KAYSVILLE -- The city of Kaysville has filed a complaint in U.S. District Court against the Federal Deposit Insurance Corporation to recover $703,646 plus interest on escrow accounts that were being held in Barnes Bank to ensure the proper development of three residential subdivisions in the city.
The FDIC took control as the receiver for the Barnes Banking Company on Jan. 15 after state regulators closed the bank.
Cindy Stout, FDIC head attorney for claims, declined to comment and referred all media inquiries to David Barr with the FDIC office of public affairs.
An attempt to reach Barr was unsuccessful.
The escrow funds held in the bank were to be used by the city to ensure such infrastructure as curb, gutter, sidewalk and waterlines were completed in Old Mill Villages, the Stonne Lane Cluster and Apgood Estates residential subdivisions, according to the document filed by the city with the federal court Aug. 19.
The funds were being held in escrow in Barnes Bank to ensure the subdivider did not abandon or default in meeting the responsibility to install improvements to the project, the document states.
The specified sum was to "be used exclusively for the purpose of paying for the costs of materials, and construction and installation of the improvements required by the Kaysville City subdivision ordinances," according to the document.
Escrow funds are deposited by the subdivider into a city-approved bank, savings and loan institution or insurance company, with the amount deposited equal to at least 115 percent of the estimated costs of the improvements not yet complete, as determined by city engineers.
The complaint prepared by Kaysville-based attorney Felshaw King, who serves as legal counsel for the city, was filed because the FDIC was slow to respond to the city's request for the funds, Mayor Steve Hiatt said.
It was on reliance of the funds the city approved the development of the subdivisions, the document states.
"(FDIC has) been slow to respond, slow to act," Hiatt said of an earlier request the city made for the money prior to filing litigation.
"First of all, our best-case scenario would be the developer completes all of the required improvements," Hiatt said. "We are hopeful that will still happen."
In the event it doesn't, he said, municipalities and the general public should have peace of mind knowing the improvements are still guaranteed.
"When a federal organization like the FDIC comes in and arbitrarily decides to disallow an existing agreement, well, you can't help but lose a little a faith in the overall financial system," Hiatt said.
"It's simply not right. And it is our responsibility to fight it."
And fight it, Kaysville has.
On Feb. 10, the city filed a claim for the accounts.
The FDIC responded June 30 with a certified letter, serving as "notice of disallowance of claims" with no real reason given, Hiatt said.
On July 14, the FDIC sent a certified letter, stating it had determined the agreement with Kaysville is "burdensome" and "the disaffirmance of said agreement will promote the orderly administration of the institution's affairs."
King, in the complaint filed by the city, implies that the request made by the city is not burdensome based on FDIC's news release, dated Jan. 15, stating the cost to FDIC's Insurance Fund for closure of Barnes Banking Company was estimated to be $271.3 million.
Kaysville's claim amounts to about 0.245 percent, less than one-fourth of 1 percent, of that total estimated cost, the court document reads.
The decision to repudiate without an explanation or reference to any criteria or established rules constitutes an "arbitrary and capricious decision and an abuse of discretion," the complaint states.
The Utah Department of Financial Institutions closed Barnes Bank in January, naming FDIC as "receiver," with the bank reopening as Deposit Insurance National Bank of Kaysville for the purpose of handling depository transactions for a time.
As receiver, it is the responsibility of FDIC to marshal and collect all assets, pay, disallow or disaffirm all liabilities or other claims and wind up all affairs of the Barnes Banking Company, the complaint states.
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