The resolution of this issue potentially impacts whether SVBFG must obtain a bankruptcy loan to operate in Chapter 11, as disclosed in a court hearing on April 26.
The Silicon Valley Bank Financial Group (SVBFG) filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code on March 17, 2023, exactly one week after the FDIC’s midday bank takeover. Tensions were high and sparks flew at the “first day” court hearings on March 21 about whether the FDIC should immediately turnover approximately $2 billion that SVBFG had on deposit with Silicon Valley Bank (SVB). Bondholders who were owed several billion dollars joined SVBFG’s demands for turnover, citing the future potential need for cash that could not be delayed. At that time, SVBFG had approximately $180 million and expected to spend about $100 million in the ordinary course.
The resolution of this issue potentially impacts whether SVBFG must obtain a bankruptcy loan to operate in Chapter 11, as disclosed in a court hearing on April 26. It could also impact the amount of the special assessment fee the FDIC will be proposing to cover losses to its deposit insurance fund (DIF) after backstopping SVB and other recently failed banks (the FDIC’s proposal was expected in May 2023 and was not yet available at the time of submission).
On April 26, the Bankruptcy Court directed the FDIC, as receiver for SVB (through FDIC-R), to file a statement “identifying specifically any Title 12 regulations on which the FDIC relies in exercising rights of setoff,” indicting the “authority” for its setoff right, and “any rules or regulations or authority upon which the FDIC relies in sweeping the parent’s funds…”
The FDIC filed its statement on May 3, starting with a reminder that SVBFG, as a depositor, has nothing more than a “promise to pay” from SVB because its relationship with the bank is one of debtor-creditor, meaning SVB owned all of the deposits. Instead, SVBFG has a claim it may assert in the FDIC’s receivership case, a claim which SVBFG has not yet made in a claims process the FDIC states is “an exclusive process and core function of FDIC-R.” Any claim would be addressed through the receivership estate (including resolution of the amount) and to the extent deposit claims are not fully satisfied, “the FDIC will fully protect and satisfy any remaining amounts” under Title 12.
Drawing an analogy to the bankruptcy code’s distribution process, the FDIC explained “[a]s in a Chapter 7 bankruptcy distribution scheme, however, claimants receive payment after the claims allowance process is completed, not before it starts.” In short, SVBFG will have to wait.
The FDIC clarified that it did not “sweep” and is not “holding” any of SVBFG’s funds, stating that:
“After the depositors ran on the bank, SVB lacked sufficient cash on hand to cover deposit demands. No segregated cash was allocated to SVBFG’s deposit claims among more than $100 billion other deposit claims SVB expected to be unable to fulfill on March 10, 2023. Although the FDIC approved additional funding under the systemic risk exception to protect SVB’s depositors, nothing that has transpired since March 10 altered the debtor-creditor relationship…”
The FDIC claimed the receiver (FDIC-R) has a codified right to setoff under Title 12 § 1821(d) which it asserts has been recognized by courts as creating a federal statutory. It further argues that FDIC-R succeeds to all of SVB’s contractual rights, including setoff rights in the Deposit Agreement and Disclosure Statement-Business Accounts providing for setting off any “direct, indirect and/or acquired obligations that you owe us, regardless of the source of funds in the account, to the fullest extent permitted by law.” Importantly, the FDIC argues that § 1821(d)(2)(A) provides a common law right to setoff by providing the FDIC-R with the right to succeed to SVB’s claims or causes of action that it has against its parent, SVBFG.
The claims FDIC-R may have against SVBFG would appear to include those related to the bank’s collapse, including the mismanagement alleged in the report issued by the Federal Reserve Board on April 23. Private parties have already asserted claims against SVB’s current or former directors and/or officers in seven putative securities class actions according to a motion filed on May 3 in the bankruptcy case to allow for advancement and payment of defense costs as insureds under director & officer liability policies, which provide more than $200 million in coverage.
This $2 billion issue does not appear to be getting resolved consensually anytime soon. The Bankruptcy Court may be asked to decide, which could lead to a dispute over whether it has jurisdiction in light of the FDIC arguing that the claims resolution process under Title 12 is exclusive. This issue will be one of many that arises in SVBFG’s bankruptcy case that is worth banks and their management to be aware of while providing a glimpse into the interplay between the FDIC’s receivership and SVBFG’s Chapter 11 case.
Spencer Fane partner Eric Van Horn assists clients nationwide with all aspects of bankruptcy, restructurings, reorganizations, negotiations, collection actions, multi-jurisdictional insolvencies, corporate liquidations, and bankruptcy litigation. He can be reached at 214.459.5895 and ericvanhorn@spencerfane.com.
