Velazquez-Ortiz et al v. Federal Deposit Insurance Corporation
Filing
13
OPINION AND ORDER granting 5 Motion to Dismiss for Lack of Jurisdiction. Signed by Judge Juan M Perez-Gimenez on 4/18/2012. (JG)
THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
MOISÉS VELÁZQUEZ-ORTIZ, ET AL.,
Plaintiffs,
v.
CIV. NO. 11-1757 (PG)
FEDERAL
DEPOSIT
INSURANCE
CORPORATION
as
receiver
for
Eurobank of Puerto Rico,
Defendant.
OPINION AND ORDER
Plaintiff Moisés Velázquez-Ortiz and his spouse Virginia ClaudioRodríguez (hereinafter the “Plaintiffs”) were lessors of Eurobank of
Puerto
Rico
(“Eurobank”).
When
Eurobank
failed
and
was
brought
into
receivership by the Federal Deposit Insurance Corporation (FDIC), the
FDIC
repudiated
the
lease
agreements
entered
into
by
Plaintiffs
and
Eurobank. Plaintiffs filed two proofs of claim before the FDIC requesting
payment
for
the
postrepudiation
rent
they
claim
was
due
under
the
agreements. The FDIC disallowed those claims. Dissatisfied, Plaintiffs
brought this action charging the FDIC with breach of contract claims and
requesting this Court reverse said agency’s disavowal of their claims.
The matter is before the Court on the FDIC’s motion to dismiss. Docket
No. 5. Plaintiffs opposed the motion and the FDIC filed a reply. Dockets
No. 9 and 12, respectively. For the reasons that follow, the Court GRANTS
the FDIC’s motion to dismiss.
I. BACKGROUND
A. Factual Background
The
following
factual
narrative
is
drawn
directly
from
the
complaint; the Court takes it as true for purposes of resolving the
FDIC’s motion to dismiss.
Plaintiffs are residents of Humacao, Puerto Rico and among other
things, provide property leasing services to third parties. They have
served as lessors to Eurobank since July 1, 2005.
Civil No. 11-1757 (PG)
Page 2
Eurobank provided financial services as a Bank in Puerto Rico until
April 30, 2010. On that date, Defendant FDIC became the receiver of
Eurobank, under 12 U.S.C. §1891, et seq. The FDIC is a United States
government corporation. It is organized and exists under the laws of the
United States with its principal place of business located in Washington,
DC.
On May 12, 2005, Plaintiffs acquired three lots of land in Ciénaga
Abajo Ward of the municipality of Rio Grande, Puerto Rico. The purchase
of these lands was financed by Eurobank, with the purpose of Eurobank
leasing back from the purchasers-plaintiffs certain part of such premises
to
build
a
banking
branch
and
a
lot
to
serve
as
a
depository
of
repossessed motor vehicles, boats, and the like.
Plaintiffs provided Eurobank with the lease of certain properties
since
July
1,
2005.
Under
the
purchase-sale
financing
and
lease
agreements, Eurobank paid a monthly lease for the premises, for which
rent was deposited in Plaintiffs’ bank account held in Eurobank. Upon
depositing the monies to cover the cost of leasing the premises, the
funds were debited to cover the mortgage loans’ monthly payments, as
these were rents ceded to Eurobank.
Such an arrangement worked without problems until the FDIC took
possession
of
Eurobank
on
April
30,
2010.
Thereafter,
the
payments
continued to be made until October 2010, month in which the Eurobank
leases were repudiated by the FDIC.
Subsequently, on January 24, 2011, the FDIC received two proofs of
claims filed by Plaintiffs based on the deficiencies of the repudiated
lease
agreements,
repudiation
unpaid
one
for
lease
of
amount
the
of
$1,398,540.00
premises
where
the
(for
bank
the
post-
branch
was
located). The second, for the amount of $39,000.00 (for the lot used as
depository for repossessed motor vehicles, boats and the like).
