Veluchamy v. Fed. Deposit Ins. Corp.

• Decision Date: 04 February 2013
• Docket Number: No. 10–3879.,10–3879.
• Citation: 706 F.3d 810
• Parties: Pethinaidu VELUCHAMY, et al., Plaintiffs–Appellants, v. FEDERAL DEPOSIT INSURANCE CORP., in its capacity as receiver for Mutual Bank, Harvey, Illinois, and in its corporate capacity, Defendant–Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

706 F.3d 810

Pethinaidu VELUCHAMY, et al., Plaintiffs–Appellants,

v.FEDERAL DEPOSIT INSURANCE CORP., in its capacity as receiver for Mutual Bank, Harvey, Illinois, and in its corporate capacity, Defendant–Appellee.

No. 10–3879.

United States Court of Appeals, Seventh Circuit.

Argued Nov. 2, 2012.

Decided Feb. 4, 2013.

Chad A. Schiefelbein (argued), Attorney, Vedder Price P.C., Chicago, IL, for Plaintiffs–Appellants.

Michelle Ognibene, Minodora D. Vancea (argued), Federal Deposit Insurance Corporation, Arlington, VA, Thomas P. Walsh, Office of the United States Attorney, Chicago, IL, for Defendant–Appellee.

Before MANION, WILLIAMS, and HAMILTON, Circuit Judges.

WILLIAMS, Circuit Judge.

Plaintiffs, members of the Veluchamy family and the Veluchamy Family Foundation, controlled Mutual Bank. In an effort to save the bank from insolvency and at the request of FDIC–Corporate, they raised about $30 million mostly in the form of note purchases. But after that money was raised in 2008, FDIC–Corporate requested another $70 million to keep the bank open, and Plaintiffs were not able to get that funding. In May and June 2009, regulators issued warnings that the bank would soon go under without more capital. On July 1, 2009, the board of Mutual Bank voted to redeem the $30 million in notes and convert the proceeds into personal deposit accounts belonging to two of the Veluchamys, essentially returning their money, but this transaction could not occur without the approval of FDIC–Corporate. See12 U.S.C. § 1821(i). Thirty days later, without a response from FDIC–Corporate, the bank was declared insolvent, and the FDIC was appointed as the receiver of the bank. FDIC–Receiver moved quickly to arrange with United Central Bank to assume the bank's deposits, and Mutual Bank's branches opened as branches of United Central Bank the next day. Plaintiffs then filed proofs of claim with FDIC–Receiver seeking to redeem the notes and convert the proceeds into personal deposit accounts so that they could obtain depositor-level (i.e., high) priority in the post-insolvency distribution scheme, but FDIC–Receiver did not allow the claims.

Plaintiffs brought an Administrative Procedure Act (“APA”) claim against FDIC–Corporate, alleging that they had been (1) misled into investing $30 million into the bank and (2) prevented from getting their money back on the eve of insolvency. The district court dismissed this claim as moot, but we dismiss on different jurisdictional grounds. This claim asserts that FDIC–Corporate's failure to approve the note redemption caused Plaintiffs injury, and that FDIC–Corporate should compensate them for that injury in the form of cash and the use of the FDIC's own funds to create personal deposit accounts for them. But this request for substitute monetary relief constitutes a request for “money damages,” which the APA does not authorize. See5 U.S.C. § 702.

In addition, Plaintiffs asserted APA and Financial Institutions Reform, Recovery and Enforcement Act (“FIRREA”) claims against FDIC–Receiver for rejecting their proofs of claim. The district court's dismissal of these claims was proper. We lack jurisdiction to consider Plaintiffs' APA claim against FDIC–Receiver because 12 U.S.C. § 1821(d)(7)(A) only permits such a claim if Plaintiffs first seek administrative review of the disallowance, which they did not. And Plaintiffs' FIRREA claim essentially challenges the FDIC's regulatory decision not to act on the bank's redemption approval request, when FIRREA's administrative claims process only contemplates claims premised on the acts of the bank, not the FDIC as regulator. Therefore we affirm.

I. BACKGROUND

Because this case is considered on a motion to dismiss for failure to state a claim, we assume the facts alleged in the complaint to be true. No evidence outside the pleadings was submitted with respect to the jurisdictional arguments, so the jurisdictional analysis also assumes those facts to be true. See Alicea–Hernandez v. Catholic Bishop of Chi., 320 F.3d 698, 701 (7th Cir.2003).

The Federal Deposit Insurance Corporation (“FDIC”) is most typically known as the federal agency that insures the accounts of a bank's depositors, but it also serves as a bank overseer and regulator. See FDIC v. Ernst & Young LLP, 374 F.3d 579, 581 (7th Cir.2004). And when an insured bank fails, the FDIC acts in a receiver capacity, stepping into the shoes of the failed bank much like a trustee in bankruptcy. Id. As receiver, the FDIC attempts to preserve or enhance the value of the bank's assets and to dispose of them as quickly as possible, protecting depositors and maintaining confidence in the banking system. The parties refer to the FDIC acting in its regulatory capacity as “FDIC–Corporate,” and in its receiver capacity as “FDIC–Receiver,” and so do we.

