The Federal Deposit Insurance Corp. and its partner in suing borrowers in defaulted loans of failed banks have lost a second Nevada lawsuit.
U.S. District Judge Lloyd George, in dismissing a suit against a Las Vegas homebuilder on Friday, became the second Nevada federal judge in less than a month to find the FDIC and its lawsuit partner, distressed debt investor and homebuilder Lennar Corp. of Miami, can't pursue their state-law claims in federal court.
After the collapse of scores of banks during the recession, the FDIC and Lennar in 2010 created a company called Multibank 2009-1 RES-ADC Venture LLC. Multibank then acquired a portfolio of $2.253 billion in defaulted loans from failed banks.
After Multibank started foreclosing on property backing the loans and suing the borrowers for deficiency judgments, it ran into jurisdictional problems when the suits were filed in federal courts after defense attorneys said federal courts lacked jurisdiction to hear these state-law claims.
Multibank typically alleged in its lawsuits that the federal courts had jurisdiction because the disputes involved parties from different states as the FDIC "is a Delaware corporation with its principal place of business in Washington, D.C."
That assertion about the FDIC is wrong, George ruled Friday in dismissing one of the lawsuits.
"This court lacks diversity jurisdiction over this civil matter because the Federal Deposit Insurance Corporation is a federal corporation that is not a citizen of any state," George wrote in his order.
In the suit at issue, Multibank had sought to recover a $21.6 million deficiency judgment involving a loan from the failed Silver State Bank of Henderson.
The borrowers, including Astoria Pearl Creek LLC and Thomas McCormick of Astoria Homes, had intended to use the 2007 loan for $20.5 million for a homebuilding project at Boulder Highway and Magic Way in Henderson.
Then, as Astoria’s attorneys put it in a court filing: "Little did Astoria know that the housing bubble was about to burst."
"The project failed, Silver State Bank failed and Astoria too failed," Astoria attorneys at the Las Vegas law firm Marquis Aurbach Coffing wrote in a court filing.
A Multibank subsidiary that was the plaintiff in the suit, RES-NEV APC LLC, charged in the complaint that $25.2 million was due on the loan when it foreclosed on the property backing the note and bought it in December 2010 with a credit bid of $3.6 million.
Multibank can now try to sue again over the defaulted loan in state court, though it may face problems there because of a state law basing deficiency judgments not on the face value of the note, but on the discounted price the note holder paid for the loan.
For McCormick and his attorneys, Friday’s ruling was at least an interim legal victory against what they have complained is a vulture investor.
Friday’s ruling by George follows an Oct. 26 ruling by U.S. District Judge James Mahan in Las Vegas, who dismissed another Multibank lawsuit after finding "FDIC’s status as a federally-chartered bank destroys citizenship."
With local attorneys seeking additional dismissals of similar lawsuits, the national law firm Ballard Spahr LLP issued a legal alert on the issue last week saying: "For banks and investors purchasing loans from the FDIC under certain types of risk sharing arrangements, these rulings may directly affect litigation strategy, and awareness of this issue can mean the difference between recovering on your investment, or losing it altogether."
"Federal court is often the preferred venue for this type of contract-based judicial action for a variety of reasons, including predictability of outcome; clear precedent; avoiding the risk of judicial bias; and a tendency on the part of federal judges to construe contracts and statutes plainly and as written," Ballard Spahr said in its alert. "But co-venturers must recognize that the mere fact of partnering with the FDIC may prevent the venture from using the federal courts."