W Financial REIT, Ltd v. 150-152 East 79 LLC

Background

W Financial REIT, Ltd. brought a foreclosure action in New York state court concerning a mortgage securing a loan to 150-152 East 79 LLC. The mortgage covered five New York City properties. First Republic Bank was served as a John Doe defendant because it was a tenant of the properties. After First Republic did not appear or respond, the state court entered a default judgment against it and later entered a judgment of foreclosure and sale.

The properties were sold at a foreclosure sale to W Financial, which assigned its bid to an affiliate that became the owner under a referee’s deed. The state court later vacated First Republic’s default judgment and voided any portion of the foreclosure judgment that could be read to decide that the mortgage had priority over First Republic’s leases. W Financial then filed an amended complaint seeking a declaration that First Republic’s leasehold interest in 150 East 79th Street was subject to W Financial’s mortgage lien.

On May 1, 2023, the Commissioner of Financial Protection and Innovation of California closed First Republic and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. The FDIC received First Republic’s rights and powers and became responsible for resolving outstanding claims against the bank. The FDIC, acting as receiver and referred to in the opinion as the FDIC-R, substituted itself for First Republic and removed the action to federal court. The FDIC-R’s motion to stay the case was unopposed.

Administrative claims process

The Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) creates an administrative process for resolving claims against a failed financial institution in receivership. The process covers claims seeking payment from, or a determination of rights concerning, the failed bank’s assets, as well as claims relating to acts or omissions of the bank or receiver.

The FDIC set September 5, 2023, as the deadline for filing claims against the First Republic receivership. After a claim is filed, the receiver generally has 180 days to decide whether to allow or disallow it. If the receiver disallows the claim, the claimant has 60 days after receiving notice of disallowance to continue pre-receivership litigation.

Court’s reasoning

The court noted that courts are divided over whether FIRREA imposes a statutory exhaustion requirement on plaintiffs who filed lawsuits before a bank entered receivership. The court did not resolve that broader issue. Instead, it relied on decisions recognizing that FIRREA permits, and can require, a stay of pre-receivership litigation at the FDIC-R’s request so the administrative claims process can proceed.

The court determined that W Financial’s requested declaration concerned rights relating to the assets of a failed bank for which the FDIC had been appointed receiver. Because the FDIC-R had given notice and requested a stay, the court concluded that the case should be stayed while W Financial exhausted FIRREA’s administrative review process.

Ruling and effect

The court granted the FDIC-R’s motion for a stay. It stayed the action pending W Financial’s exhaustion of FIRREA’s administrative claims process and directed the Clerk to close the motion. Because it granted the stay on that ground, the court found it unnecessary to consider the FDIC-R’s alternative request for a 90-day stay under 12 U.S.C. § 1821(d)(12)(B). The opinion did not decide the priority of W Financial’s mortgage lien or otherwise resolve the merits of the foreclosure-related dispute.