Relevant Documents:
Debtor Supplemental Brief
FDIC-C Supplemental Brief
The SVB Financial Group debtor and the Federal Deposit Insurance Corp., in its corporate capacity, or FDIC-C, have completed supplemental briefing on preemption issues in the debtor’s
claim turnover and claim denial appeal. At a July 11
hearing on the FDIC-C’s
partial motion to dismiss the debtor’s complaint, U.S. District Court Judge Beth Labson Freeman directed the parties to submit supplemental briefing to address issues related to the
systemic risk exception, or SRE, invoked by Treasury Secretary Janet Yellen, the Federal Reserve Board and the FDIC in the wake of Silicon Valley Bank’s, or SVB’s, collapse.
The judge asked the parties to brief the Treasury Secretary’s “scope” of authority under the SRE, the ability of the FDIC-C to use the deposit insurance fund for “non-insurance purposes,” and other issues relevant to the FDIC-C’s preemption argument. At a following hearing on July 16, Judge Freeman indicated she would dismiss the turnover, automatic stay violation, due process and other counts of the debtor’s complaint with leave to amend depending on her decision on the preemption issues. According to the FDIC-C, section 1821(f) of the Federal Deposit Insurance Act provides the exclusive claims process for all payments from the deposit insurance fund, including the payment of uninsured deposit claims under the SRE, and therefore preempts all other claims.
Judge Freeman is presiding over the debtor’s
appeals of the FDIC’s denial of its claims for
approximately $1.93 billion in funds formerly held in accounts at SVB against the FDIC-C, as well as against the agency in its capacities as receiver for Silicon Valley Bank and as receiver for Silicon Valley Bridge Bank NA, or FDIC-R. A parallel complaint in the U.S. District Court for the Southern District of New York seeking turnover of the account funds has been
stayed pending developments in the claim denial appeals. In all of the suits, the debtor asserts that it is entitled to its full deposit account balance under the protection of the SRE.
The debtor - the former bank holding company for SVB - contends that the invocation of the SRE in March 2023 mandated protection of “all depositors,” quoting the Treasury Secretary’s public statement. The debtor argues the SRE’s statutory mechanism “vested authority solely in the Secretary of the Treasury” with respect to what action the FDIC-C must take following the invocation of the exception. The debtor says the governing statute makes clear that the innovation is “not an open ended grant of discretion to do anything it chooses,” and the agency is constrained to “execute” the Treasury Secretary’s determination.
According to the debtor, the Treasury secretary determined that all SVB depositors, both insured and uninsured, “‘will have access to
all their money’” and be “‘fully” protected” pursuant to the SRE as “necessary to protect the U.S. banking system as a whole.” The debtor argues that the FDIC-C’s interpretation would render the SRE “an open-ended grant of discretion” allowing the FDIC to take actions potentially at odds with the secretary’s determination, choosing to provide only partial guarantees, or picking or choosing to only assist certain depositors or certain banks.
Such wide discretion would allow the FDIC-C to choose forms of assistance that the Treasury secretary “had not even considered,” or “worse yet,” allow the agency to choose to provide only partial protection to uninsured depositors,” which the secretary had already “determined
would not ‘avoid or mitigate’ the risks of financial contagion.”
The FDIC-C counters that the SRE is “
not a determination that FDIC-C must take a
specific action, but rather a
general determination that some FDIC-C action would avoid or mitigate the crisis.” According to the FDIC-C, the SRE merely relieved the FDIC-C of its “least cost resolution” mandate, which ordinarily requires the agency to minimize losses to the deposit insurance fund but otherwise fully preserved the agency’s discretion as to the form of depositor assistance.
Consequently, the FDIC-C argues that the debtor’s position that the agency is constrained by a mandate to protect the debtor along with all other uninsured depositors is contrary to various provisions of the statute, which the agency contends makes “any actions” taken solely within the FDIC-C’s discretion. The FDIC-C points out that the statute does not specify that the Treasury secretary will “instruct the FDIC-C what action to take” and it does not even provide that the FDIC-C “will ever even review or see” the documentation related to the secretary’s invocation of the SRE. Instead, the FDIC-C says the only statutory review of the SRE documentation will be conducted by the U.S. comptroller general and the Government Accountability Office.
The FDIC-C says the GAO’s
initial report to Congress on SVB’s failure shows that the debtor’s interpretation of the SRE parameters is wrong. According to the FDIC-C, the GAO report shows that once the Treasury secretary invokes the SRE, the secretary’s role is complete and the FDIC-C is “‘[a]uthorized’ - not mandated or instructed - ‘to take actions under [the] systemic risk exception.’” This confirms, the FDIC-C argues, that the SRE’s “emergency purpose” is furthered by granting “broad, discretionary powers” and that the FDIC-C’s discretion to act or not to act is not constrained by a “mandate” from the Treasury Department.
Turning to the second briefing topic on the ability to use the deposit insurance fund for non-insurance purposes, the debtor contends that its account claims are for “non-insurance” payments authorized by the SRE and, accordingly, the complaint’s ancillary claims for turnover of the funds, estoppel for breach of promised deposit protections, due process violations for deprivation of the deposit funds and other ancillary claims fall outside of the insured deposit claim process. The debtor argues that the fund can be used for non-insurance purposes when authorized under the SRE.
According to the debtor, the FDIC-C may use the deposit insurance fund for non-insurance purposes, including by assisting insured depository institutions to “avoid adverse outcomes” by guaranteeing uninsured deposits and to facilitate mergers. The debtor notes that the statute“narrowly prohibits” the use of the deposit insurance fund to benefit any shareholder or affiliate of an insured deposit institution “
except as provided under the [SRE.]”
The debtor says the court “correctly noted” that the logic of the FDIC-C’s claim denial letter is “circular” in requiring the debtor to make a section 1821(f) claim for uninsured deposits only to deny the claim on the basis that there is no coverage for uninsured deposits above the $250,000 insurance coverage limit.
The FDIC-C rejects this framing, arguing that the “gravamen” of the debtor’s complaint is directed at seeking insurance coverage. The FDIC-C says the statute is clear that a “claim for insurance coverage” also “encompasses” claims seeking insurance coverage for “any deposit,” whether insured or uninsured.
Regardless of how the claims are characterized, the FDIC-C argues that the claims “
are about deposits and thus fall squarely within [section] 1821(f)’s preemptive scope.” Otherwise, the FDIC-C warns, allowing parties to pursue claims against the agency outside the section 1821(f) process would “open the flood gates” to similar claims from other depositors, undermining the administrative claims process established by Congress.