Banking Law

Although it appears on its face to be another fairly mundane breach of contract lawsuit, recent litigation commenced by a Medford, Oregon real estate developer against the FDIC as receiver of a failed Vancouver, Washington bank caught my eye because of a statement by the attorney for the plaintiff. It was a line that echos a similar warning sounded by the bellowing gas bag who writes this blog.

The basics of the transaction are fairly simple. The failed bank had made a loan to a development company, which was secured by unimproved real estate. The loan proceeds were intended to be used to develop the real estate.The loan appears to have been guaranteed by an individual who owned the borrower. The bank failed to fund construction draws, the bank failed and was placed into an FDIC receivership, the borrower couldn't continue the project, and in stepped the plaintiff to save the day. The plaintiff negotiated a deep discount (93.6%) off the unpaid loan balance with the FDIC, and the FDIC and the plaintiff executed a loan sale agreement for that purchase price. Simultaneously, the plaintiff negotiated an agreement with the borrower and guarantor for a deed in lieu of foreclosure in consideration of, we assume, a release of personal liability. After paying off what appear to be $300,000 in mechanics liens, the plaintiff would appear to have paid $550,000 for a piece of real estate that at one time served as collateral for a $3.9 million dollar loan.

Obviously, the deal was too good to be true, because the FDIC refused to close, told the plaintiff that it would not honor its agreement, and told the plaintiff that "the loan would be sold through a sealed bid on Feb. 9." Since the FDIC refuses to comment, we don't know what it's legal defenses might be; however, on its face, it appears that somebody at the FDIC didn't like the legally binding deal's sale price and decided to simply break the contract and seek a higher price through an auction process.

This is what we call "The Flounder Defense." We first discussed it four years ago and it bears repeating.

You remember Kent "Flounder" Dorfman, the pledge in the movie "Animal House" whose brother's new Cadillac was wrecked by his frat brothers on a famous road trip. As he stood there blubbering while surveying the wreckage caused by his misplaced trust, you must also recall the response of Eric "Otter" Stratton:

"Flounder, you can't spend your whole life worrying about your mistakes! You f***ed up -- you trusted us! Hey, make the best of it!"

The poor plaintiff trusted the FDIC to abide by its written agreement and didn't secure the FDIC's promise by locking a chastity belt on Sheila Bair and then swallowing the key, or by having Jack Bauer keep a laser sight on the receiver's forehead until the deal closed. You live, you learn.

"It?s bewildering to us,? [plaintiff's attorney Steve] Wilker said. ?No private party could get away with this conduct."

Welcome to my world, Steve. My advice to you is to start drinking heavily.