GARY ALLEN FEESS, District Judge.
Deutsche Bank National Trust Company ("Deutsche Bank") brings suit on behalf of itself and as trustee for numerous investors who hold mortgage-backed securities issued by IndyMac Bank, FSB ("IndyMac"). Deutsche Bank asserts claims against the Federal Deposit Insurance Corporation ("FDIC") in various capacities as the successor to IndyMac, which failed in 2008. Before its failure, IndyMac had aggressively marketed mortgage-backed securities that were sold to investors. These securities consisted of mortgage pools that were established by so-called "Pooling and Servicing Agreements" ("PSAs") and evidenced by certificates held in a trust managed by Deutsche Bank as trustee. When the real estate market collapsed, mortgage loan defaults skyrocketed, and IndyMac failed.
The Office of Thrift Supervision ("OTS") declared IndyMac insolvent, and FDIC took control of the institution and began to wind up its affairs. At the time of the seizure, OTS authorized the creation of a new federally-chartered savings bank, IndyMac Federal, to which FDIC as receiver for IndyMac ("FDIC-R") transferred substantially all of IndyMac's assets. FDIC operated the business of IndyMac for eight months and sold a substantial portion of IndyMac's assets, including the right to service the mortgage loans deposited into the trusts, to a newly formed financial institution, OneWest Bank. OneWest acquired these rights without the consent of Deutsche Bank, contrary to a provision in
In February 2010, FDIC-R
On February 9, 2011, FDIC-R filed two motions: a motion for leave to file a motion for reconsideration of the Court's Order on the motion to dismiss (along with a proposed motion for reconsideration) and a motion to certify that Order for interlocutory appeal. (Docket Nos. 59, 60.) These motions seek reconsideration of, or certification of an interlocutory appeal of, two of the Court's determinations: (1) that Deutsche Bank's claims are not prudentially moot because, absent repudiation, a post-receivership breach of contract claim is not subject to the priority distribution scheme of § 1821(d)(11) of the Financial Institutions Reform, Recovery, and Enforcement Act ("FIRREA"); and (2) that § 1821(d)(2)(G)(i)(II) of FIRREA does not preempt a contractual provision that required FDIC to obtain consent from Deutsche Bank before selling the failed bank's servicing rights.
On May 2, 2011, the Court granted FDIC-R's motion for leave to file a motion for reconsideration and denied the motion for reconsideration in part. (Docket No. 77, 5/2/11 Order.) Specifically, the Court declined to reverse its earlier holding that FIRREA § 1821(d)(2)(G)(i)(II) does not preempt contractual consent-to-transfer requirements. (Id. at 8.) The Court deferred deciding whether to reverse its earlier decision on the prudential mootness issue. This Order addresses the motion to reconsider that issue and the motion to certify an interlocutory appeal.
As the Court explained in its previous Order, the doctrine of prudential mootness
FIRREA establishes a priority scheme for distributing the amounts realized from the resolution of a failed bank. See 12 U.S.C. § 1821(d)(11). Under this distribution priority:
Id. FDIC-R and Deutsche Bank dispute which category Deutsche Bank's claims fall within. FDIC-R argues that Deutsche Bank's claims are third-tier general unsecured claims that will not receive any compensation. The FDIC has made a determination that the assets of IndyMac and IndyMac Federal "are insufficient to make any distribution on general unsecured claims and therefore, such claims, asserted or unasserted, will recover nothing and have no value." Fed. Deposit Ins. Corp., Notice, Determination of Insufficient Assets to Satisfy Claims Against Financial Institution in Receivership, 74 Fed.Reg. 59,540 (Nov. 18, 2009).
