SUMMERHAZE COMPANY, L.C.; ANTION FINANCIAL, L.C.; DURBANO PROPERTIES, L.C.; DURBANO DEVELOPMENT, L.C.; DURBANO LAW FIRM, P.C.; and DOUGLAS M. DURBANO, Petitioners and Appellants, v. FEDERAL DEPOSIT INSURANCE CORPORATION, as receiver for AMERICA WEST BANK, Respondent and Appellee.
No. 20120461
Supreme Court of the State of Utah
July 8, 2014
332 P.3d 908 | 2014 UT 28
Second District, Farmington; The Honorable Rodney S. Page; No. 090700093
2014 UT 28
IN THE
SUPREME COURT OF THE STATE OF UTAH
Attorneys:
George W. Pratt, Jessica P. Wilde, Salt Lake City, L. Miles LeBaron, Layton, for appellants
George W. Pratt, Jessica P. Wilde, Salt Lake City, Douglas M. Durbano, L. Miles LeBaron, Layton, for appellant Douglas M. Durbano
Brent D. Wride, Salt Lake City, for appellee
ASSOCIATE CHIEF JUSTICE NEHRING authored the opinion of the Court, in which CHIEF JUSTICE DURRANT, JUSTICE DURHAM, JUSTICE PARRISH, and JUSTICE LEE joined.
ASSOCIATE CHIEF JUSTICE NEHRING, opinion of the Court:
INTRODUCTION
¶ 1 Plaintiffs Summerhaze Company, L.C.; Antion Financial, L.C.; Mr. Douglas M. Durbano; Durbano Development, L.C.; Durbano Law Firm, P.C.; and Durbano Properties, L.C.
BACKGROUND
¶ 2 Mr. Durbano was the chief executive officer of the Bank. Mr. Durbano was also the owner or manager of the other plaintiffs in this appeal: Summerhaze Company, L.C. (Summerhaze); Antion Financial, L.C. (Antion); Durbano Properties, L.C.; Durbano Development, L.C.; and Durbano Law Firm, P.C. In 1985, Mr. Durbano hired Anna S. Padlo to work for him at his various companies. Then, in 2001, Mr. Durbano hired Ms. Padlo to work at the Bank. Between 2001 and 2007, Ms. Padlo embezzled over $550,000 from the Bank.1 Plaintiffs filed a complaint against the Bank on February 10, 2009. They alleged (1) improper acceptance of unauthorized signatures, (2) negligence, and (3) liability under a theory of respondeat superior.
¶ 3 The Bank was insured by BancInsure, Inc. under a Financial Institution Bond (Bond). The Bond was an indemnity policy. Under its terms, the Bank would be indemnified in the event of losses occasioned by employee dishonesty, forgery or alteration of negotiable instruments, unauthorized signatures and endorsements, and claims expenses, among other things. The maximum coverage under the Bond was $2,000,000. Plaintiffs filed their complaint ―in order to trigger the bond coverage of [the Bank‘s] bonding company, BancInsure, Inc.‖ After receiving the complaint, the Bank tendered the defense of the claim to
¶ 4 On January 9, 2009, before the Plaintiffs filed their complaint, the Bank filed a declaratory judgment action against BancInsure seeking to establish that the Bank was entitled to coverage under the Bond for the losses claimed by the Plaintiffs.3 On March 23, 2009, the Bank and BancInsure agreed to stay the declaratory judgment action because coverage under the Bond would become an issue only if the Plaintiffs proved the damages alleged in their complaint against the Bank.
