The Illinois Appellate Court issued an opinion this week with important repercussions for financial institutions who step in and take over the assets of failed institutions.

In a case of “first impression in Illinois,” the Illinois Appellate Court held that Illinois courts lacked jurisdiction to consider a motion to vacate an arbitration award where the underlying arbitration claim was barred by the federal Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”).

Instead of filing her defamation claim with the FDIC as required by FIRREA, Plaintiff filed her complaint in 2010 in state court, alleging our client was liable as successor for Washington Mutual Bank’s (“WMB”) pre-dissolution defamation by publishing an allegedly false financial report. (Our client had assumed most of WMB’s accounts when it was closed on September 25, 2008.)

Because the WMB customer agreement had an arbitration provision, the trial court ordered the matter to arbitration before the American Arbitration Association (“AAA”). But, plaintiff argued that FIRREA says “no court” shall have jurisdiction; it does not say “no arbitrator.” Further, she argued our client waived the FIRREA protections by agreeing that the claim should be arbitrated. Nonetheless, the AAA arbitrator decided that the claim was barred by FIRREA and dismissed the claim.

Plaintiff challenged the arbitrator’s decision by filing a motion to vacate in state court, arguing the arbitrator lacked authority to dismiss the claim based on FIRREA. The trial court denied the motion to vacate and Plaintiff appealed.

Last week, the Illinois Appellate Court issued its ruling that the trial court lacked jurisdiction to hear a motion to vacate. As a result of the Court’s decision, the arbitrator’s dismissal will stand. While its holding is unquestionably a great victory for our client, its implications extend far beyond the unique facts of this case and could impact future proceedings against financial institutions that assume the accounts of failed institutions.

Specifically, the Appellate Court reaffirmed existing law in other states that it mattered not whether the claim was asserted against our client as a successor in interest or against WMB directly. Either way, the Court held the claim is barred since plaintiff had failed to file the claim with the FDIC before the FIRREA bar date. The court states, “[t]he court did not have such jurisdiction when plaintiff filed … the claim … in 2010. For the same reason, the court also lacked jurisdiction to consider plaintiff’s motion to vacate the arbitrator’s award on the claim.”

Significantly, the Illinois Appellate Court expressly declined to decide whether the arbitrator lacked jurisdiction under FIRREA to hear the barred claim, but in dicta the Court commented “arguably, he did not.”

Without the protections provided by FIRREA, financially sound institutions would be reluctant to aid customers of less secure institutions due to the fear that they will be liable for pre-failure misdeeds of the dissolved institution. For the first time in Illinois, the Illinois Appellate Court’s decision reaffirms the basic principles and protections of FIRREA.

However satisfying the result in this case, the Appellate Court’s reasoning raises multiple questions:

  • Would the state court have jurisdiction to hear a bank’s motion to vacate a legally erroneous arbitration ruling if the arbitrator had failed to dismiss the barred claim?
  • Would the state court have jurisdiction to hear a bank’s motion to confirm an order by the arbitrator awarding the bank money damages (say for attorney’s fees) if the claim was barred by FIRREA so the award could be enforced?

Questions aside, the decision reached the right result, allowing the arbitrator’s dismissal to stand. Here is a copy of the Appellate Court’s opinion.