CHICAGO (CN) - The Federal Deposit Insurance Corporation is not liable to a family that put nearly $30 million into keeping their now-defunct bank afloat, the 7th Circuit ruled.
Members of the Veluchamy family owned 93 percent of the state-chartered Mutual Bank, which the FDIC rated as "well capitalized" in 2007.
After a June 2008 call report, however, the FDIC downgraded Mutual Bank to "adequately capitalized" status and announced that it would need to produce an additional $30 million by September to regain its former status.
Mutual Bank met the deadline, mostly through note purchases from the Veluchamys. But in April 2009, the FDIC again revoked the "well capitalized" status and announced that it would need another $70 million in capital to remain solvent.
In July 2009, the bank's board of directors voted to redeem the notes and transfer the proceeds into personal accounts of Pethinaidu and Parameswari Veluchamy.
"This seems like nothing more than rearranging deck chairs on the Titanic, or perhaps more like the captain rushing to secure a lifeboat for himself, especially since Plaintiffs confirmed at oral argument that this transaction would not have infused the Bank with more capital which would have saved the sinking ship," the 7th Circuit's opinion summarized.
The transaction required FDIC approval, but the agency never responded. Instead, 30 days later, Mutual Bank was declared insolvent. The FDIC became the receiver and arranged for United Central Bank to assume Mutual Bank's deposits beginning the next day.
Seeking to obtain high priority in the post-insolvency distribution scheme, the Veluchamys filed proofs of claim seeking to convert proceeds from the notes into personal deposit accounts. When the FDIC "disallowed" the claims, the Veluchamys sued both the FDIC and the appointed receiver under the Administrative Procedure Act (APA) and Financial institutions Reform, Recovery, and Enforcement Act (FIRREA).
U.S. District Judge William Hibbler dismissed the case entirely, and the 7th Circuit affirmed last week.
Since the Veluchamys seek money damages, their APA claim is jurisdictionally barred, according to the ruling. The APA defines such damages as any "relief that substitutes for that which ought to have been done."
"Appellants claim that FDIC-Corporate's allegedly misleading behavior caused them to pour their money into the bank, and the millions of dollars they seek are meant to compensate them for their loss, which is classic substitute relief," Judge Ann Claire Williams wrote for a three-member panel.
Satisfaction of this request, however, would require the FDIC to expend taxpayer money.
"Though what is essentially a transfer of money from the FDIC's coffers into appellants' pockets does not itself make that relief 'money damages' under the APA, appellants' additional failure to demonstrate (or even to assert) a legal entitlement to that specific money transfer does make such relief 'money damages,'" Williams added (emphasis an parentheses in original). "The core of appellants' claims is that FDIC-Corporate should have simply given permission for the bank to redeem the notes in July 2009, which would have resulted in the creation of these personal accounts. But giving permission pre-insolvency I different from directly handing over money post-insolvency, and Appellants' demand for an order requiring the FDIC - potentially in a capacity far different from its role in July 2009 - to spend government money to repurchase the notes and/or to create deposit accounts post-insolvency is clearly a substitute for that pre-insolvency permission."
The Veluchamys also do not have an APA claim against the receiver since they never challenged the disallowance of claims administratively.
Their FIRREA claim meanwhile fails because it "is properly framed as being brought against the FDIC as receiver, i.e. in its capacity as the bank," but does not actually advance a claim against the bank.
"In fact, the bank, under the allegedly well-intentioned leadership of [the Veluchamys], did everything within its lawful power to bestow such coveted depositor status upon [the Veluchamys]," the ruling states. "It was the FDIC in its regulatory capacity that prevented that from happening, and thus the real target of [the Veluchamys'] claim, dressed in FIRREA clothing, is the FDIC-as-regulator, not the bank."
This is the second time that the Veluchamys have appeared before the 7th Circuit. In 2011, the court ordered them to turn over their passports because of the risk that they might flee to India after defaulting on Bank of America loans.
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