Will the FDIC Compensate Parties Wronged by a Bad Contract?

January 30, 2015 | Charles Bowen

rent-word-cloud_f1FgUwDuThe Question:

Is the FDIC-R required to compensate parties when a contractual error makes compliance with the contract infeasible?

The Answer:

Not unless the terms of the contract specifically allow it (according to the recent case of Inlet Beach Capital Investments, LLC, et al. v. FDIC).  

Background and Explanation:

The complaining parties in the above-referenced case had a contract to purchase two parcels of land from the FDIC-R, which was in possession of the land due to its takeover of a failed bank (Peoples First Community Bank).  The first of the parcels was a commercial lot and the second was residential.  The two parcels comprised a total of approximately 40 acres of land near Panama City Beach, Florida. 

U.S. 98 Capital Investments, LLC was one of the appellants in this case.  U.S. 98 purchased the commercial parcel from FDIC-R.  During the sale,  U.S. 98 noticed that the commercial parcel was erroneously written as containing 21 of the residential lots and a service road from the residential parcel, however the error was not brought to the attention of the FDIC-R. The commercial deal was closed for $635,000.00, even though it also erroneously included residential areas.  

Inlet Beach Capital Investments, LLC, was also part of the appellant group. Inlet was intended to be the purchaser of the residential parcel. Inlet Beach had agreed to make the purchase of all of the residential land at a cost of $1,203,000.00.  Inlet Beach brought the error to the attention of the FDIC-R and demanded that FDIC-R purchase back the residential portions transferred in the U.S. 98 Capital Investments contract so that the deal could be completed as originally agreed.  This meant that the appellant group would have had to pay a total of $1,838,000 for the two parcels.  U.S. 98 Capital offered to sell the residential aspects of the commercial parcel back to the FDIC-R for a cost of $2,625,000.00.  This would have allowed the residential parcel sale to be completed as originally agreed.

Such a move would have resulted in a net payment from the FDIC-R to the appellant group in the amount of $787,000.00. The FDIC-R refused to do so and voided the contract for the purchase of the residential parcel. This meant that Inlet Beach Investments to pay the originally agreed-upon price of $1,203,000.00 for the residential parcel. They brought suit against the FDIC-R in federal court, but the District Court ruled in favor of the FDIC-R.  The appellants brought an appeal on the basis that there was no mutuality in the contract’s remedies limitation provision.  The 11th Circuit Court of Appeals disagreed, ruling that mutuality existed due to the fact that that the purchase was voided prior to closing. 

It should be noted, however, that had Inlet Beach Capital Investments, LLC, et al. placed languange in the contract that had specifically allowed for more significant or severe remedies for both sides, they may well have been able to contractually force the FDIC-R to make good on the sale (even if it meant a net payment to the appellants). While in hindsight it is easy to say that this should have been done, not every eventuality is reasonably foreseeable.  In addition, more significant remedies may have worked against them as well had THEY been the erroneous party. This becomes a risk management decision.  Bigger risks can lead to bigger rewards, but also to bigger losses.  

The Bottom Line: 

Wording is everything.  Make sure that any contract that is entered into is written in a way that protects your interests and that any errors made (by either party) will be fully redressed to your satisfaction.

Topics: Georgia Banking Law