What happens to a remediation escrow account when the funds are deposited in a bank that is subsequently closed and Federal Deposit Insurance Corp (FDIC) is appointed as a receiver? Some of the issues that need to be considered are illustrated in Kuruvilla Edukutharayil v. FDIC, 2013 U.S. Dist. LEXIS 8840 (N.D.Ill. 1/23/13).
In this case, the plaintiff agreed to sell 6 gas station properties in August 2004. Due diligence revealed that three of the properties were impacted with petroleum contamination. The petroleum releases were disclosed to the Illinois Environmental Protection Agency (“IEPA”) prior to the closing and plaintiff agreed to perform any investigation and cleanup required by IEPA after the closing. To ensure that plaintiff complied with its post-closing obligations, the parties entered into an escrow agreement whereby $300K of the sales proceeds were placed into an escrow account that was to be maintained by Broadway Bank. The escrow was to be released in $100K increments when the IEPA issued No Further Remediation Letter for each property.
It appears that the corporate entities that owned the three properties were formally dissolved December 2006. At the time of the corporations were dissolved, the cleanups had not been completed so the corporate entities did not have any right to demand release of the escrow.
In April 2010, the Illinois Department of Financial and Professional Regulation closed Broadway Bank and appointed the FDIC as Receiver. MB Financial Bank, N.A. (“MB”) acquired all of the assets of Broadway Bank, including deposits and escrows pursuant to a Purchase and Assumption Agreement on the same day that FDIV was appointed receiver. MB sent notices to depositors, including escrow account holders, of its acquisition of the Broadway Bank accounts.
Meanwhile, Plaintiff completed a cleanup at one of the properties. Pursuant to the escrow agreement, plaintiff was entitled to release of $100K of the escrow proceeds. According to the Plaintiff’s complaint, it first learned of the closing of Broadway Bank and the appointment of the FDIC as Receiver in April 2011. In July 2011, plaintiff submitted a completed Proof of Claim Form and other documentation substantiating its claim. In August 2011, FDIC was notified plaintiff that his claim was disallowed because it had been submitted after the expiration of the period of time to file claims. In addition, the FDIC advised plaintiff that Broadway Bank had applied the escrow account to satisfy another loan by plaintiff in December 2009.
In September, one of plaintiff’s investors, Rodney Simon, contacted FDIC representative Kirk Kelly by email to inquire on the status of the escrow. Simon advised Kelly that Broadway Bank had not been not been authorized to apply the escrow account to the other loan and alleged that escrow funds had been kept in three separate accounts that were FDIC insured. Simon further advised Kelly to “[p]lease consider this an appeal or let us know how else to proceed so we don’t miss [the 60 day] deadline.
Kelly responded in October 2011 by email that Kelly was “waiting on a response from our Legal Division” and told Simon “Please accept this as my acknowledgement that the 60 day term to respond is on hold until I hear back from Legal.” In December 2011, Simon e-mailed Kelley to ask if he had “heard from Legal as yet.” Kelley replied that the FDIC had initiated a more in depth review by MB since the bank had taken over Broadway Bank’s assets and liabilities. Two weeks later, Simon again contacted Kelly, asking if there was any update. Kelley replied the same day, stating that he had not heard back from the MB but also stated that the matter had been transferred to the FDIC’s Dallas office. Several days later, Kelley advised Simon that the plaintiff’s claim was a ” Deposit Claim” because it involved a deposit that MB claimed had been applied to a loan prior to its assumption of Broadway Bank’s assets and liabilities, and that there was not a time frame exclusion for Deposit Claims.
Plaintiff filed its lawsuit suit in August 2012 and the FDIC filed a motion to dismiss the complaint. FDIC first argued the complaint should be dismissed because plaintiff did not pursue an administrative hearing within the sixty (60) day statutory deadline. The FDIC also asserted since the escrow had been applied to the balance of a loan prior to the failure of Broadway Bank, there was no basis for a claim against the FDIC as receiver. Finally, since the FDIC said the $300K amount of the escrow exceeded the limit insured by the FDIC, the Plaintiff assumed the risk of loss of such funds.
The court held that the plaintiff’s claim was not only untimely filed but might actually be premature. The court said plaintiff to seek agency review within 60 days of notice of the disallowance and that the Plaintiff had its email expressly stating that the correspondence was an appeal was well within the sixty day period following issuance of the notice of disallowance. The FDIC argued the e-mail did not did not amount to a request for administrative review because the email was insufficiently specific. In other words, the FDIC appeared to claiming that the email correspondence was not a request for an administrative request because it lacked the magical phrase “administrative review”. The court declined to exalt form over substance, holding that there was not FDIC did not cite to any authority that there was any particular format for requesting review of disallowance claim.
FDIC alternatively argued that even if the September 28, 2011 email amounted to a request for administrative review, the deadline expired with the December 19th email and plaintiff failed to file its lawsuit within 60 days of that email. However, the court said Kelley’s e-mail was anything but a final determination of the administrative appeal. The court found that Kelley’s emails “essentially strung plaintiff along for several months” and then passed the matter off to the FDIC’s Dallas office. The e-mail does not amount to a “final determination” of the claim by the FDIC. In sum, the FDIC’s argument that the suit is untimely lacks merit. Indeed, the court said plaintiff’s email might be premature because FDIC had not concluded its administrative process. Since the FDIC had not made that argument, the court declined to rule on the ripeness of plaintiff’s lawsuit.
As we have previously discussed, a motion to dismiss is filed early in litigation before discovery is conducted and usually before a defendant files its answer. When ruling on a motion to dismiss, the court is asked to determine if the plaintiff has adequately pled a cause of action based on the facts pled by the plaintiff and the court will assume the facts are true as pled. Thus, these rulings are often not very informative. Nevertheless, this decision is instructive.
Perhaps the most important lesson is to remember that in this age of informal email correspondence, it is still important for a party to formally invoke its statutory, common law or contractual rights. The plaintiff was fortunate that this court did not follow a formalistic approach and look for the existence of a magical phrase containing the words “administrative review.” In New York, for example, some courts have held parties failed to preserve rights to dispute resolution or other administrative remedies despite lengthy email correspondence and conference calls because the party failed to specifically refer to the specific contractual right in the underlying agreement or consent order.
During the depth of the Great Recession, hundreds of community banks were failing each year. In such an environment, the parties should have been monitoring the status of the escrow account. There are alternatives to cash escrows such as letters of credit or performance bonds but these are more costly than maintaining a depository account. Perhaps the lesson from this case is to place deposits in a bank that-dare I say it- is “too big to fail”….