Well over 100 financial institutions failed in 2009, and so far this year, over 40 financial institutions have failed.  Failed bank assets are frequently purchased by the Federal Deposit Insurance Corporation (“FDIC”) and other banks.  Congress has passed powerful legislation in order to protect the FDIC and to incent other banks to purchase these assets.

This federal law prohibits “secret agreements” that could diminish the value of the failed bank’s assets.  By “secret agreement,” Congress means agreements not in writing.  The federal law requires that agreements modifying a loan or guaranty made prior to the FDIC’s acquisition of the assets must be in writing.  The law clearly was enacted to protect the FDIC, but many courts have extended the doctrine to protect banks which purchase these assets from the FDIC or the failed institution.

The Seventh Circuit, the court of appeals for federal courts in Indiana, Illinois and Wisconsin, has found that “secret agreements” cannot be used as a defense or claim against a bank acquiring assets from the FDIC.  Additionally, the Indiana Court of Appeals has adopted the same doctrine for defenses and claims brought in state court.

This legislation can provide important protection to financial institutions purchasing assets from failed banks.  If you have questions about this law, please contact one of the firm’s banking and creditors’ rights attorneys.