Co-authored by Jason F. Clouser.

The US Court of Appeals for the Seventh Circuit recently affirmed an Illinois district court’s dismissal of claims brought by the former chairman and controlling stockholder of an Illinois-state chartered bank against the Federal Deposit Insurance Corporation (FDIC), both in its regulatory capacity (FDIC-Corporate) and its receiver capacity (FDIC-Receiver).

Plaintiff Pethinaidu Veluchamy, together with other members of his family and the Veluchamy Family Foundation, owned 93.2% of First Mutual Bancorp of Illinois, Inc., a holding company that was the sole owner of Mutual Bank at Harvey, Illinois (Mutual Bank).

In June 2008, the Veluchamy family invested approximately $30 million in Mutual Bank, primarily through note purchases, in order to maintain Mutual Bank’s “well-capitalized” rating. In early 2009, the Veluchamy family arranged for an additional capital infusion of $6 million in response to an order from the Illinois Department of Financial and Professional Regulation (IDFPR). On May 12, 2009, the IDFPR notified Mutual Bank that the bank needed another $70 million in capital to remain solvent, and that IDFPR would seize control of the bank if certain capital ratio benchmarks were not achieved within 60 days. On July 31, 2009, the IDFPR declared Mutual Bank insolvent and appointed the FDIC as receiver.

Shortly before the insolvency order, Mutual Bank’s board voted to seek approval from the FDIC to redeem the $30 million note investment made by the Veluchamy family in June 2008, noting that the Veluchamy family had agreed to keep the returned capital in a deposit account at Mutual Bank (depositors have higher priority in a post-insolvency distribution than capital investors). FDIC-Corporate did not respond to the board’s request, and FDIC-Receiver rejected proofs of claims submitted by the Veluchamy family that apparently sought to treat their $30 investment as a deposit account.

Plaintiffs brought an action under the Administrative Procedure Act (APA) and the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA).

The Seventh Circuit found that the appellants’ APA claim against FDIC-Corporate was barred because the United States has not waived sovereign immunity for APA claims seeking money damages. The court affirmed dismissal of plaintiffs’ FIRREA claims against FDIC-Receiver because plaintiffs’ FIRREA claims were based on the FDIC’s regulatory decision not to act on the bank’s request for the redemption of the notes, as opposed to any actions taken by the bank itself.

Veluchamy v. FDIC, No. 10-3879 (7th Cir. Feb. 4, 2013).