Kusen v. Herbert, II

Background

This was a putative securities class action concerning statements allegedly made by officers, directors, and the auditor of First Republic Bank (FRB), a now-defunct bank. The plaintiffs alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. They alleged that FRB and the individual defendants misrepresented the bank’s deposits, liquidity, interest-rate risk, risk-management practices, and financial condition. They also alleged that KPMG, FRB’s auditor, falsely represented that FRB’s financial statements complied with accounting standards.

After FRB failed, the Federal Deposit Insurance Corporation (FDIC) became its receiver. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) created an administrative claims process for claims related to a failed institution in FDIC receivership. The FDIC established September 5, 2023, as the deadline for filing administrative claims.

The original complaint was filed on June 14, 2023, after the FDIC became FRB’s receiver. Alexandra Kusen and Neil Fairman did not submit administrative claims to the FDIC receiver. Lead Plaintiff Alecta Tjänstepension Ömsesidigt submitted an individual administrative claim and a second claim on behalf of a proposed class on September 5, 2023. The FDIC receiver closed the proposed-class claim as duplicative and later disallowed Alecta’s individual claim on March 1, 2024. Alecta filed the amended complaint on February 13, 2024, before that disallowance.

Motions and Jurisdiction

The individual defendants, KPMG, and the FDIC each moved to dismiss. The court focused on the FDIC’s motion because it disposed of the case. The FDIC argued that the plaintiffs had failed to exhaust FIRREA’s administrative claims process and that the claims belonged to the FDIC receiver as the real party in interest. The court addressed only the jurisdictional argument and did not reach the real-party-in-interest argument.

Subject-matter jurisdiction means the court’s legal authority to hear a case. The court held that FIRREA strips courts of jurisdiction over claims relating to any act or omission of an institution for which the FDIC has been appointed receiver unless the claimant first completes the administrative claims process or otherwise satisfies the statute’s requirements.

The court applied the Ninth Circuit’s three-part test: there must be a claim, the claim must relate to an act or omission, and the act or omission must involve an institution for which the FDIC is receiver. The court concluded all three requirements were met. Although the plaintiffs sued the individual defendants and KPMG rather than FRB, their securities claims were based on statements made by or on behalf of FRB. FIRREA focuses on the facts underlying the claim rather than only the identity of the defendant.

Because the lawsuit related to FRB’s acts or omissions and was filed after the FDIC’s appointment as receiver, the plaintiffs had to exhaust their claims administratively before seeking judicial review. Kusen and Fairman never filed administrative claims. Alecta filed an administrative claim, but the amended complaint was filed before the receiver disallowed that claim. The court therefore concluded that no plaintiff had exhausted the administrative process before filing the relevant claims in court and that the court lacked jurisdiction.

Plaintiffs’ Additional Arguments

The plaintiffs argued that applying FIRREA’s claims process to a securities class action conflicted with the Private Securities Litigation Reform Act (PSLRA), which includes procedures for selecting a lead plaintiff in private securities class actions. The court rejected that argument. It explained that FIRREA requires each claimant to exhaust individually and does not permit one proposed class member to exhaust the process for other class members without actual authority to act for them.

The plaintiffs also argued that FIRREA conflicted with the Seventh Amendment right to a jury trial. The court rejected that argument as well. It reasoned that the receiver’s process determines whether to allow or disallow a claim but does not make binding factual findings or issue a binding judgment. If a claim is disallowed, the claimant may file suit in federal court, preserving the right to have a jury determine the facts.

Disposition

The court granted the FDIC’s motion to dismiss for lack of subject-matter jurisdiction. It did not reach the FDIC’s alternative argument or the other defendants’ motions. The court terminated the remaining motions as moot, dismissed the action with prejudice, and instructed the clerk to close the file.