In its previous Order, the Court agreed with Deutsche Bank that its claims for FDIC-R's post-receivership breach of the trusts' governing agreements fell outside of the § 1821(d)(11) distribution priority and thus were not prudentially moot. (1/7/11 Order, 784 F.Supp.2d at 1158-61.) In support of this conclusion, the Court relied on the Ninth Circuit's decision in Sharpe v. FDIC, 126 F.3d 1147 (9th Cir. 1997), which held that a claim against the FDIC for breach — as opposed to repudiation — of a pre-receivership contract did not
In its motion for reconsideration, FDIC-R contends that the Court erred in assuming that if something did not qualify as a "claim" within the meaning of FIRREA's exhaustion requirement, it also did not qualify as a "claim" under the § 1821(d)(11) distribution priority. In support, FDIC-R points to the Ninth Circuit's decision in Battista v. FDIC, 195 F.3d 1113 (9th Cir.1999), which FDIC-R contends makes clear that something can qualify as a "claim" under other FIRREA sections even if it does not qualify as a "claim" for purposes of the administrative exhaustion requirement. Further, FDIC-R contends that Sharpe does not establish a blanket rule that a claim for breach of a pre-receivership contract never qualifies as a "claim" under FIRREA's exhaustion requirement. In particular, FDIC-R contends that a later Ninth Circuit decision, McCarthy v. FDIC, 348 F.3d 1075 (2003), limited Sharpe to the narrow circumstances present in that case. (Mot. for Reconsideration at 1-2.). According to FDIC-R, this narrowing makes clear that Deutsche Bank's claims, unlike the claims in Sharpe, are "claims" within the meaning of FIRREA, and thus are subject to the § 1821(d)(11) distribution priority. The Court addresses each argument in turn.
FDIC-R contends that Battista makes clear that the term "claim" does not have a uniform meaning throughout FIRREA. (Mot. for Interlocutory Appeal at 16.) Thus, it contends, even if Sharpe establishes that Deutsche Bank's breach of contract claim does not qualify as a "claim" for administrative exhaustion purposes, that claim could nonetheless qualify as a "claim" for purposes of the distribution priority. In support of this contention, FDIC-R cites Battista's discussion of § 1821(i)(2), which provides that the FDIC's "`maximum liability ... to any person having a claim against the receiver of the insured depository institution'" is limited to "`the amount such claimant would have received if the Corporation had liquidated the assets and liabilities of such institution.'" Battista, 195 F.3d at 1118 (quoting 12 U.S.C. § 1821(i)(2)) (emphasis added). FDIC-R points to the court's remark in that case that § 1821(i) "gives no indication that its provisions are limited to claims under § 1821(d)," the administrative claims provision. Id. Thus, FDIC-R argues, a "claim" under § 1821(i)(2) is not necessarily also a "claim" under § 1821(d).
FDIC-R takes these statements in Battista radically out of context. In Battista, the court considered whether claims for repudiation damages were subject to the § 1821(d) administrative claims process and distribution priority, or whether § 1821(e) governing repudiation established a "separate right to payment" of damages in cash, outside of the distribution priority scheme. Id. at 1116-17. The court offered several reasons why claims for repudiation damages under § 1821(e) were "merely a subset of the claims discussed in § 1821(d)." Id. at 1117. Section 1821(i)'s limitation on liability was one such reason: it limited the FDIC's liability to the amount of the failed institution's assets, whether or not the claims were for repudiation damages. Although perhaps inartfully phrased, the court's statement
FDIC-R also contends that McCarthy limited Sharpe in a way that renders Deutsche Bank's claim for breach of contract damages a "claim" under § 1821(d). Understanding how McCarthy might have limited Sharpe requires a very close reading of those two cases. The Court will accordingly discuss those cases in some detail.
In Sharpe, the plaintiffs had entered into a settlement agreement with Pioneer Bank under which the parties were to simultaneously exchange consideration on July 8, 1994. Sharpe, 126 F.3d at 1150. On the appointed date, the Sharpes performed their part of the bargain, delivering a promissory note, deed of trust, and reconveyance documents to Pioneer Bank. Id. The bank, however, did not perform its part of the bargain, which required it to wire the Sharpes $510,000. Id. at 1150-51. Instead, the bank issued two cashier's checks in that amount. Id. at 1151. After the close of business that day, state regulators seized the bank, FDIC was appointed as receiver, and FDIC notified the Sharpes that it would not honor the cashier's checks. Id. The Sharpes submitted a claim for breach of contract to the FIRREA administrative claims process, and the FDIC allowed the claim. Id. In compensation, the FDIC paid the Sharpes $100,000 in cash and $380,000 in receiver's certificates. Id. Unsatisfied, the Sharpes sued the FDIC in federal court for breach of contract. Id.
