505 SFD, LLC v. Federal Deposit Insurance Corporation

Background

505 SFD, LLC owns a commercial property in Greenbrae, California. First Republic Bank leased the property beginning January 4, 2023. After California’s financial regulator closed the bank on May 1, 2023, the Federal Deposit Insurance Corporation (FDIC) became the bank’s receiver and assumed its responsibilities under the lease.

The lease listed monthly rent of $23,000 and included a $69,000 rent-abatement provision. It also allowed a prevailing party in a lease-related action to recover reasonable attorney’s fees and costs. The FDIC later repudiated the lease effective December 4, 2023. It partially allowed 505 SFD’s claim for $23,000 and disallowed the remaining amount.

505 SFD sued under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), seeking unpaid base rent, property taxes, utilities and landscaping expenses, $69,000 in abated rent, attorney’s fees, and 10% annual interest on past-due amounts. The FDIC moved under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal when a complaint does not state a legally sufficient claim, as to the abated-rent, attorney’s-fee, and interest requests.

Rent Abatement

FIRREA permits a lessor to recover contractual rent accruing before the later of specified dates related to the receiver’s notice of repudiation. It also bars claims for damages under an acceleration clause or other penalty provision.

Judge Illston concluded that the lease’s rent-abatement repayment provision was a penalty provision rather than contractual rent. The provision credited rent to the tenant and required repayment of the unamortized amount if the lease ended in connection with a default. Because FIRREA bars damages under a penalty provision, the court granted the motion to dismiss the rent-abatement claim.

The court did not resolve the parties’ disagreement about whether one or three months of rent abatement had accrued. It concluded that dispute did not matter because the provision was not recoverable under FIRREA in either event. The court dismissed this request without leave to amend.

Attorney’s Fees

The court denied the motion to dismiss the attorney’s-fee request. It relied on Ninth Circuit precedent stating that attorney’s fees against the FDIC are not categorically barred and on the lease provision allowing reasonable fees for the prevailing party. The court stated that, at this early stage, it could not conclude that attorney’s fees were unavailable as a matter of law.

Additional Interest

The complaint requested 10% annual interest on all past-due amounts. The court held that sovereign immunity—the legal protection generally preventing lawsuits or monetary awards against the federal government unless it has consented—barred an award of interest against the FDIC. The court stated that Congress had not expressly waived the FDIC’s immunity from prejudgment interest and granted the motion to dismiss the 10% additional-interest request without leave to amend.

Disposition

Judge Susan Illston granted in part and denied in part the FDIC’s motion to dismiss. She granted the motion as to the requests for abated rent and additional interest, without leave to amend, and denied the motion as to the request for attorney’s fees.