¶ 5 On May 1, 2009, the Utah Department of Financial Institutions (UDFI) closed the Bank and appointed the FDIC as receiver, because the UDFI determined the Bank had failed and was operating in an unsafe manner.4 On May 6, 2009, the FDIC mailed notice of the Bank‘s receivership to all of the Bank‘s recorded creditors. The FDIC published notice of the Bank‘s receivership on May 7 and again on June 8 and July 8, 2009. The notices were published in the two most prominent newspapers in Utah, the Deseret News and The Salt Lake Tribune. Both the mailed and published notices indicated that all claims against the Bank, along with proof of the claims, had to be submitted to the FDIC
¶ 6 On October 8, 2009, sixty-five days after the administrative claims review deadline, Plaintiffs filed a proof of claim with the FDIC ―out of an abundance of caution.‖ On December 3, 2009, the FDIC disallowed the claims because they were not filed by the deadline. On December 18, 2009, the district court issued a Notice of Intent to Dismiss Plaintiffs‘ claims for failure to prosecute. On January 10, 2010, Plaintiffs notified the Bank and the FDIC that they intended to proceed with their suit to recover the alleged damages. On January 21, 2010, Plaintiffs filed their Notice of Intent to Prosecute. With the case revived and apparently moving forward, the district court entered a scheduling order and the parties exchanged initial disclosures. On October 1, 2010, the FDIC informed Plaintiffs—in a letter that accompanied its initial disclosures—that it was pursuing a motion to dismiss.
¶ 7 Several weeks later, the FDIC filed a motion to dismiss alleging that the district court lacked subject matter jurisdiction because the Plaintiffs had failed to comply with FIRREA. The district court granted the FDIC‘s motion to dismiss and ruled that the court was deprived of subject matter jurisdiction because the Plaintiffs failed to file a timely proof of claim, as mandated by FIRREA. Plaintiffs filed a timely notice of appeal. We have jurisdiction under
STANDARD OF REVIEW
¶ 8 The primary issue before us is whether the district court erred when it determined that it lacked subject matter jurisdiction. ―Whether a district court has subject matter jurisdiction is a question of law‖ and we review the district court‘s determination for correctness.5 The district court concluded it lacked subject matter jurisdiction based on its reading of FIRREA. We review
ANALYSIS
¶ 9 Plaintiffs present three general challenges to the district court‘s determination that it lacked subject matter jurisdiction based on FIRREA. First, Plaintiffs contend that FIRREA is not applicable to their claims against the FDIC or the Bank. Second, Plaintiffs argue that even if FIRREA is applicable, they were not required to file a proof of claim with the FDIC because the FDIC did not ―trigger‖ the administrative claims review process. Third, Plaintiffs argue that the dismissal of their complaint denied them due process under the law.
¶ 10 Our decision regarding the subject matter jurisdiction of the district court depends on the requirements of FIRREA. We begin with a review of FIRREA. We conclude that exhaustion of administrative remedies under FIRREA is a prerequisite to the exercise of a district court‘s subject matter jurisdiction. We then address each of the Plaintiffs‘ arguments.
I. FAILURE TO EXHAUST ADMINISTRATIVE REMEDIES THROUGH FIRREA‘S CLAIMS PROCESS DEPRIVES THE DISTRICT COURT OF SUBJECT MATTER JURISDICTION
A. Overview of FIRREA
¶ 11 FIRREA was passed in response to the financial crisis of the 1980s.8 The purpose of FIRREA was to ―revamp[ ] the deposit insurance fund system in order to strengthen the country‘s financial system.‖9 FIRREA abolished the Federal Savings and
¶ 12 To aid in the winding up of and disposal of claims against a failed financial institution, FIRREA created an administrative claims review process for institutions in receivership.15 The process allows a receiver to settle claims against the institution in receivership and liquidate its assets.16 After being named, the receiver must promptly publish notice to the institution‘s creditors, informing them that claims against the bank must be presented by a deadline, which is at least ninety days from the publication notice.17 The receiver must also publish notice again at one month and two months after the initial publication.18 The receiver is also required to review and pay any claim received on or before the published deadline, provided that the claim is proven to be legitimate to the satisfaction of the receiver.19 The receiver has no discretion regarding claims filed
¶ 13 The disallowance of late-filed claims is generally final, subject to one exception: if the claimant did not receive notice of the receivership in time to file a claim by the deadline and the claim is filed in time to permit payment of the claim, it may be paid.21 The receiver is required to decide the legitimacy of any claim within 180 days of receipt and notify the claimant of its determination of the claim.22 If the receiver denies the claim, it must notify the claimant of the reason for the denial and the procedures available for obtaining either administrative or judicial review of the denial.23 Following denial, a claimant may request a review of the claim within sixty days.24 This process for a post-claim denial review gives the claimant the option to seek an administrative review, file a suit, or continue an action commenced before the appointment of the receiver.25 If a
contain a clear and unequivocal withdrawal of state court jurisdiction, . . . state courts retain jurisdiction over cases against the [FDIC] which were pending when the [FDIC] was appointed receiver.‖ Holmes Fin. Assocs., Inc., 33 F.3d at 562. In this case, Plaintiffs filed suit in state court prior to the appointment of the FDIC as receiver.