The district court held that it had no jurisdiction to review the Sharpes' claim because FIRREA did not authorize judicial review of claims "allowed" by the FDIC. Id. On appeal, the Ninth Circuit reviewed this determination, among other things. Rather than considering whether it had jurisdiction to review an "allowed" claim, however, the Circuit re-framed the question as whether the Sharpes were required to exhaust their claim at all before suing in federal court. Id. at 1152. If they were not, then the court had jurisdiction. In concluding that the Sharpes were not required to pursue the administrative claims process, the court offered two lines of reasoning: a parsing of the statute and policy reasons why exhaustion should not be required.
Under FIRREA, "except as otherwise provided in this subsection," federal courts lack jurisdiction over:
12 U.S.C. § 1821(d)(13)(D). The "except as otherwise provided" language allows for judicial review of such claims that have been exhausted through the administrative claims process. Sharpe, 126 F.3d at 1156.
The court in Sharpe noted that this language was "broad," but not absolute, given other precedents not requiring exhaustion of certain types of claims. Id. The court noted that "[n]othing in the statute addresses whether a cause of action by a party to a contract breached by the FDIC is considered a `claim' for the purposes of the administrative exhaustion requirement." Id. The court, however, concluded that the Sharpe's breach of contract claim did not qualify as a "claim" within the meaning of this provision, and that the Sharpes therefore were not required first to exhaust it in the administrative process. Id. In reaching this conclusion, the court first reasoned that the statute requires "creditors" — and, impliedly, only creditors — to submit "claims" for administrative resolution. The Court concluded that only "creditors" have "claims" because the statute requires the receiver to publish a notice only to the institution's creditors advising them to present their claims by a specified date. Id. (citing 12 U.S.C. § 1821(d)(3)(B)). Thus, the court reasoned, "[i]f the Sharpes are considered creditors, they are subject to that claims process." Id. The court then concluded that the Sharpes were not creditors by virtue of their possession of the cashier's checks drawn on the failed bank. Id. The Sharpes were not creditors because the Sharpes did not intend to maintain credit there, as the agreement required a simultaneous wire transfer and the Sharpes' arguable creditor status came about only as a result of the breach of that requirement. Id. at 1152, 1156. Because the Sharpes were not creditors, they did not have a "claim" within the meaning of the exhaustion requirement. Id. at 1157 ("The Sharpes cannot be considered creditors of the FDIC, and we hold that their claim is not a `claim' for the purposes of the FIRREA exhaustion requirement.").
In sum, the Circuit's statutory construction reasoning followed five logical steps: (1) Only "claims" are subject to exhaustion. (2) Only "creditors" have claims. (3) The Sharpes were not creditors because they did not intend to be creditors and would not be creditors but for the FDIC's breach. (4) Because they were not "creditors," the Sharpes did not have a "claim" for exhaustion purposes. (5) Because they did not have a "claim," they were not required to exhaust their administrative remedies, and the § 1821(d)(13) bar on judicial review of unexhausted "claim[s]" did not apply.
In addition to this statutory analysis, the court also offered policy reasons in support of its decision. First, the court reasoned that deeming the Sharpes to be creditors would allow the FDIC "to breach any pre-receivership contract, keep the benefit of the bargain, and then escape the consequences by hiding behind the FIRREA claims process." Id. at 1156. Similarly, the court reasoned, allowing the FDIC "to avoid its contractual obligations by invoking the administrative claims process would effectively preempt state contract law." Id. The court concluded that Congress did not intend broadly to preempt state contract law, and "adopt[ed] the reasoning" of the D.C. Circuit's decision to that effect in Waterview Management Co. v. FDIC, 105 F.3d 696, 699 (D.C.Cir.1997). The court, however, did not identify what, precisely, it adopted from Waterview. Waterview did not address whether a
Finally, the court noted that its conclusion was "further supported" by FIRREA's provision allowing the FDIC to repudiate contracts so long as it informs the parties within a reasonable time and pays compensatory damages, 12 U.S.C. § 1821(e). Sharpe, 126 F.3d at 1157. The court remarked that it "would have been a very different case" had the FDIC repudiated the contract here. Id. However, it breached the contract rather than repudiating it, and "it cannot be the case that the FDIC is in a better position when it breaches a contract than when it chooses to repudiate pursuant to § 1821(e)." Id.