Plaintiffs Pethinaidu Veluchamy, Parameswari Veluchamy, Arun K. Veluchamy, Anu Veluchamy, and the Veluchamy Family Foundation, a family foundation established by the individual plaintiffs, collectively own 93.2% of First Mutual Bancorp of Illinois, Inc., a holding company that was the sole owner of Mutual Bank at Harvey, Illinois, a state-chartered bank (the “Bank”). In 2007 and prior to June 2008, the Bank's capital category was “well capitalized,” the highest and best level of capitalization that an FDIC-insured bank may have. See12 U.S.C. § 1831 o(b)(1).

However, after the Bank's June 2008 call report (a report on the financial conditions of a bank submitted quarterly to the FDIC, see12 U.S.C. § 1817), FDIC–Corporatenotified the Bank that its capital category was downgraded to “adequately capitalized,” and that it would need an additional $30 million of capital in order to be restored to “well capitalized” status. Plaintiffs met this requirement before the next call report was due in September 2008, arranging for the purchase of millions of dollars of notes from the Bank and additional shares of First Mutual, among other actions. Most of the $30 million infusion through note purchases came from Plaintiffs themselves. After FDIC–Corporate reviewed these transactions in September 2008, the Bank's “well capitalized” status was restored.

According to Plaintiffs' depiction of events, the rug was soon pulled out from under them through a series of tag-team regulatory actions by FDIC–Corporate and the Illinois Department of Financial and Professional Regulation (the “IDFPR”), which regulates state-chartered banks, over the next several months. On December 30, 2008, without any further examination of the Bank, the IDFPR and FDIC–Corporate ordered the Bank to develop an acceptable “Capital Plan” within 60 days (the reasons for this are not alleged in the complaint). On February 10, 2009, the Bank filed a “Preliminary Response” outlining how it would maintain “well capitalized” status, but FDIC–Corporate revoked that status the following day because it did not believe that approximately $6 million of the notes sold by the Bank in 2008 should be considered capital, and because of an additional $40 million in capital losses that FDIC–Corporate had discovered. In March 2009, IDFPR issued a “Section 51 Order,” see205 ILCS § 5/51, stating that it intended to take control of the Bank if it did not satisfy certain capital ratio benchmarks within 60 days (May 2009). Soon thereafter, Plaintiffs arranged for the infusion of another $6 million or so in capital, keeping the Bank “adequately capitalized” and staving off the threatened IDFPR takeover. But on April 28, 2009, a company (whose independence Plaintiffs question) hired by FDIC–Corporate to investigate the Bank reported that the Bank needed another $70 million in capital to stay solvent. On May 12, 2009, the IDFPR issued another Section 51 Order stating that it would take control of the bank if the Bank did not satisfy certain capital ratio benchmarks within 60 days (July 2009). On June 3, 2009, FDIC–Corporate notified the Bank that it was “critically undercapitalized,” the worst level of capitalization that may be designated. See12 U.S.C. § 1831 o(b)(1). (There is no allegation that suggests that any of the regulators' capital assessments were inaccurate, nor is there any allegation that Plaintiffs as owners were not aware of these problems.)

At a special meeting on July 1, 2009, the Bank's board of directors resolved to seek FDIC–Corporate's approval to redeem approximately $30 million in notes. See12 U.S.C. § 1828(i)(1) (FDIC–Corporate approval required for bank to redeem notes). In doing so, the board noted that Pethinaidu and Parameswari Veluchamy would agree to keep the proceeds of the redeemed notes on deposit at the Bank in an interest-free demand deposit account. This would give them the same highly-protected status as ordinary depositors in the case of bank failure, which was imminent. Otherwise, Plaintiffs—like other investors who may not have the privilege of such an arrangement—would drop to lowly creditor or equity holder status near the end of the post-insolvency distribution pecking order. The complaint alleges that this transaction was approved for the legitimate business interests of the Bank, by providing liquidity (in the form of the personal deposit accounts) among other purported benefits. This seems like nothing more than rearranging deck chairs on the Titanic, or perhaps more like the captain rushing to secure a lifeboat for himself, especially since Plaintiffs confirmed at oral argument that this transaction would not have infused the Bank with more capital which would have saved the sinking ship. Nonetheless, given the motion to dismiss posture, we assume the transaction was done for legitimate reasons. The Bank submitted its request for FDIC–Corporate's approval the following day. With no response, the Bank again asked FDIC–Corporate to act on July 24, 2009.

On July 31, 2009, the IDFPR declared the Bank insolvent and appointed the FDIC as receiver. See12 U.S.C. § 1821(c)(3)(A) (state...