Thereafter, on June 6, 2011, the FDIC notified Plaintiffs of the
disallowance of the claims mentioned above. The notice of disallowance of
claims included language advising claimants that if they did not agree
Civil No. 11-1757 (PG)
Page 3
with the disallowance, they had the right to file, within a 60-day period
of the disallowance, a lawsuit on their claims in the United States
District Court for the District within which the failed institutions
principal place of business was located.
Defendant failed to comply with the terms of the lease agreements
between Eurobank and Plaintiffs, causing Plaintiffs to default under
payments to Eurobank’s successors in interest [namely Oriental Bank &
Trust (Oriental Bank), another financial institution based in Puerto
Rico].
On
April
14,
2011,
Oriental
Bank
sued
Plaintiffs
in
the
local
courts for collection of monies and foreclosure of mortgage, claiming
that as of March 30, 2011, Plaintiffs owed $6,149,645.43. Civil Case No.
K CD2011-0886(906), Tribunal of First Instance, Superior Court of San
Juan.
In its suit, Oriental Bank alleges that it acquired and became the
holder in good faith of Eurobank’s loans and that, at present, it is the
creditor-assignee
of
all
of
the
rights
of
Eurobank
under
the
loan
agreements with the herein Plaintiffs. On the other hand, Oriental Bank
does not recognize being the successor of Eurobank’s obligations.
Plaintiffs were induced by Eurobank to purchase the realty that
they would then lease to Eurobank. The property where the banking branch
was located was leased for an initial period of 20 years. In other words,
the
loan
to
finance
substantially
the
through
the
purchase
long
of
term
the
lease
property
would
agreement
of
pay
itself
Plaintiffs’
property. Eurobank’s successor in interest, however, deprived Plaintiffs
of their right to the contractual rental income as well as of their right
to claim the monies due after the repudiation of the lease, which is no
different
than
a
breach
of
contract
between
the
parties
and
their
successors in interest.
The repudiation of the lease agreement caused harm to Plaintiffs.
They have suffered indignation caused by the inevitable default of their
loans with Eurobank and its successors in interest as a direct cause of
Civil No. 11-1757 (PG)
Page 4
the breach of contract based on the repudiation of its lease agreements
with said banking or financial institutions.
Moreover, the disallowance of Plaintiffs’ claims for the unexpired
leases’ deficiencies deprived them of any other remedy as a result of the
breach of contract, practically placing them on risk of having to file
for bankruptcy protection, forcing them to defend themselves from legal
suits in the Commonwealth Courts for a cause that plaintiffs did not
bring upon themselves, but by acts contrary to previous acts of Eurobank
and its successors in interest.
B. Procedural Background
On
against
August
the
complaint,
4,
FDIC
they
2011,
as
Plaintiffs
receiver
request
filed
the
Eurobank.
Court
this
for
reverse
instant
Docket
the
No.
FDIC’s
action
1.
solely
In
their
determination
disallowing their proofs of claims for the postrepudiation contractual
rent due under the unexpired lease agreements between them and Eurobank.
Oriental Bank, as a successor in interest of Eurobank, was not included
in this action as a defendant.
On September 21, 2011 the FDIC responded to the allegations with
the motion to dismiss currently pending before the Court. Docket No. 5.
In it, the FDIC informed the Court that on August 2, 2011 the FDIC’s
Board
of
Eurobank’s
Directors
made
receivership
a
“formal
estate
lacked
and
binding”
sufficient
determination
assets
to
make
that
any
distribution aimed at satisfying general unsecured claims against the
estate (hereinafter the “no value determination”). As such, Defendant
argues that even if Plaintiffs are able to ultimately prevail on the
merits of their claims, they cannot obtain any relief from the FDIC as
they are general unsecured creditors and will never be able to obtain
payment on their claims, given the FDIC’s no value determination. Thus,
the FDIC maintains that as the Court is unable to provide any meaningful
relief to Plaintiffs, the case fails to present a justiciable case or
controversy as required by Article III of the Constitution and should be
dismissed.
