engaged in deceptive and fraudulent acts in connection with the refinancing, including securing a false appraisal and exaggerating Borrowers’ income. JPM removed the action to federal court, and the district court dismissed the case against JPM for lack of jurisdiction, because Borrowers had failed to exhaust their claims against the FDIC through the FIRREA claims process. The district court held that, alternatively, Borrowers failed to sate a claim.

On appeal, the Ninth Circuit affirmed, holding that because “WaMu was placed into receivership of the [FDIC], and the Rundgrens failed to exhaust the administrative remedies provided by FIRREA, the district court correctly determined it lacked authority to hear the Rundgrens’ claims.” Borrowers asserted two arguments that were flatly rejected by the Court.

First, Borrowers argued that their claims are not the sort of claims contemplated by section 1821(d)(13)(D), because Borrowers are not WaMu’s creditors.  The Court examined the purpose of FIRREA and explained that section 1821(d)(13)(D) “is drafted broadly to preclude courts from exercising jurisdiction over ‘any claim or any action for payment from, or any action seeking a determination of rights with respect to’ the assets of a failed bank in the hands of the FDIC, or ‘any claim relating to any act or omission’ of a failed bank, without respect to the identity of the claimant.”  The Court emphasized that nothing in the section suggests that “any claim” is limited to claims by creditors.  The Court also noted that although Congress specifically referred to “creditors” in other sections of FIRREA, section 1821(d)(13)(D) does not refer to “creditors,” which further supports the conclusion that federal courts should be precluded from exercising jurisdiction over any claims by a claimant who has failed to exhaust the FIRREA claims process.

Second, Borrowers argued that their complaint should be construed as raising affirmative defenses, because they are attempting to prevent a nonjudicial foreclosure.  This argument was based on Borrowers’ belief that section 1821(d)(13)(D) does not preclude the district court from exercising jurisdiction over an affirmative defense.  The Court disagreed, indicating that since Borrowers’ had contractually agreed to allow the lender to proceed to foreclosure without judicial proceedings, the lender “had no need to pursue foreclosure through a court action” and therefore, Borrowers “could not block a foreclosure by raising affirmative defenses.”  Rather, Borrowers chose to bring an affirmative lawsuit against WaMu and JPM for common law and statutory claims based on WaMu’s alleged fraud.  The Court found that nothing in FIRREA supports Borrowers’ argument that such a lawsuit should be construed as an affirmative defense.

Lastly, the Court concluded that Borrowers’ complaint alleges claims “relating to any act or omission” of WaMu, but does not assert any independent claims against JPM.  In reaching this conclusion, the Court found that all the claims in Borrowers’ complaint “rest on the theory that WaMu took deceptive and fraudulent actions to induce them to enter into a loan agreement.”  Importantly, the Court emphasized that “a claimant cannot circumvent the exhaustion requirement [of FIRREA] by suing the purchasing bank based on the conduct of the failed institution.”  Indeed, “[w]here a claim is functionally, albeit not formally, against a depository institution for which the FDIC is receiver, it is a ‘claim’ within the meaning of FIRREA’s administrative claims process.’” (Emphases in original).

Entities that purchase assets out of receivership and entities that subsequently acquire such assets should be mindful of the jurisdictional defense based on FIRREA.