Kaysville City v. Federal Deposit Insurance Corporation

The city of Kaysville (plaintiff) entered into agreements with several developers who sought to build subdivisions in the city. The developers agreed to create six escrow agreements with Barnes Banking Company (Barnes), a state-chartered bank, to guarantee the developers’ work. Under the agreements, Kaysville could withdraw funds from the escrow accounts to pay for correcting any defects in the subdivisions if after notifying the developer of a defect and demanding the developer to correct it, city resources had to be used to correct the defect. Four of the escrow accounts were putatively funded by Barnes by the bank extending a revolving-line-of-credit loan, backed by a $1,000,000 promissory note from one developer secured by real property. Another escrow account was funded by the developers’ authorization that Barnes may use money from the developers’ saving accounts to cover defect costs. The last escrow account was funded by a straight line of credit backed by an unsecured promissory note. In 2010, Barnes became insolvent, and the Federal Deposit Insurance Corporation (FDIC) (defendant) was appointed the receiver for the bank and the insurer of its deposits. Kaysville filed claims for deposit insurance on the six escrow accounts. FDIC denied all six claims because the agent determined that five accounts were not funded with cash and Kaysville was unable to establish entitlement to the funds or incur compensable damages giving rise to a claim under any of the escrow agreements. Kaysville filed suit against the FDIC in district court. The district court upheld the FDIC’s denial of the claims. Kaysville appealed.