Civil No. 11-1757 (PG)
Page 5
Plaintiffs filed a brief opposition to Defendant’s request. Docket
No. 9. There, Plaintiffs for the first time claimed they were entitled to
a setoff against the amounts owed to Oriental Bank. The FDIC replied
arguing, inter alia, that Plaintiffs were not entitled to amend their
complaint by bringing a new claim for setoff in their opposition, and
that
in
any
event,
Plaintiffs
failed
to
implead
Oriental
Bank,
a
necessary party to this action. See Docket No. 12. The Court will address
these arguments below after outlining the applicable standard of review
for Rule 12(b)(1) motions.
II. STANDARD OF REVIEW
Motions
to
dismiss
brought
under
FED. R. CIV. P.
12(b)(1)
and
12(b)(6) are subject to the same standard of review. See Negrón-Gaztambide
v. Hernández-Torres, 35 F.3d 25, 27 (1st Cir. 1994). Firstly, when ruling
on a motion to dismiss for failure to state a claim, a district court
“must
accept
as
true
the
well-pleaded
factual
allegations
of
the
complaint, draw all reasonable inferences therefrom in the plaintiff’s
favor,
and
determine
whether
the
complaint,
so
read,
limns
facts
sufficient to justify recovery on any cognizable theory.” Rivera v. Centro
Médico de Turabo, Inc., 575 F.3d 10, 15 (1st Cir. 2009) (citing LaChapelle
v.
Berkshire
Life
Ins.
Co.,
142
F.3d
507,
508
(1st
Cir.
1998)).
Additionally, courts “may augment the facts in the complaint by reference
to (i) documents annexed to the complaint or fairly incorporated into it,
and (ii) matters susceptible to judicial notice.” Gagliardi v. Sullivan,
513 F.3d 301, 306 (1st Cir. 2008) (internal citations and quotation marks
omitted).
In
determining
whether
dismissal
of
a
complaint
is
appropriate
pursuant to Rule 12(b)(1) or 12(b)(6), the court must keep in mind that
“[t]he general rules of pleading require a short and plain statement of
the claim showing that the pleader is entitled to relief.... this short
and plain statement need only give the defendant fair notice of what the …
claim is and the grounds upon which it rests.” Gargano v. Liberty Intern.
Underwriters, Inc., 572 F.3d 45, 48 (1st Cir. 2009) (internal citations
Civil No. 11-1757 (PG)
and
quotation
marks
Page 6
omitted).
Nevertheless,
“even
under
the
liberal
pleading standard of Federal Rule of Civil Procedure 8, the Supreme Court
has ... held that to survive a motion to dismiss, a complaint must allege
‘a plausible entitlement to relief.’” Rodríguez-Ortiz v. Margo Caribe,
Inc., 490 F.3d 92, 95 (1st Cir. 2007) (citing Bell Atlantic Corp. v.
Twombly, 550 U.S. 544, 559 (2007)). “A claim has facial plausibility when
the plaintiff pleads factual content that allows the court to draw the
reasonable inference that the defendant is liable for the misconduct
alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949 (2009)
(citing Twombly, 550 U.S. at 556). That is, “[f]actual allegations must be
enough to raise a right to relief above the speculative level ... on the
assumption that all the allegations in the complaint are true (even if
doubtful in fact)….” Twombly, 550 U.S. at 555 (internal citations and
quotation
marks
omitted).
“Determining
whether
a
complaint
states
a
plausible claim for relief will … be a context-specific task that requires
the reviewing court to draw on its judicial experience and common sense.”
Iqbal, 129 S.Ct. at 1950.
III. DISCUSSION
The Financial Institutions Reform, Recovery, and Enforcement Act of
1989 (“FIRREA”), Pub. L. 101-73, 103 Stat. 183, extensively amended the
Federal Deposit Insurance Act, 12 U.S.C. §§ 1811 et seq., following the
turmoil caused by the savings and loan crisis of the 1980s. The FIRREA
provides
for
the
FDIC
to
be
appointed
as
receiver
for
financial
institutions that become insolvent and are closed down by the government.