B. Administrative Exhaustion
¶ 14 The doctrine of administrative exhaustion generally states that ―no one is entitled to judicial relief for a supposed or threatened injury until the prescribed administrative remedy has been exhausted.‖29 ―The doctrine is applied in a number of different situations‖ and can be ―subject to numerous exceptions.‖30 We must look to the purposes of the doctrine and ―the particular administrative scheme involved‖ to determine if the doctrine is applicable to a particular claim.31 One purpose of the doctrine is ―the avoidance of premature interruption of the
¶ 15 The text of FIRREA creates ―a jurisdictional prerequisite by expressly providing that ‗no court shall have jurisdiction‘ over claims against the receiver outside the administrative claims process set forth in section 1821(d).‖35 Thus, we conclude that under the doctrine of administrative exhaustion, the failure to exhaust administrative remedies available through FIRREA deprives a court of subject matter jurisdiction over any action seeking a determination of rights with respect to assets of a failed bank that is in receivership. By tying timely claim application to jurisdiction, we join an overwhelming majority of federal circuits.36 This does not end our analysis, however, because the
C. Failure to Exhaust FIRREA’s Administrative Claims Process Divests a Court of Jurisdiction Over Prereceivership Claims
¶ 16 Plaintiffs filed their action against the Bank in the district court in February 2009, nearly three months before the FDIC was appointed receiver. Plaintiffs argue that FIRREA creates two statutory schemes, one for prereceivership claims, and another for postreceivership claims, and that administrative exhaustion is not required for prereceivership claims. We disagree.
¶ 17 We agree with those federal circuits that hold FIRREA‘s exhaustion requirements apply equally to both pre- and postreceivership claims.37 FIRREA states that a claimant may request administrative review, file suit, or ―continue an action commenced before the appointment of the receiver.‖38 This language reflects express statutory intent to conditionally recognize the viability of claims filed before a receiver is appointed. The condition for viability is that the claim must conform to FIRREA‘s procedural mandates. FIRREA contains no ―language which could be construed to support [the] argument that the claim procedures can be dispensed with in cases where suit was filed prior to the appointment of the receiver.‖39 Nevertheless, Plaintiffs attempt to point to such language.
Meliezer, 952 F.2d at 883; Praxis Props., Inc. v. Colonial Sav. Bank, S.L.A., 947 F.2d 49, 63 (3d Cir. 1991); Resolution Trust Corp. v. Elman, 949 F.2d 624, 627 (2d Cir. 1991); Resolution Trust Corp. v. Mustang Partners, 946 F.2d 103, 106 (10th Cir. 1991).
¶ 19 FIRREA creates one scheme for both pre- and postreceivership cases under which a court retains jurisdiction. This is not to say that the mere appointment of a receiver divests a court of jurisdiction. Rather, ―FIRREA expressly allows for preexisting actions to be stayed‖ and states that ―such actions may be ‗continue[d]‘ following completion of the administrative claims process.‖43 Thus, FIRREA allows a court to suspend, rather than dismiss, suits, ―subject to a stay of [the] proceedings as may be appropriate to permit exhaustion of the administrative review process as it pertains to the underlying claims.‖44 None of the provisions diminish the importance of the statutory claim review
¶ 20 There is no dispute that Plaintiffs failed to file a claim by the August 5, 2009 deadline. Plaintiffs submitted their claim on October 8, 2009, sixty-five days after the deadline. The Plaintiffs‘ failure to file a claim by the administrative claims review deadline deprived the district court of subject matter jurisdiction.
