What are my rights as a borrower, lender or creditor of a failed bank?

The parties should continue to abide by the terms of the agreement, as written.

The bankruptcy of Silicon Valley Bank’s parent company does not affect the counterparty’s rights to the contract.

With things remaining up in the air, you should monitor closely and ensure that you have alternative sources of financing available.

The FDIC Has Created Two Bridge Banks

Things are still on shaky footing following the failure of Silicon Valley Bank and Signature Bank. The FDIC has created two bridge banks which have taken on each bank’s deposits and commitments. The parent of Silicon Valley Bank has also filed for bankruptcy. Counterparties are reassessing their rights.

The FDIC was appointed receiver for Silicon Valley Bank. On March 13, it created a bridge bank to house almost all of the Silicon Valley assets: Silicon Valley Bridge Bank, N.A. Similarly, it created Signature Bridge Bank, N.A., and transferred almost all Signature Bank’s assets on March 12.

The FDIC released a letter on March 14 saying that every pre-failure contract with SVB and Signature has been assumed by the bridge banks. This includes vendor contracts and qualified financial contracts (QFCs) under 12 USC 1821(e). QFCs are broad. They can include, but are not limited to, swaps, foreign exchange forwards, futures contracts, repurchase agreements, stock loans, forward securities contracts, certificates of deposit, mortgages, commodity forwards, and guarantees.

SVB Financial Group, the parent of Silicon Valley Bank, filed for bankruptcy on March 17 in federal court, Southern District of New York. The filing specifically excluded SVB Bridge Bank (the bridge bank created by FDIC), SVB Securities (the broker-dealer) and SVB Capital (a venture and private credit fund). The same day, the parent issued a press release noting it had about $3.3 billion in unsecured notes that remain outstanding, but which are only against the parent, and not SVB Capital or SVB Securities.

The Rights of Borrowers, Co-lenders or Creditors

The failed banks’ borrowers, lenders and creditors face many questions about their rights in the wake of Silicon Valley Bank’s and Signature Bank’s failures and the establishment of bridge banks. Here are a few of the most common ones.

Silicon Valley Bank’s parent filed for bankruptcy. Does that affect the rights of borrowers, co-lenders or creditors of Silicon Valley Bank?

No. Silicon Valley Bridge Bank is under FDIC control, and not part of the bankruptcy of Silicon Valley Bank’s parent company, SVB Financial Group. Rights against Silicon Valley Bridge Bank are unaffected.

As a borrower of the failed bank, am I still required to keep paying the loan and performing all my obligations?

If your loan is funded, then yes. The FDIC has said yes, keep making payments and keep up on covenants, such as maintaining an account at the bank if required; any obligations on the part of the bridge bank are backed by FDIC and by the full faith and credit of the U.S. government.

For undrawn or partially drawn loans, everything is still up in the air. The FDIC may keep undrawn or partially drawn facilities in place for some time while it tries to move the loans to another bank. You should not default on a loan, until and unless the bank either tells you they are not paying out money or you can confirm they are not paying out money. During this period, if you are depending on the cash, arrange backup financing.

I am a lender in a loan syndicate with the failed bank. Do I still have to fund draw requests?

According to the FDIC, counterparties of Silicon Valley Bank and Signature Bank are legally obligated to perform their contracts with the bridge banks, and can expect timely payments from the bridge banks. Failure to perform could expose the counterparty to legal action by the U.S. government.

All members of syndicates with Silicon Valley Bank and Signature Bank should continue to fund as normal and to keep performing all of their covenants, such as keeping a deposit account if required under the loan. If you are a lender or borrower in a syndicate, and decide to stop performing, you could find yourself on the receiving end of claims by the rest of the syndicate and the FDIC.

The documents that govern syndicated loans often include defaulting lender provisions that give the borrower, and other members of the syndicate, remedies if a lender is unable or unwilling to fund. The question is whether the remedies (by borrowers or co-lenders) under the loan contract against a defaulting lender can be used by the borrower or co-lenders. Federal law and regulation, however, may limit the ability to use the remedies. Just because a loan has been transferred to a bridge bank may not create an enforceable right, unless the bridge bank later defaults.

Can a counterparty to a qualified financial contract (QFC) with Silicon Valley Bank or Signature Bank walk away from it now?

For now, the answer is no. Under federal law, counterparties in qualified financial contracts (QFCs) are prohibited for a period of one business day from exercising their termination rights against the bank once a receiver is appointed. Then they were stayed permanently once the QFCs were transferred to the bridge banks. You do not have the right to terminate for the receiver appointment, or its transfer. You may have the right to terminate the contracts once the bridge banks default, but you should not bank on it, and need to speak with counsel.

What should I do if I have a deposit account at SVB which serves as collateral for a loan with a different lender?

The perfection of the secured lender is in no way disturbed as a result of your deposits being moved to the bridge bank. If the secured lender had a DACA, then the bridge bank should have taken on control bank duties over the accounts and should be doing what it is instructed in writing by the secured lender. But the lender can ask you to move your accounts to a new bank and give it a new DACA.

I am a creditor of the failed bank. What should I do now?

If you are providing a service to the bank, you should keep providing that service. If you provided a service before the cutoff dates (SVB, March 10, 2023; Signature, March 12, 2023), and your invoice to the bank has not been paid, you may be able to file a claim, FDIC has said, in its online claim portal or by mail.