The U.S. Court of Appeals for the Ninth Circuit recently affirmed the dismissal of a consumer’s Truth in Lending Act (TILA) claim for lack of subject matter jurisdiction, holding that the claim was barred by the jurisdiction-stripping provision of the federal Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA).
A copy of the opinion in Shaw v. Bank of America is available at: Link to Opinion.
The plaintiff refinanced his home loan in 2006 with a bank that failed and was placed into receivership by the Federal Deposit Insurance Corporation (FDIC). Another bank acquired the failed bank’s assets through a Purchase and Assumption Agreement with the FDIC.
The borrower defaulted in 2009. One month before the foreclosure sale, he sent notices rescinding the loan to the defunct bank, its successor and the servicer, claiming that the failed bank “violated TILA by providing him with defective notice of the right to cancel when the loan was signed.”
The borrower filed bankruptcy then brought an adversary proceeding asserting his TILA allegations, which the bankruptcy court dismissed for lack of jurisdiction. The borrower then filed suit in the federal trial court.
After years of litigation and an appeal, the lender’s successor in interest moved to dismiss for lack of subject matter jurisdiction, “arguing he failed to exhaust administrative remedies through the FDIC as required by FIRREA.” The trial court agreed, granted the motion and entered judgment against the borrower. This appeal followed.
During the pendency of the appeal, the borrower “sent the FDIC a letter explaining the alleged TILA violations and requesting assistance in rescinding the loan. … The FDIC responded a week later, explaining it was ‘unable to process’ his request because ‘[t]he financial institution referenced in your request, … is not in a FDIC Receivership.’”
On appeal, the Ninth Circuit explained that “FIRREA granted ‘the FDIC, as receiver, broad powers to determine claims asserted against failed banks.’ … To that end, FIRREA ‘provides detailed procedures to allow the FDIC to consider certain claims against the receivership estate.’” This “’claims process allows the FDIC to ensure that the assets of a failed institution are distributed fairly and promptly among those with valid claims against the institution, and to expeditiously wind up the affairs of failed banks without unduly burdening the District Courts.’”
“Once a claim is filed, the FDIC is given authority to ‘determine’ claims. … This authority includes, inter alia, ‘allow[ing]’ claims, ‘disallow[ing]’ claims, and ‘pay[ing] creditor claims.’ … If the FDIC disallows a claim, ‘the claimant may request administrative review of the claim … or file suit on such claim’ in the district court whose jurisdiction covers the depository institution.”
The Ninth Circuit then explained that “[i]f a claim has not been exhausted through this process, FIRREA strips courts of jurisdiction over … any claim or action for payment from, or any action seeking a determination of rights with respect to, the assets of any depository institution for which the [FDIC] has been appointed receiver …; or … any claim relating to any act or omission of such institution or the [FDIC] as receiver.”
The Court noted that it “has interpreted this provision to be a jurisdictional exhaustion requirement” and that because the three elements required by the statute were met, “FIRREA’s exhaustion requirement therefore applies” since “[a] claim under FIRREA is ‘a cause of action … that gives rise to a right to payment or an equitable remedy. [Plaintiff] has a ‘claim’ because his cause of action gives rise to an equitable remedy—rescission.”
The Ninth Circuit rejected the plaintiff’s argument that “he does not have a ‘claim’ under FIRREA because his demand for rescission of his loan under TILA ‘is not susceptible of resolution through the claims procedure[,]’ reasoning that “none of his arguments rely on FIRREA’s claims procedures or its general statutory scheme. To the contrary, his arguments are inconsistent with FIRREA’s plain text.”
The plaintiff’s argument that his claim couldn’t be resolved through the “claims process because TILA claims are against the current holder of the loan—not the originating bank[,]” failed because “’FIRREA does not make any distinctions based on the identity of the party from whom relief is sought.’” To hold otherwise “would ‘permit claimants to avoid the provisions [of FIRREA] by bringing claims against the assuming bank’ and ‘would encourage the very litigation that FIRREA aimed to avoid.’”
In addition, the Ninth Circuit held, the plaintiff’s argument that “his claim is not susceptible of resolution via FIRREA because his loan was sold to a different bank before [the failed lender] was placed into receivership” failed because “FIRREA’s claims process … never requires the FDIC to have possessed the loan before ‘determin[ing] a claim. … And the exhaustion provision broadly applies to ‘any claim relating to any action or omission of [an institution for which the FDIC has been appointed receiver]’ focusing on the factual basis for the claim, not where the assets are located.”
Agreeing with the Fourth Circuit’s 2017 decision in Willner v. Dimon, which rejected as “irrelevant” the homeowners’ argument that “‘FIRREA’s exhaustion requirement [did not] apply’ because their home loan was securitized prior to the failure of the bank such that the loan never passed through the receivership estate[,]” the Ninth Circuit concluded that “[e]ven where an asset never passes through the FDIC’s receivership estate, the FDIC should assess the claim first.” Even though the Court was not deciding “whether or not the FDIC could have provided relief to [the plaintiff, he] was required to ask the FDIC to ‘determine’ his claim before filing suit.”
The Court also rejected the borrower’s argument that “his claim is not susceptible of resolution because he did not become aware of his claim until months after the deadline for filing a claim” because “the FDIC still could have permitted his claim at that time [because] FIRREA contains provisions allowing the FDIC to consider claims filed after the filing period under certain circumstances. … And even had the FDIC not allowed [plaintiff’s] claim, he would still have the right to seek review of that decision before a district court.”
The Ninth Circuit next rejected the borrower’s argument that the element that his claim relates to an “act or omission” by the failed bank was not met “because he has alleged ‘[c]laims of independent misconduct’ by subsequent holders of the loan for failing to respond to his rescission letter” because “[h]is claim for rescission depends entirely on alleged misconduct by [the failed bank that allegedly provided the defective right to rescind TILA notice]. Any notice of rescission a later loan holder did not respond to would only be actionable if [the defunct bank] failed to comply with TILA’s disclosure requirement at loan closing. [The borrower’s] claim is ‘functionally, albeit not formally against [the] failed bank.’”
The Court then rejected the borrower’s argument that “even if all three elements of FIRREA are met, dismissal was still erroneous because filing a claim with the FDIC would have been futile” since “the Supreme Court has made clear that if exhaustion ‘is a statutorily specified prerequisite’—as opposed to a judicially created one—‘[t]he requirement … may not be dispensed with merely by a judicial conclusion of futility[.]’”
After determine that FIRREA applies, the Ninth Circuit turned to “decide whether [the borrower] has exhausted his remedies with the FDIC” and concluded that “he has not” because his “Complaint includes no allegations that he presented his TILA claim to the FDIC before filing suit.” The fact that the borrower presented his claim to the FDIC after the district court’s dismissal and thus arguably exhausted his administrative remedy was unavailing because “'[s]ubject matter must exist as of the time the action is commenced,’ … especially in the context of administrative exhaustion. … Because subject matter jurisdiction was lacking when this action was filed, [the borrower’s] later communications with the FDIC do not prevent dismissal of his TILA claim.”
Finally, the Court rejected the borrower’s “request for further discovery[,]” finding that the trial court did not abuse its discretion.
Accordingly, the Ninth Circuit affirmed the trial court’s judgment.