As receiver, the FDIC is furnished with broad powers to collect the
assets
of
failed
institutions,
operate
the
institutions,
and
settle
claims involving the institutions. 12 U.S.C. §1821(d). Congress granted
the FDIC broad discretion so that it may advance important public policy
goals such as avoiding a national banking crisis and promptly resolving
the affairs of insolvent banks. United States v. Sweeny, 226 F.3d 43, 4546 (1st Cir. 2000). The FDIC is also expected to “make efficient use of
public funds.” Id. (quoting RTC v. Thornton, 41 F.3d 1539, 1542 (D.C.Cir.
Civil No. 11-1757 (PG)
Page 7
1994)). In this regard, Congress vested the FDIC with the power to allow
or disallow claims against a failed institution’s receivership estate. 12
U.S.C.
§1821(d)(5).
liability
of
the
In
FDIC
addition,
as
Congress
receiver
to
the
also
limited
amount
a
the
maximum
creditor
of
the
receivership estate would have received in a liquidation under federal
priority regulations. First Indiana Fed. Sav. Bank v. FDIC, 964 F.2d 503,
507 (5th Cir. 1992).
In this case, Plaintiffs charge the FDIC with a breach of contract
claim stemming from its repudiation of the lease agreements. They adduce
the FDIC erred when it disallowed their claims for postrepudiation rent
and argue they are entitled to damages in the sum of $1,437,540. In the
alternative, Plaintiffs maintain they should be afforded a setoff against
the amounts they owe Oriental Bank pursuant to the mortgage note. The
Court will address these arguments in turn.
A. Disallowance of claims
Plaintiffs’
determination
contractual
to
rent
complaint
prays
the
disallow
plaintiffs’
owed
the
on
Court
“reverse
proofs
unexpired
lease
of
the
claims
agreements
FDIC’s
for
the
between
plaintiffs and Eurobank and/or its successors in interest, and to allow
said proofs of claims as filed, one for $1,398,540.00 and the other for
$39,000.00 for a total amount claimed of $1,437,540.00.” Compl. at 7. In
essence, Plaintiffs’ claims are confined to seeking the reversal of the
FDIC’s disallowance of their proofs of claims; they neither impeach the
validity of the FDIC’s finding that the lease agreements in question were
“burdensome” to the receivership estate nor do they challenge the FDIC’s
“no value determination.”
Pursuant to 12 U.S.C. §1821(d)(5)(D) the FDIC has authority to
“disallow any portion of any claim by a creditor or claim of security,
preference, or priority which is not proved to the satisfaction of the
receiver.” Section 1821(d)(5)(E) explicitly states that “[n]o court may
review the [FDIC's] determination ... to disallow a claim.” At odds with
this provision, however, is §1821(d)(6)(A), which states that a claimant
Civil No. 11-1757 (PG)
Page 8
may “file suit on such claim ... in the district or territorial court of
the
United
States
for
the
district
within
which
the
depository
institution’s principal place of business is located ... (and such court
shall have jurisdiction to hear such a claim).” Plaintiffs in this case
have grounded their claims for relief under this latter section, and thus
this Court has jurisdiction to entertain them, bearing in mind that when
a claimant seeks judicial relief under §1821(d)(6)(A), “review is by a de
novo determination of the claim, not a review of the administrative
disallowance of the claim.” Muhammad v. FDIC, 751 F.Supp.2d 114, 121
(D.D.C. 2010); Brady Dev. Co. v. RTC, 14 F.3d 998, 1003 (4th Cir. 1994).
In light of this, the Court now proceeds to review Plaintiffs’ breach of
contract claim de novo.
Pursuant to §1821(e)(1), the FDIC may disaffirm or repudiate any
contract or lease-- “(A) to which such an institution is a party; (B) the
performance of which the [FDIC], in [its] discretion, determines to be
burdensome; and (C) the disaffirmance or repudiation of which the [FDIC]
determines, in [its] discretion, will promote the orderly administration
of the institution’s affairs.” It follows that the FDIC enjoys broad
discretion in deciding which lease agreements to repudiate, and nothing
in the Plaintiffs’ complaint seems to challenge the FDIC’s finding that
the lease agreements in question where burdensome, and that repudiating
them
would
have
promoted
the
orderly
administration
of
Eurobank’s
affairs. As such, the Court must presume that the FDIC’s repudiation of
the lease agreements was valid and carried out in conformance with the
FIRREA. Now, the Court must examine the effects of such a repudiation on
Plaintiffs’ claims.