The decision in Sharpe did not squarely address the issue presented here: whether a claim for post-receivership breach of a pre-receivership contract qualifies as a general unsecured liability under the § 1821(d)(11) distribution priority, or whether it falls outside of that scheme altogether. In its previous Order, the Court relied on Sharpe's holding that the Sharpes' claim for a post-receivership breach of a pre-receivership contract did not amount to a "claim" for purposes of FIRREA's administrative exhaustion requirement. The Court reasoned that if such a claim did not qualify as a "claim" for administrative exhaustion purposes, it likewise did not qualify as a "claim" subject to the § 1821(d)(11) priority order for distributing assets "to pay claims." Now, FDIC-R contests the validity of this reasoning because, it contends, McCarthy limited the circumstances in which a claim for post-receivership breach of a pre-receivership contract will not qualify as a "claim" under FIRREA.
In McCarthy, the Circuit considered a breach of fiduciary duty claim by a borrower who had taken out a loan from a bank operated by FDIC-R without knowing that the bank was under receivership. McCarthy, 348 F.3d at 1077. The borrower claimed that the bank improperly offered him the loan on a "take-it-or-leave-it" basis and that he would not have accepted the loan had he known of the receivership. Id. In that case, the court confronted whether the plaintiff — who was a debtor, not a creditor — was subject to the FIRREA administrative exhaustion requirement. Id. The court concluded that the debtor-plaintiff was required to exhaust because FIRREA's bar on judicial review broadly required exhaustion of "any claim or action" that asserts a right to assets of a failed institution. Id. (citing 12 U.S.C. § 1821(d)(13)(D)) (emphasis added by McCarthy). Already, this decision undercuts Sharpe's reasoning. As explained above, Sharpe based its conclusion on the proposition that only "creditors" have "claims" subject to exhaustion. By holding that a debtor can have a "claim" subject to exhaustion, McCarthy eliminates that key step in Sharpe's logic.
McCarthy, however, did not — and could not — overrule Sharpe. Instead, the court
For these reasons, McCarthy's explanation of Sharpe is ambiguous. McCarthy limited Sharpe to its factual circumstances, without clearly identifying which factual circumstances were relevant. McCarthy's reasoning directly conflicts with, and undercuts, the Sharpe statutory analysis, but the decision unquestionably left Sharpe intact. Thus, Sharpe's policy reasons must independently support the holding that the Sharpes' claims were not subject to FIRREA's administrative exhaustion requirement. It is these policy reasons that continue to control.
Unfortunately, the court in Sharpe did not thoroughly explain the policy reasons supporting its decision. All of the policy reasons cited by the Sharpe court reflect the notion that the FDIC should not be able to breach a failed institution's contracts with impunity. The court refers to the FDIC "escap[ing] the consequences," "avoid[ing] its contractual obligations," and being "in a better position when it breaches a contract than when it chooses to repudiate." Sharpe, 126 F.3d at 1156-57. The court, however, did not specify in what ways the claims process would allow the FDIC to avoid the consequences of its breach or to be in a "better position" than if it had repudiated the contract.
The court's statement that the FDIC should not be in a better position when it breaches than when it repudiates appears to have been based on an assumption that repudiation damages were not subject to the administrative claims process, but rather were payable in full by the FDIC outside of the ordinary claims scheme.
In short, McCarthy undercuts Sharpe's statutory analysis, leaving only Sharpe's policy reasoning intact. Sharpe, however, does not clearly explain the policy reasons supporting its holding, and Battista appears to undercut those policy reasons at least in part. In light of this, the Court find that Sharpe is limited to the unique circumstances presented in that case. Given the tension in the case law, the Court finds it prudent to adopt McCarthy's more narrow characterization of Sharpe as establishing only that claims "arising out of a breach of contract fully performed by the aggrieved party but not repudiated by the receiver" do not qualify as "claims" under § 1821(d)'s administrative exhaustion requirement. McCarthy, 348 F.3d at 1081. Deutsche Bank's claims do not fall within the Sharpe exception so understood. Deutsche Bank had not fully performed its obligations, but rather had continuing obligations to pay servicing fees over time. Thus, its claims for post-receivership breach of pre-receivership contracts are subject to the § 1821(d)(11) distribution priority.