¶ 21 We now turn to Plaintiffs‘ alternative arguments that (1) they are excused from the mandatory administrative claims review process and (2) the dismissal of their claims violates due process of the law.
II. NO EXCEPTION TO ADMINISTRATIVE EXHAUSTION EXISTS FOR PLAINTIFFS, THUS THEIR CLAIMS ARE SUBJECT TO THE REQUIREMENTS OF FIRREA
¶ 22 Plaintiffs argue that they were excused from administrative exhaustion, and alternatively, FIRREA is not applicable to their claims against the FDIC. First, Plaintiffs argue that the FDIC failed to provide notice or otherwise manifest its intent to follow the administrative claims review process, thus fitting into an exemption from FIRREA. Second, Plaintiffs argue that FIRREA is inapplicable because they do not seek payment from any assets of the FDIC or the Bank, and thus they do not present a ―claim‖ as contemplated by the statute. Third, Plaintiffs argue that their claims are not susceptible to resolution through FIRREA‘s administrative claims review process because the FDIC tendered defense of the claim to BancInsure, and thus the FDIC did not have the authority to resolve Plaintiffs‘ claims.45 We address each argument in turn.
Every liability insurance policy shall provide that the bankruptcy or insolvency of the insured may not diminish any liability of the insurer to third parties, and that if execution against the insured is returned unsatisfied, an action may be maintained against the insurer to the extent that the liability is covered by the policy. (Emphasis added.)
con‘t.
¶ 23 Plaintiffs argue that they were excused from administrative exhaustion because the FDIC failed to provide notice or otherwise manifest its intent to follow the administrative claims review process. Plaintiffs also assert that the FDIC was required to (1) stay the pending litigation to allow exhaustion of administrative remedies and (2) substitute itself as a party.
¶ 24 Section 1821(d)(12)(A) states that a ―receiver may request a stay . . . in any judicial action or proceeding‖ not to exceed ninety days, and that a request for a stay by a receiver must be granted.46 The term ―may‖ is permissive; thus the statute does not require that the receiver request a stay. Rather, the purpose of the stay provision is to give the receiver time to familiarize itself with any pending litigation and decide how best to proceed.47 The FDIC was not required to stay any pending litigation, and we need not inquire as to the reason for its decision to not request a stay.
¶ 25 Nor is the FDIC required to substitute itself as a party to a prereceivership lawsuit. When a receiver is appointed, it is granted all the powers conferred and duties imposed by federal and state law.48 A receiver may take over the assets of and operate the failed institution with all the power of members,
Plaintiffs have not obtained a judgment against either the Bank or the FDIC, let alone had such judgment returned unsatisfied. Thus,
¶ 26 Finally, Plaintiffs assert that the FDIC failed to provide notice of the FIRREA administrative claims review process. We disagree. Plaintiffs‘ argument focuses on the narrow exception to the rejection of an untimely administrative claim under
¶ 27 However, in this case, the record is replete with references to both published and mailed notices.52 The FDIC
¶ 28 Plaintiffs claim that not all of them received notice. We find this argument without merit. A failure to mail notice ―does not relieve the [creditor] of the obligation to exhaust administrative remedies,‖ provided the creditor had actual notice of the FDIC‘s appointment as receiver.54 The FDIC mailed notice to Mr. Durbano, Durbano Development, and Durbano Law Firm because they were parties listed as creditors of the Bank due to the litigation filed prior to receivership. Mr. Durbano and Durbano Law Firm were listed as the manager and servicing agent, respectively, for Summerhaze, Antion, Durbano Properties, and Durbano Development. Mr. Durbano was listed as both the manager and servicing agent for Durbano Law Firm. Mr. Durbano testified that he personally received notice of the administrative claims review process. Although Mr. Durbano testified that he believed the notice of the administrative claims review process was in relation to a separate matter, he was also the CEO of the Bank and was personally aware of the Bank‘s
remedies with regard to the claims will be barred.‖ Both the published and mailed notices reference
¶ 29 Furthermore, ―when the [receiver] knows that a claimant is represented by counsel with regard to a claim, and especially when litigation is pending, it is entirely proper for the [receiver] to notify the claimant of the receivership via [his or her] attorney.‖55 ―Indeed, to do otherwise might be an improper communication with a represented party, and could well be a breach of professional ethics.‖56 The FDIC mailed notice to Plaintiffs‘ counsel of record due to the litigation pending at the time the Bank was placed in receivership.