Once the FDIC repudiates a contract it is freed from having to
comply with the contract. Howell v. FDIC, 986 F.2d 569, 571 (1st Cir.
1993). Repudiation is treated as a breach of contract giving rise to an
ordinary contract claim for damages. See id.; ALLTEL Info. Svcs. v. FDIC,
194
F.3d
according
1036,
to
1039
(9th
ordinary
Cir.
contract
1999).
But
damages
principles;
are
rather,
not
they
assessed
must
be
Civil No. 11-1757 (PG)
Page 9
determined in accordance with FIRREA’s terms. MCI Communs. Servs. v.
FDIC, 808 F.Supp.2d 24, 28 (D.D.C. 2011). Section 1821(e)(4) states the
following:
(4) Leases under which the institution is the lessee
(A) In general
If the conservator or receiver disaffirms or repudiates a
lease under which the insured depository institution was
the lessee, the conservator or receiver shall not be
liable for any damages (other than damages determined
pursuant to subparagraph (B)) for the disaffirmance or
repudiation of such lease.
(B) Payments of rent
Notwithstanding subparagraph (A), the lessor under a lease
to which such subparagraph applies shall—
(i) be entitled to the contractual
before the later of the date—
rent
accruing
(I) the notice of disaffirmance or repudiation is
mailed; or
(II) the disaffirmance or repudiation becomes
effective, unless the lessor is in default or
breach of the terms of the lease;
(ii) have no claim for damages under any acceleration
clause or other penalty provision in the lease; and
(iii) have a claim for any unpaid rent, subject to all
appropriate offsets and defenses, due as of the date
of the appointment which shall be paid in accordance
with this subsection and subsection (i) of this
section.
12
U.S.C.
§1821(e)(4)(our
emphasis).
Subsection
(e)(4)(A)
clearly
establishes that the FDIC will not be liable for any damages caused to
the lessor by the repudiation, except for the type of damages set out in
subsection (e)(4)(B). Pursuant to subsection (e)(4)(B)(i), Plaintiffs, as
lessors of Eurobank, would only be entitled to the contractual rent
accruing up until the later of either the date when the Plaintiffs
received
notice
of
the
disaffirmance
of
their
leases
or
when
the
disaffirmance of those leases became effective.
Plaintiffs do not argue that the FDIC has not paid them for the
contractual rent accruing before the repudiation of the agreements—by
their own admission they received payments until October 2010, month in
Civil No. 11-1757 (PG)
Page 10
which the FDIC repudiated the leases—rather, Plaintiffs seek the FDIC pay
them for the contractual rent accruing after the FDIC repudiated the
leases.
Unfortunately
for
Plaintiffs,
subsection
(e)(4)(B)
does
not
afford them relief on these claims, as they are claims for future rents
which are clearly proscribed by the FIRREA. See Resolution Trust Corp. v.
Ford Motor Credit Corp., 30 F.3d 1384 (11th Cir. 1994)(FIRREA clearly
prohibited lessor from any claim for future rents from any party or
against
any
property);
Howell,
986
F.2d
at
573
(stating
that
the
“lessor’s damages are limited to past rent and loss of future rent is not
compensable”); Unisys Fin. Corp. v. Resolution Trust Corp., 979 F.2d 609,
611
(7th
Cir.1992)
(explaining
that
the
“lessor's
damages
claim
is
completely exhausted except for back rent”); and see Qi v. FDIC, 755
F.Supp.2d 195, 201 (D.D.C. 2010)(collecting further cases).
In light of the above, it is clear that the FDIC was correct in
disallowing Plaintiffs’ proofs of claims, as these were claims for future
rents, shunned by the FIRREA. As such, Plaintiffs’ demand for payment of
the
contractual
agreements
does
rents
not
accruing
proceed
after
and
the
thus
FDIC’s
the
same
repudiation
is
of
DISMISSED
the
WITH
PREJUDICE.
