(CN) - Deutsche Bank cannot sue the FDIC over the billions it claims it lost when IndyMac collapsed in 2008, because there's no money left to recover, the 9th Circuit ruled Tuesday.
"[W]e agree with the district court that Deutsche Bank's third-tier unsecured claims are prudentially moot because Deutsche Bank cannot recoup any sums owed from an insolvent IndyMac," the three-judge panel in Pasadena ruled.
Deutsche Bank National Trust Co. claims to have been the trustee for more than 240 mortgage-backed security trusts created by IndyMac Bank, one of the largest banks to fail in the subprime mortgage crisis.
After a run on IndyMac by panicked depositors, the Office of Thrift Supervision closed IndyMac on July 11, 2008, and the Federal Deposit Insurance Corporation temporarily assumed operations.
Another federal savings bank, OneWest Bank, was formed to buy IndyMac's assets and liabilities.
Deutsche Bank claimed that when the FDIC sold certain IndyMac assets and rights to OneWest for $13.9 billion, it omitted some key risks, including "any repurchase obligations for breaches of loan level representations, any indemnities relating to origination activities or securities law or any seller indemnity."
In other words, the FDIC allegedly tried to sell - and thus reap the benefits of - the trusts' pooling and servicing agreements "without assuming and assigning (or otherwise performing) the related obligations." (Parentheses in original.)
Deutsche Bank also accused the FDIC of breaching several representations and warranties, and of failing to comply with the trusts' governing agreements when servicing the mortgages.
The bank claims the FDIC's actions caused $6 billion to $8 billion in damages to the trusts and trustee.
Under federal law, Deutsche Bank's claims would take a back seat to the claims of IndyMac's creditors. But Deutsche Bank argued that because the FDIC had exceeded its authority by splitting the trusts' governing agreements and transferring the servicing rights without its consent, its claims were not subject to the usual hierarchy.
The 9th Circuit was not convinced, however. It said the bank's argument would apply to non-creditors only, not to "a quintessential creditor" like Deutsche Bank.
"Deutsche Bank's agreements with IndyMac established a creditor relationship between Deutsche Bank and the FDIC as IndyMac's successor, prior to the FDIC's alleged post-receivership breach of contract," Judge Johnnie Rawlinson wrote for the panel. "Indeed, the allegations of the complaint reflect the extensive nature of Deutsche Bank's creditor status."
As a result, "Deutsche Bank's claims must be evaluated under the statutory priority framework," Rawlinson added.
"The district court's dismissal of Deutsche Bank's third-tier general unsecured claims as prudentially moot is legally sound," the panel concluded.
It noted that Deutsche Bank's interpretation of the law "would disadvantage other equally deserving creditors who are constrained by the statutory payment priority framework."
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