On September 25, 2008, the Office of Thrift Supervision appointed the Federal Deposit Insurance Corporation (“FDIC”) as Washington Mutual’s receiver, and the FDIC entered into a Purchase and Assumption Agreement (“PAA”) with JP Morgan Chase Bank (“Chase”) on that same day. Thereafter, Chase assumed many of Washington Mutual’s assets and liabilities. In April 2008, prior to its insolvency, Washington Mutual entered into a ten-year lease for the premises at 216-20 Hillside Avenue, Queens, N.Y., previously a video store. The parties to the lease intended that the premises be used as a new bank branch, and plans for renovations were attached to the lease. These plans were never carried out. Pursuant to the PAA, Chase acquired most of Washington Mutual’s real property leases, but not its “Leased Bank Premises,” all of which Chase could be assigned within ninety days of signing the PAA. The PAA was also expressly for the benefit of the FDIC and Chase only, ruling out any intent to benefit third parties. The agreement provided that it would be governed by federal law, or in the absence of controlling federal law, by the laws of the State housing Washington Mutual’s main office.
The FDIC and Chase had agreed that the Hillside lease was for bank premises, and by January 2009, Chase properly declined assignment of the lease. As a result, the FDIC decided that compliance with the Hillside lease would burden its receivership, and, in April 2009, the FDIC informed Hillside that it would exercise its authority under the Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”) to repudiate the lease. Hillside then declined to seek recovery from the FDIC, and sought it instead from Chase, operating under the theory that Chase had assumed the lease under the PAA and was in default. Chase refuted Hillside’s claim and refused to pay the rent. The question, then, before the Second Circuit was whether Hillside had standing to assert that the lease at issue was among the assets and liabilities that Chase assumed under the PAA.
In October 2011, the district court denied Hillside’s motion for summary judgment, Chase’s cross-motion for summary judgment, and the FDIC’s cross-motion to dismiss the suit. Chase and the FDIC argued primarily that Hillside lacked standing to sue Chase because it was neither a party to nor a third-party beneficiary of the PAA. The district court held that Hillside had standing to sue because Hillside’s interpretation of the PAA conceivably placed Chase and Hillside in privity of estate. On that theory, Hillside had a protected legal interest in the enforcement of the PAA. The district court also permitted the parties to submit additional evidence on the issue of whether the property was “bank premises.” With the aid of such additional evidence, the court reasoned that the lease was not in fact for bank premises because the video store had not been fully converted at the time Washington Mutual collapsed. This reasoning lead to the court’s conclusion that Chase had automatically assumed the lease pursuant to the PAA, and the district court granted Hillside’s motion for summary judgment.
Before the circuit court, the only issue to be addressed was Hillside’s standing to sue. In order to pursue a claim under federal law, plaintiffs must have (1) prudential standing and (2) Article III standing. The Second Circuit noted that it could assume Hillside’s Article III standing to sue in federal court and thus address the issue of prudential standing. Prudential standing embodies the principle that a litigant may not raise another person’s legal rights, or that the plaintiff’s complaint must fall within the zone of interests of the law invoked. The court concluded that Hillside did not have prudential standing because, as neither a party nor a third-party beneficiary, it could not enforce the terms of the PAA and that enforcement was necessary to its claim.
The court applied the contract law in interpreting the PAA. Without a contractual relationship there can be no contractual remedy, and a plaintiff must be in privity of contract with the defendant, or a third-party beneficiary of the contract, in order to successfully claim such a contractual relationship. Third-party beneficiary status can be proven by clear evidence of intent to permit enforcement by the third party at issue. The third party cannot simply be an incidental beneficiary to whom no duty is owed.
Here, the PAA did not clearly demonstrate intent to benefit or permit enforcement by Hillside, but rather it manifested the intention to benefit the FDIC and Chase only and expressly ruled out any intent to benefit third parties. Additionally, in the absence of a contractual relationship under the PAA, Hillside failed because its claim for damages required that the PAA assignments provisions be enforced in a way that would contradict the provision disclaiming any third-party benefits. Finally, the court noted that Hillside was effectively seeking to enforce the rights of a third party here (the FDIC), which the doctrine of prudential standing plainly forbids. The Second Circuit concluded that Hillside lacked prudential standing to sue.
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2014 WL 401303