This conclusion finds support in the policies underlying FIRREA and its statutory text. First, FIRREA establishes a depositor-preference by allowing depositors to recover from the failed institution ahead of creditors with general unsecured claims. See 12 U.S.C. § 1821(d)(11). Although FDIC-R may have acted beyond its statutory authority in breaching the contracts, there is no reason why this breach should result in a super-priority claim that would disadvantage other claimants, including depositors. It is unlikely that Congress intended to create such a super-priority status for these claims without explicitly so stating.
Second, Deutsche Bank's interpretation of the statute would prevent FDIC from maximizing the assets of the receivership, in contravention of its statutory mandate to "conduct its operations in a manner which ... maximizes the net present value return from the sale or disposition of ... assets [of any insured depository institution for which FDIC has been appointed conservator or receiver]." See 12 U.S.C. § 1821(d)(13)(E). According to Deutsche Bank, the PSAs did not permit FDIC-R to sell the servicing rights without Deutsche Bank's written consent. (See Docket No. 46-1, Pooling and Servicing Agreement § 10.07.) If FDIC-R had repudiated these contracts (rather than simply breaching their consent requirement), it would have destroyed the contract, leaving no contractual rights left to sell. If FDIC-R had complied with the consent requirement and sought Deutsche Bank's consent to sell the servicing rights, Deutsche Bank could have denied its consent, effectively holding the servicing rights hostage until FDIC-R had no choice but to sell them to Deutsche Bank below value or to allow them simply to revert to Deutsche Bank after resolution of the receivership. In Deutsche Bank's view, it should have been able to prevent the value-maximizing sale of the servicing rights in this way. This, however, would have prevented FDIC-R from maximizing the value of the receivership, and accordingly would have elevated Deutsche Bank's interests above those of all other creditors, and depositors, of the institution.
Third, contrary to Deutsche Bank's contention, concluding that a claim for postreceivership breach of a pre-receivership contract is merely a third-tier general unsecured claim would not effectively render the repudiation provisions a nullity. To the contrary, the FDIC would retain incentives to repudiate, rather than breach, because repudiation results in a limitation on damages. See 12 U.S.C. § 1821(e)(3)(A).
Finally, Battista's reasoning explaining why claims for repudiation damages are subject to the § 1821(d)(11) distribution priority applies equally here. "[I]f Congress had wished to depart from the § 1821(d) regime for claims for damages" for repudiation or for breach of contract, "presumably it would have said so." See Battista, 195 F.3d at 1117. In fact, it did so in § 1821(f) with respect to payment of insured deposits. Id. Second, § 1821(i) limits the FDIC's liability to the amount of the failed institution's assets, and nothing suggests that this provision is inapplicable to claims for breach of contract damages, just as nothing suggests that the provision is inapplicable to claims for repudiation damages. See id. at 1118. Thus, payment of such damages on a super-priority basis would not harm the FDIC itself, but rather only other creditors and depositors — a result that cannot be reconciled with Congress's depositor preference. Finally, the distribution priority in § 1821(d)(11) "makes little sense if parties injured by" repudiations or breaches of contract "are treated separately from parties with claims under § 1821(d)." See id. If such claims "were to be treated differently from claims under § 1821(d), ... one would have expected Congress to have given [such] claims a place in § 1821(d)(11)'s hierarchy." Id.
For these reasons, the Court now concludes that Deutsche Bank's breach of contract-based claims are not entitled to super-priority, but rather are third-tier general unsecured claims. Deutsche Bank therefore cannot recover anything on those claims given IndyMac's deep insolvency. Deutsche Bank's claims — except for the second cause of action against FDIC-R for post-failure breach of contract to the extent that it is based on the alleged breach of contracts that FDIC-R "executed or approved," which would be entitled to a priority right of payment under 12 U.S.C. § 1821(d)(20) — are accordingly prudentially moot. The Court therefore
FDIC-R also brings a motion seeking certification of an interlocutory appeal.