¶ 30 The district court correctly found that Plaintiffs had actual notice of the August 5, 2009 administrative claims review process deadline. It is undisputed that Plaintiffs filed a claim on October 8, 2009—more than two months after the claims deadline. Based on our review of the record, we conclude the district court properly concluded that Plaintiffs had notice of the August 5, 2009 deadline to submit claims under the administrative claims review process.
B. Plaintiffs Sought Payment from the Bank’s Assets and Thus Presented a Claim Regulated by FIRREA
¶ 31 Plaintiffs assert that FIRREA is inapplicable to their claim. Specifically, Plaintiffs argue that, under
¶ 32 We further hold that Plaintiffs were required to present a ―claim‖ as contemplated by FIRREA. Section 1821(d)(13)(D)(ii) ―explicitly bars jurisdiction over any claim relating to any act or omission of [a] failed financial institution.‖65 There is no qualification of the terms ―act or omission,‖66 and the statutory provision should be given ―the full scope that [the] text demands.‖67 The statute applies to creditors‘ claims,68 consumer
¶ 33 In Tellado v. IndyMac Mortgage Services, the plaintiffs brought a claim against a bank that had purchased a failed institution in receivership.72 Although the suit was filed against the purchasing bank, the claims related to an act or omission of the bank that was the target of FDIC receivership.73 The Third Circuit Court of Appeals held that because the plaintiffs‘ claims were wholly dependent upon the wrongdoing of the financial institution that was in receivership, the plaintiffs‘ claims fell within the ambit of FIRREA.74
¶ 34 In the present case, Plaintiffs filed claims against the Bank. The claims included allegations of improper acceptance of unauthorized signatures, negligence, and liability under a theory of respondeat superior. These claims stemmed from losses suffered due to embezzlement by a Bank employee. Thus, the claims relate to an ―act or omission‖ of the Bank—an institution for which the FDIC was appointed receiver—or the Bank‘s employee. The fact that Plaintiffs sought payment from the Bond is irrelevant. The Plaintiffs‘ claims are squarely within the ambit of FIRREA.
C. The Bank’s Tender of Defense Did not Deprive the Bank or FDIC of the Authority to Resolve Plaintiffs’ Claims
¶ 35 Plaintiffs next argue that their claims are not susceptible to resolution through FIRREA‘s administrative claims review process because the FDIC tendered defense of the claim to
¶ 36 Under the typical liability insurance policy, the insurer has two duties.75 The sole source of these duties is the insurance contract.76 First, an ―insurer has a duty to indemnify the insured, up to the limits of the policy, for the payment of a judgment based on a liability claim which is covered.‖77 Second, the insurer ―has a duty to defend the insured against a liability claim which is covered or which is potentially covered.‖78 These are two distinct duties, with ―an insurer‘s duty to defend [being] broader than its duty to indemnify.‖79 This is because ―[t]he duty to indemnify [is] determined by the underlying facts of the case, [while] the duty to defend [is] controlled by the allegations in the complaint against the insured.‖80 The duty to defend is a continuing duty81 that ―is triggered when the insured tenders the defense of an action against it which is potentially within the policy coverage.‖82 If the
¶ 37 One of the purposes of tendering a defense is notice. A tender of defense allows an insurer to appear and defend the insured on claims where the insured may ultimately seek to hold the insurer liable.84 Although a tender of defense allows the insurer to appear and defend the insured, a tender of defense does not change the real party in interest,85 and Plaintiffs have provided no authority to the contrary. If an insurer has notice of a claim against an insured, and ―has been afforded an opportunity to appear and defend,‖ regardless of whether the insurer actually appears, any judgment against the insured will also conclusively bind the insurer.86 Failure to tender a defense ―simply changes the burden of proof and imposes on the [insured] the necessity of again litigating and establishing‖ that it is entitled to indemnity from the insurer.87 Thus, without a tender of defense, an insurer may challenge its liability for the judgment, contest the amount of
861 P.2d at 1157 (noting the duty to defend ―aris[es] on tender of defense and last[s] until the underlying lawsuit is concluded‖); Hill v. Okay Constr. Co., 252 N.W.2d 107, 121 (Minn. 1977) (noting that tender of defense is generally a condition precedent to obtaining indemnification for fees incurred in the defense of a claim which is the responsibility of another party).
