Remedies Against Receiver Must Be Exhausted Before Claim Against Assignee

Foley & Lardner LLP

From the consumer plaintiffs’ perspective, a recent appellate decision in Rundgren v. Washington Mutual Bank, FA, is far from Utopia.

The U.S. Court of Appeals for the Ninth Circuit affirmed the dismissal of claims brought by singer-songwriter Todd Rundgren and his wife Michelle Rundgren against JPMorgan Chase Bank, N.A. (Chase). Since the Rundgrens’ claims relate to alleged acts of a lender that was later placed in a receivership of the Federal Deposit Insurance Corporation (FDIC), the subsequent assignee of the loan can’t be sued until the Rundgrens exhaust their administrative remedies against the receiver.

The Rundgrens’ claims are based upon alleged fraudulent actions and violations of the Truth in Lending Act (TILA) and other consumer laws in connection with a loan refinancing in early 2008 by their mortgage lender, Washington Mutual Bank (WaMu). According to the Rundgrens, WaMu, among other misdeeds, falsified the loan application, inflated the Rundgrens’ assets and income, misled the Rundgrens regarding loan document terms, and secured a fraudulent appraisal. Later in 2008, WaMu was seized by the Office of Thrift Supervision and placed into receivership by the FDIC. The FDIC, as receiver, later sold the Rundgrens’ loan to Chase pursuant to a Purchase and Assumption Agreement, under which the receiver retained (and Chase did not assume) liabilities for borrowers’ claims arising from WaMu’s acts.

Within months following WaMu’s receivership, Chase declared the Rundgrens’ loan in default, accelerated the maturity of the loan, and set a non-judicial foreclosure sale. The Rundgrens responded by bringing a case against Chase and WaMu in Hawaii state court, seeking, among other remedies, statutory damages under TILA, punitive damages, and declaratory and injunctive relief to prevent the foreclosure. Upon Chase’s removal of the case to federal court, the district court granted Chase’s motion to dismiss the case under Rule 12(b)(1) of the Federal Rules of Civil Procedure due to the Rundgrens’ failure to exhaust their claims with the FDIC prior to bringing the case, as required by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA).

On appeal, the Ninth Circuit affirmed the district court’s ruling, noting that FIRREA establishes an exclusive procedure for creditors’ claims against the estate of an institution in receivership, and “strips courts of jurisdiction over claims that have not been exhausted through this process….” The court also rejected the Rundgrens’ claim that their causes of action are in the nature of affirmative defenses to a foreclosure action, noting that the Rundgrens and WaMu contractually agreed to Hawaii’s efficient non-judicial foreclosure process and thus there is no “action” to present affirmative defenses.

Lacking jurisdiction, the federal courts will be unable to avert the non-judicial foreclosure. The Rundgrens’ sole recourse, at least until exhaustion, is to the FDIC claims resolution process to resolve their monetary claims. Unfortunately for the Rundgrens, the FDIC claims resolution process will not achieve the Rundgrens’ primary goal of saving their home, meaning that they will need to find a new house in which to Bang the Drum All Day.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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