The United States District Court for the Northern District of Illinois has dismissed an insurer’s counterclaims against the FDIC for rescission and declaratory judgment related to a fidelity bond and a D&O insurance policy issued to a defunct bank.  The court held that the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) prevented it from considering those claims that would “restrain or affect” the FDIC’s powers and that the counterclaims were otherwise barred by the insurer’s failure to exhaust its administrative remedies.  The court did hold, however, that the insurer could assert that the policy was “unenforceable and/or void ab initio” as an affirmative defense.  FDIC, as Receiver for Wheatland Bank v. OneBeacon Midwest Ins. Co., 2012 WL 2814393 (N.D. Ill. July 10, 2012).

The insurer issued a financial institution fidelity bond and a D&O insurance policy to the bank following the completion of a renewal application by the bank’s CEO.  In the application, the bank denied knowledge of “any claim that ‘could reasonably be expected to give rise to a future liability or bond loss.’”  It subsequently was revealed that the CEO and a director of the bank had caused the bank to make loans that benefited the CEO and the director at the bank’s expense.  The bank eventually was closed and the FDIC was appointed receiver.  When the insurer denied coverage under the fidelity bond, the FDIC, as receiver for the insured, brought this action alleging a single claim for beach of contract related to the bond.  In response, the insurer asserted various counterclaims for rescission of the bond as well as the D&O policy and for declaratory judgment regarding coverage.

With respect to the insurer’s declaratory judgment claims related to the D&O policy and its claims for rescission, the court held that it lacked subject-matter jurisdiction because, under FIRREA, it could not take any action to “restrain or affect” the FDIC’s exercise of its powers or functions—in particular, the ability of the FDIC to assert claims against the insurer in the future.  Regarding the declaratory judgment claims related to the fidelity bond, the court held that it had jurisdiction because the bond was already before the court, but dismissed the claims as redundant, stating that it “necessarily [would] address the coverage question when ruling on the FDIC’s affirmative claim.”  The court acknowledged that “dismissing [the insurer’s] declaratory-judgment counterclaims deprives it of a remedy that is traditionally available to insurers asked to defend lawsuits for which there is no coverage,” but held that the statutory language did not allow it to “balance the relative interests of the FDIC and the party seeking non-monetary relief.”

The court also held that the insurer’s counterclaims were barred because the insurer had failed to exhaust its administrative remedies as required under FIRREA.  In reaching its ruling, the court rejected the insurer’s argument that exhaustion was required only with respect to creditors and was otherwise not required because the carrier was “responding defensively to the FDIC’s complaint.”  The court did, however, allow the insurer to assert as an affirmative defense that the bond was “unenforceable and/or void ab initio,” stating that “[t]he fact that a particular defense could be asserted as an administrative claim does not convert that defense into a ‘claim’ or ‘action’ within the ordinary meaning of those terms.”

The opinion is available here.