¶ 38 Once presented with a tender of defense, an insurer that believes it is not liable for coverage has two options. The insurer may either ―protect its interests through a declaratory judgment proceeding‖ asking the court to determine coverage under an insurance policy,89 or it may ―defend the suit under a reservation of its right to seek repayment later.‖90 However, an insurer ―may not refuse the tendered defense of an action unless a comparison of the policy with the underlying complaint shows on its face that there is no potential for coverage.‖91 An insurer ―that refuses a tender of defense by its insured takes the risk not only that it may eventually be forced to pay the insured‘s legal expenses but also that it may end up having to pay for a loss that it did not insure against.‖92
¶ 39 In the present case, the Bank and the FDIC triggered BancInsure‘s duty to defend by tendering the defense of Plaintiffs‘ complaint to BancInsure. The Bank and the FDIC sought a declaratory judgment regarding coverage under the Bond for the embezzlement by Ms. Padlo. The declaratory judgment action was stayed because coverage would not be required unless Plaintiffs received a judgment against the Bank or the FDIC. The tender of defense did not affect the rights of the Bank or the FDIC, nor did it change the real party in interest. The tender of defense merely triggered the duty of defense under the Bond. The Bank
III. THE DISMISSAL OF PLAINTIFFS‘ LAWSUIT DOES NOT VIOLATE DUE PROCESS UNDER THE UNITED STATES OR UTAH CONSTITUTIONS
¶ 40 Plaintiffs argue that the dismissal of their complaint denied them due process of law under both the United States and Utah Constitutions. Plaintiffs claim that the FDIC sought to ―ambush‖ them by ―awaiting expiration of the administrative deadline‖ in order to dispose of their claim ―without consideration of the merits,‖ and deprive them of their opportunity to be heard.
¶ 41 The Due Process Clause prevents ―denying potential litigants use of established adjudicatory procedures, when such an action would be the equivalent of denying them an opportunity to be heard upon their claimed right[s].‖93 Essentially, due process requires ―notice and an opportunity to be heard.‖94 FIRREA clearly spells out when and how judicial review is available.95 It expressly provides for de novo judicial review, but only after exhaustion of the administrative procedures.96 ―Since the language of the statute expressly provides for judicial review after exhaustion of the administrative procedures, [Plaintiffs] cannot prevail on [their] claim that FIRREA‘s administrative procedures deny [them] due process by making judicial review unavailable,‖ because it does not.97
CONCLUSION
¶ 43 We hold that compliance with FIRREA‘s administrative claims review process is mandatory to vest the district court with subject matter jurisdiction. Plaintiffs‘ claims were subject to FIRREA‘s administrative claims review, they were required to exhaust their administrative remedies, and no exception applied. Plaintiffs failed to comply with the administrative exhaustion requirements of the statute, and failure to comply with the statute deprived the district court of subject matter jurisdiction. Finally, we hold that the Plaintiffs were not deprived due process of the law as it was their failure to comply with the requirements of FIRREA that deprived them of their opportunity to be heard on their claims. Accordingly, we affirm the decision of the district court to dismiss Plaintiffs‘ claims for lack of subject matter jurisdiction.