Under 28 U.S.C. § 1292(b), the court may certify an issue for interlocutory appeal if three elements are satisfied: (1) the issue is a controlling question of law; (2) the issue offers substantial grounds for a difference of opinion; and (3) an immediate appeal may materially advance the ultimate termination of the litigation. In re Cement Antitrust Litig., 673 F.2d 1020, 1026 (9th Cir.1982), affd sub nom., Ariz. v. Ash Grove Cement Co., 459 U.S. 1190, 103 S.Ct. 1173, 75 L.Ed.2d 425 (1983). Certification is warranted only where "`exceptional circumstances justify a departure from the basic policy of postponing appellate review until after the entry of a final judgment.'" Id. (quoting Coopers & Lybrand v. Livesay, 437 U.S. 463, 475, 98 S.Ct. 2454, 57 L.Ed.2d 351 (1978)). The Ninth Circuit has held that certification to file an interlocutory appeal should be granted sparingly. United States v. Woodbury, 263 F.2d 784, 788 n. 11 (1959). Thus, a court should grant such certification only where allowing an immediate appeal "might avoid protracted and expensive litigation." United States Rubber Co. v. Wright, 359 F.2d 784, 785 (9th Cir.1966).
To qualify as a "controlling question of law," it need not be the case that "the reversal of the district court's order [would] terminate the litigation." In re Cement Antitrust Litig., 673 F.2d at 1026. Rather, "all that must be shown in order for a question to be `controlling' is that resolution of the issue on appeal could materially affect the outcome of litigation in the district court." Id. The Court concludes that the question whether claims for post-receivership breach of a pre-receivership contract are subject to the § 1821(d)(11) distribution priority constitutes a controlling question law worthy of certification.
If the appeals court reversed this Court's decision on the prudential mootness issue, that would revive counts 3, 5, and 11.
There are also substantial grounds for a difference of opinion with respect to whether Deutsche Bank's claims relating to FDIC-R's post-failure breach of contract are third-tier general unsecured claims under the § 1821(d)(11) distribution priority and thus prudentially moot. This Court's own ruling reversing its earlier decision on this issue, and the tension in the Ninth Circuit precedent discussed above, makes clear that substantial grounds for differing opinions exist here.
"To determine if a `substantial ground for difference of opinion' exists under 28 U.S.C. § 1292(b), courts must examine the extent to which the controlling law is unclear." Davis Moreno Constr., Inc. v. Frontier Steel Bldg. Corp., No. 1:08-cv-00854, 2011 WL 347127, at *2 (E.D.Cal. Feb. 2, 2011). Although "a sufficient number of conflicting and contradictory opinions will provide substantial ground for disagreement, ... a dearth of cases does not constitute substantial ground for difference of opinion." Id. Even where no conflicting case law exists, however, it is still possible to establish a substantial ground for a difference of opinion. Stuart v. Radioshack Corp., No. 07-4499, 2009 WL 1817007, at *3 (N.D.Cal. June 25, 2009). In such circumstances, the Court must make "an inquiry into the merits" to determine whether there is substantial grounds for a difference of opinion. Oyster v. Johns-Manville Corp., 568 F.Supp. 83, 86 (E.D.Pa.1983).
As noted above, there is no controlling precedent on this issue. Neither Sharpe nor McCarthy addresses whether a claim for post-receivership breach of a pre-receivership contract falls within the § 1821(d)(11) priority scheme. Thus, no controlling precedent precludes a finding that there are substantial grounds for differing opinions on the issues in this case. Moreover, Ninth Circuit case law is unclear on the extent to which a claim for post-receivership breach of a pre-receivership contract qualifies as a "claim" for purposes of § 1821(d). McCarthy and Sharpe are difficult to reconcile, and McCarthy did not clearly identify the extent to which it left Sharpe's holding intact. As outlined above, FDIC-R has made strong arguments that Deutsche Bank's claims qualify as "claims" subject to the § 1821(d)(11) distribution priority.
Finally, interlocutory appeal would materially advance the ultimate termination of the litigation. One claim remains in this case — count 2 for breach of the PSAs to the extent that FDIC-R "approved or executed" them. This claim could potentially involve extensive discovery and litigation on whether FDIC-R "approved or executed" the PSAs such that its breach gives rise to a priority right of payment under § 1821(d)(20) and on whether and to what extent FDIC-R actually breached the representations and warranties in the PSAs. If the Court will ultimately have to resolve other claims that it has determined are prudentially moot, it would be far more efficient to resolve them along with count 2, rather than separately after an appeal.
For these reasons, the Court concludes that this case is appropriate for interlocutory appeal. The Court accordingly hereby
For the reasons set forth above, the Court
FDIC-R's motion for certification of an interlocutory appeal is
