Bank Risk Resource Center

If the bank is a participant in your syndicated loan (i.e., not the sole lender), what is the status of play in such circumstance?

• Borrowers should review credit documentation, ideally in coordination with their other relationship lenders in the syndicate, for potential ways to navigate some of these hurdles using defaulting lender and lender replacement provisions, or pursuant to an amendment or refinancing process. Counterparties will need to consider the effects of the 90-day moratorium in the Federal Deposit Insurance Act of 1950 on exercising any right or power to terminate, accelerate or declare a default under any contract to which a lender in receivership is a party, absent consent of the FDIC.
• If the relevant loan is a revolving facility with available capacity, borrowers should consider requesting a larger loan than needed, factoring in that the bank will likely not be able to fund its portion.
• Borrowers who are part of a syndicated deal where the bank is the agent should talk to other members of the syndicate, as they may not want a borrower to pay interest to the bank’s accounts as agent.
• Market provisions with respect to defaulting lenders (i.e., fee suspension, voting suspension or forced assignment) will remain enforceable under relevant state law.

Transfer of the bank’s loans to an acquiring bank: What is the state of play regarding the failed bank’s side on those loans?

• The FDIC, as receiver (or in control of a bridge bank), will seek a healthy financial institution to act as buyer for some or all of a failed institution’s assets, as well as assume some or all of the bank’s liabilities (usually insured deposits and potentially all deposits). The acquiring institution will obtain the performing loan portfolio of the failed bank in addition to the cash and cash equivalents, or the performing loan portfolio and the mortgage loan portfolio. The advantage of this method is that installment loans and mortgage loans usually provide the acquirer with a base of performing loans that are connected to the same bank customers as those with deposit accounts. The FDIC is bound to accept the resolution that represents the least cost to the Deposit Insurance Fund (DIF).
• When buying loan portfolios through the FDIC, the FDIC makes no representations or warranties in connection with any of the loans. The only remedies or recourse provided to the buyer are those set forth in the loan sale agreement. Generally, all risk associated with the loans is passed to the buyer; however, at times, the FDIC may enter into a risk-share agreement with the buyer to protect the buyer’s acquisition of nonperforming loans. 
• The FDIC is empowered to disaffirm or repudiate any contract of the bank if the FDIC determines, in its discretion, within a reasonable time following its appointment as receiver (may be up to 180 days), that (i) the performance would be burdensome, and (ii) the repudiation will promote the orderly administration of the insured depository institution. 
• The FDIC has the power to invoke the “systematic risk exception,” which permits the FDIC to take actions to avoid or mitigate serious adverse effects on economic conditions or financial stability, including the backing of all (uninsured) deposits and loan performance.  

If your loan with another financial institution is secured by a pledge of money or deposit accounts with the bank, you should have a deposit account control agreement (DACA) in place. When your deposit accounts transfer into the receivership or to a buyer, your lender should request you put a new DACA in place.

If your loan agreement with the bank requires you to maintain your deposits at the bank, you need to review your loan documents to determine if waivers or modifications are necessary to avoid default, especially if the loan and deposits are moved in different directions with the receivership / bridge bank / buyer(s).

• Borrowers who hold deposit accounts at the bank may have the ability to set off amounts in those accounts against the outstanding balance of their loans, but only to the extent that (i) their loan documents do not contain waivers of such rights, as many do, and (ii) the borrower from the bank and the person holding the deposit account at the bank are the same entity (i.e., mutuality exists). For example, a loan extended by an affiliate of a failed bank could not be set off against a deposit account at the failed bank.

When your lender fails, your prudent response requires review of the current market for alternative financing sources and your liquidity situation as well as analysis of the specific terms of your loan/credit agreement, its account structure and other factual considerations, notwithstanding a potential conflict with the existing covenants.

If you use the bank directly or indirectly (through a vendor) to process payroll or to pay vendors, you should have immediate concerns for deposits exceeding the $250,000 FDIC insurance limit, unless the bank is designated for the systematic risk exception or a financially stable/healthy institution is named buyer.

• States have laws prohibiting the employment of persons where the company does not have the ability to make payroll.

The FDIC as receiver has authority to repudiate any contract within a “reasonable” period of time so long as the receiver deems the contract burdensome, and repudiation would promote the orderly administration of the receivership estate. Although this time may vary with the circumstance, several published decisions regard 90 to 180 days to be acceptable. Although the receiver will be liable for damages, except for certain types of financial contracts, those damages will be limited to direct damages (i.e., no accelerated, consequential or loss-of-profit damages). In the case of a repudiated lease, the landlord may only claim rent which was due as of the receiver’s appointment and rent accruing thereafter until repudiation.

Companies should assess their indirect exposure to the bank through their relationships with vendors, customers and contractual counterparties.

• Assess supply-chain counterparties and vendors for direct exposure to the bank and develop redundancies and disaster plans. 
• Review large accounts receivable for direct exposure to the bank and develop ways to reduce risk associated with non- or delayed payment. 

Public companies may consider “voluntary” filings to comply with the SEC’s Regulation FD to alert security holders and the market about the impact of the bank’s troubles on the company, even if the disclosure is of “no material impact on the company.”  

• For public companies that have lost access to debt facilities or determined there has been a termination of a material definitive agreement, filing a form 8-K may be mandatory.  
• To the extent that debt facilities with the bank need to be refinanced, more disclosure to the extent there are material new agreements or material amendments to existing agreements.

Once the bank has been placed into receivership, FIRREA applies to any claim seeking payment from the assets of a failed bank for which the FDIC has been appointed receiver.

• The FDIC will send and publish notice of the bank’s failure.
• Every person or entity that has a claim, whether unliquidated or contingent, against the failed bank must file a claim under the FDIC’s process. Failure to do so results in the disallowance of the claim. 12 U.S.C. § 1821(d)(5)(C).
• Even if you have litigation pending against the failed bank, you must file a claim with the receiver and await the receiver’s determination before further action. 12 U.S.C. § 1821(d)(6)(A). Failure to file such claim and exhaust administrative remedies can result in the dismissal of your pre-receivership litigation.
• Failure to file a claim bars any right to pursue the claim. 12 U.S.C. § 1821(d)(5)(C).
• After filing the claim, the receiver has 180 days to determine whether to allow or disallow the claim (12 U.S.C. § 1821(d)(5)(A)); this period may be extended by written agreement between the receiver and claimant (12 U.S.C. § 1821(d)(5)(A)(iii)). 
• If the receiver disallows the claim, the claimant has 60 days after notice to file suit for judicial determination of the claim or to continue any pre-receivership litigation. 12 U.S.C. § 1281(d)(6)(B). Failure to seek judicial review within the 60-day period divests courts of jurisdiction to review the receiver’s disallowance of the claim.
• The following hierarchy generally applies to unsecured claims that remain in the receivership (i.e., not assumed by the buyer):
  
  • First — FDIC administrative expenses, which include any liability that the FDIC, as receiver, has against the bank (e.g., loans made to the receivership and the accrued interest thereon)
  • Second — Insured deposits, which the FDIC pays to depositors up to the $250,000 insurance limit
  • Third — Uninsured deposits (i.e., more than the insured limit)
  • Fourth — General creditors and then stockholders