B. Setoff
In their opposition to the FDIC’s motion to dismiss, Plaintiffs
argue for the first time that they are entitled to setoff relief as they
“had mutual debts with Eurobank and its receivership estate.” Docket No.
12, ¶5. Plaintiffs point out that the FDIC owes them $1,437,540 in
unpaid,
post
repudiation
rent
under
the
lease
agreements,
and
that
Plaintiffs in turn owe Oriental Bank the sum of $6,149,649.43, pursuant
to the terms of the mortgage note they originally executed in favor of
Eurobank. Thus, Plaintiffs are seeking to reduce the amount they owe to
Oriental Bank as mortgagors-debtors by the amount they claim they are due
from the FDIC as lessors-creditors of Eurobank. The FDIC argues that
Plaintiffs’ claims for setoff are unavailing, as they failed to plead for
any setoff relief in their complaint and, in any event, they failed to
Civil No. 11-1757 (PG)
Page 11
name the party to whom their debt is owed and against whom the setoff is
asserted, namely Oriental Bank. For the reasons that follow, the Court
agrees with the FDIC.
The Court notes that “it is axiomatic that the complaint may not be
amended by the briefs in opposition to a motion to dismiss.” Car Carriers
v. Ford Motor, 745 F.2d 1101, 1107 (7th Cir. 1984); see also Ocasio v.
Hogar
Geobel,
693
F.Supp.2d
167,
172
(D.P.R.
2008).
In
this
case,
Plaintiffs only advanced their setoff claim in their opposition to the
FDIC’s motion to dismiss. Although the Court is aware that the FDIC
published its “no value determination” in the Federal Register on August
16, 2011, that is 12 days after Plaintiffs filed their complaint, this
does not excuse Plaintiffs’ failure to include a plea for setoff in their
complaint.
The
“no
value
determination”
was
in
no
way
a
condition
precedent for Plaintiffs’ setoff claim, and even if they thought it was,
Plaintiffs
have
not
projected
a
minimum
of
effort
to
amend
their
complaint to include a setoff claim. Thus, this Court will not consider
after-the-fact allegations in determining the sufficiency of Plaintiffs’
complaint under Rule 12(b)(1) or 12(b)(6). See Federico v. Home Depot,
507 F.3d 188, 201-2 (3rd Cir. 2007).
Moreover, even if the Court were to allow the claim for setoff to
proceed, the same would ultimately founder as Plaintiffs have failed to
join a required party to this action, namely Oriental Bank. There is no
question that Oriental Bank, as successor in interest to Eurobank, has a
protected property interest in the mortgage note executed by Plaintiffs.
If the Court were to order a setoff against the amounts due to Oriental
Bank under that note, said Bank’s property interests would be undermined,
giving
rise
to
a
due
process
violation.
The
better
approach
for
Plaintiffs would have been to join Oriental Bank in this action, or to
join the FDIC in their state court case against Oriental Bank. Plaintiffs
have hitherto failed to do so, even in light of the FDIC’s reply, which
clearly beaconed the lack of Oriental Bank’s presence in this action as
an impediment to Plaintiffs’ claims for setoff. Thus, considering the
Civil No. 11-1757 (PG)
Page 12
procedural deficiencies that surround Plaintiffs’ claim for setoff, the
Court elects to DISMISS the same WITHOUT PREJUDICE.
IV. CONCLUSION
For the reasons expounded above, Defendant FDIC’s motion to dismiss
is GRANTED; Plaintiffs’ claims for breach of contract are DISMISSED WITH
PREJUDICE, and the claims for setoff are DISMISSED WITHOUT PREJUDICE.
IT IS SO ORDERED
In San Juan, Puerto Rico, April 18, 2012.
s/ Juan M. Pérez-Giménez
JUAN M. PEREZ-GIMENEZ
SENIOR U.S. DISTRICT JUDGE
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