News & Insights

Auditor Liability Bulletin

January 26, 2024

Eastern District of Louisiana Grants EY Motion to Compel Arbitration With FDIC-R

On January 23, 2024, Judge Eldon Fallon of the District Court for the Eastern District of Louisiana entered an order compelling arbitration of professional negligence claims asserted by the FDIC as Receiver of First NBC Bank (“FDIC-R”), against Ernst & Young LLP, the auditor for the bank’s holding company parent.  The case, previously covered in our October 30, 2020 and November 3, 2023 bulletins, involves allegations that EY engaged in accounting malpractice when it audited the financial statements of First NBC’s parent holding company. 

The FDIC-R opposed EY’s motion to compel arbitration on the grounds that (i) as a federal agency, it is not bound by arbitration agreements entered into by the failed bank, and (ii) the failed bank was not a signatory to, and thus not itself bound by, the arbitration agreement with the holding company.  The court rejected both of the FDIC-R’s arguments.  First, the court held that, when the FDIC acts in its receivership capacity, and brings claims belonging to a failed bank, it is subject to the same arbitration agreements that would have bound the bank because there is no exception to the requirements of the Federal Arbitration Act in the statutes governing the FDIC.  Second, the court held that, under Louisiana law, the FDIC-R (standing in the shoes of the bank) was bound to the holding company’s arbitration agreement by the doctrine of direct benefits estoppel, because the bank sought and obtained a direct benefit from the engagement agreement when the bank used the audit reports to satisfy its own regulatory obligations.  The court found that the FDIC-R essentially conceded the bank’s benefit in alleging its non-client malpractice claim, which requires (among other things) that the bank have relied on the audit report.

The case is FDIC v. Ernst & Young LLP, No. 20-cv-1259 (E.D. La. Jan. 23, 2024).  The FDIC-R is represented by Bailey & Glasser LLP and Stanley Reuter Thornton Alford LLC.  EY is represented by Williams & Connolly LLP and Barrasso Usdin Kupperman Freeman & Sarver, L.L.C.  The order is available here.