Friedman Kaplan Obtains Decisive Banking Litigation Victory

Friedman Kaplan recently obtained the dismissal with prejudice of a lawsuit that was initially filed by plaintiff HK Capital LLC against now defunct Signature Bank in 2021 – a decisive victory on behalf of its client, the Federal Deposit Insurance Corporation as Receiver for Signature Bank (“FDIC-R”).

HK Capital was a Signature Bank customer that provided merchant cash advances (“MCAs”) to other bank customers, purchasing their future receivables at a discount in exchange for a percentage of the customer’s future revenue. HK Capital alleged that the banker facilitating these MCAs fraudulently diverted millions of dollars of HK Capital’s funds to an unauthorized third party in 2019. In 2021, HK Capital sued Signature Bank to recover these funds, and Friedman Kaplan defended the bank in that case until March 12, 2023, when the New York State Department of Financial Services closed the bank and appointed the FDIC as receiver.

The FDIC-R then engaged Friedman Kaplan to represent it as the substituted defendant.  After HK Capital exhausted its administrative remedies, it amended its complaint to assert three sets of claims:  (1) a declaratory judgment that its claims qualified as “deposit liabilities” under the Financial Institutions Reform, Recovery, and Enforcement Act (“FIRREA”), such that its recovery on any judgment would receive higher priority in the receivership waterfall than general unsecured claims; (2) that the FDIC-R breached a “duty of commercial reasonableness” by purportedly failing to pursue appropriate insurance coverage; and (3) for breaches of the Uniform Commercial Code for allegedly transferring HK Capital’s funds contrary to its instructions.

Friedman Kaplan moved to dismiss all of HK Capital’s claims with prejudice, arguing that its diverted funds, which were transferred four years before Signature Bank failed, were not “deposit liabilities” under FIRREA because they were not “on deposit” at Signature Bank when it failed; that the commercial reasonableness claim failed because the plaintiff did not – and could not – identify any basis for such a duty, and because FIRREA did not provide a private right of action; and that the UCC-based claims were time-barred under the UCC’s one-year statute of repose, because HK Capital’s prior counsel had revealed its knowledge of these claims to Friedman Kaplan in October 2019, years before HK Capital filed its action.

Judge Denise Cote of the U.S. District Court for the Southern District of New York granted the FDIC-R’s motion with prejudice, agreeing that the plaintiff’s claims were not “deposit liabilities” under FIRREA; that the plaintiff had no private right of action against the FDIC-R with respect to its pursuit of insurance coverage; and that the UCC-based claims were time-barred because the knowledge of HK Capital’s prior counsel was attributable to HK Capital.  The Court denied leave to replead, and the time to appeal has expired – making this now one of the leading decisions on the interpretation of the FIRREA receivership waterfall.

The decision is HK Capital LLC v. Federal Deposit Insurance Corp., No. 23-CV-3775 (DLC), 2024 WL 2305364 (S.D.N.Y. May 21, 2024). The Friedman Kaplan team was led by partner John Orsini and included associate Dania Bardavid and paralegals Emily Redunski and Austin Cross.