Banking and Finance Law Daily Wrap Up, DEPOSIT INSURANCE—N.D. Cal.: FDIC prevails on three affirmative defenses at SVB holding company deposits trial, (Sep 1, 2026)

By Justin Marcus Smith, J.D.

FDIC established damages far greater than the holding company successor’s $1.71 billion claim against the FDIC, a full setoff based on the deposit agreement between the bank and holding company for breaches of fiduciary duty.

Management of Silicon Valley Bank (SVB) fell below the standard of care for ordinarily prudent bankers, concluded the federal district court in San Jose, California, after a 17-day bench trial that ended in mid-July. The trial resolved four Federal Deposit Insurance Corporation (FDIC) affirmative defenses to SVB holding company claims that FDIC unlawfully blocked holding company deposits after SVB closure and appointment of FDIC as the bank’s receiver. The court found securities losses of at least $4.5 billion easily exceeded FDIC deposit liability fixed before trial at $1.71 billion. FDIC proved three of its four affirmative defenses: setoff for aiding and abetting breach of fiduciary duties; setoff for agency liability for breach of fiduciary duties; and voidable transfer of a $294 million bank-to-parent holding company dividend. The court entered judgment in favor of the FDIC on those three affirmative defenses. The only affirmative defense the FDIC failed to prove was unclean hands (SVB Financial Trust v. Federal Deposit Insurance Corporation, as Receiver for Silicon Valley Bank, No. 5:24-cv-01321-BLF (N.D. Cal. Aug. 28, 2026)).

Background. The failure of SVB was the third-largest in U.S. history when regulators closed the bank on Mar. 10, 2023. The perceived impact was so serious that the Secretary of the Treasury invoked the rarely used systemic risk exception under 12 U.S.C. § 1823(c)(4)(G) to guarantee all deposits above the federally insured limit. The FDIC stepped in as receiver for the bank and established a bridge bank to manage the deposits and pay depositors. The holding company had about $2 billion in deposits at the bank, but FDIC blocked payment to the holding company and denied holding company claims for payment due, invoking setoff rights.

In March 2024, the bank’s holding company, SVB Financial Group, filed a 12-count complaint against FDIC alleging that FDIC unlawfully blocked holding company assets to its deposits after SVB closure and appointment of FDIC as the bank’s receiver. On Feb. 3, 2025, SVB Financial Trust (Trust), the holding company’s successor, substituted for the holding company as plaintiff in the action.

On May 29, 2025, FDIC and the Trust agreed to dismiss each of the Trust’s claims except the breach of contract claim. For that claim, FDIC liability was fixed at $1.71 billion subject to applicable setoffs should FDIC prevail on one or more affirmative defenses.

By way of affirmative defenses, FDIC asserted the Trust could not recover on its breach of contract claim because the holding company, through, inter alia, its Chief Financial Officer, Global Treasurer, and officer-only Asset Liability Management Committee (ALCO), caused the bank to take excessive risk using depositor funds in violation of prudent banking standards causing more than $1.71 billion in damages.

In June 2025, the court granted in part and denied in part the Trust’s motion to strike FDIC affirmative defenses. From that point, FDIC proceeded with the following four affirmative defenses: (1) setoff for aiding and abetting breach of fiduciary duties; (2) setoff for agency liability for breach of fiduciary duties; (3) unclean hands; and (4) voidable transfer under California Civil Code §§ 3439.04, 3439.05.

In February 2026, the court granted FDIC’s motion for partial summary judgment, holding that (1) the business-judgment rule applied to the directors of the holding company and bank but did not apply to the officers thereof; and (2) the Trust could not assert that FDIC failed to mitigate its damages as the bank’s receiver.

The court then held a 12-day bench trial on FDIC’s affirmative defenses. The trial ended on July 17, 2026. The FDIC brought three theories to bear. The theories all related to indebtedness based on prior holding company and bank misconduct. FDIC had a contractual basis for its setoff defenses under the deposit agreement between the bank and holding company. FDIC said bank losses completely setoff its stipulated liability of $1.71 billion on the Trust’s breach of contract claim. FDIC bore the burden of proving all facts necessary to establish the essential elements of the aiding and abetting, setoff, and voidable transfer affirmative defenses by a preponderance of the evidence. It also bore the burden of proving unclean hands by clear and convincing evidence.

FDIC’s first theory was that the holding company, which controlled the bank and directed its activities, exposed the bank to excessive interest-rate and liquidity risk by concentrating the bank’s investment portfolio in long-term, fixed-rate securities. Worse yet, it designated the majority of those securities as held-to-maturity thus breaching interest-rate risk limits set by the holding company board of directors as applicable to subsidiaries like the bank. These circumstances exposed the bank to billions of dollars in losses when interest rates increased.

FDIC’s second theory at trial was that the holding company amplified the bank’s interest-rate risk by removing partial hedges against the risk of rising rates while retaining the underlying, previously hedged available-for-sale securities.

FDIC’s third theory at trial was that the holding company approved a $294 million bank-to parent dividend when the bank was poorly capitalized and relatively illiquid.

FDIC argued the bank officers, with holding company officers and directors encouraging them, breached their fiduciary duties to the bank by seeking to boost the holding company’s short-term income and stock price to the detriment of the bank. FDIC further argued the bank officers’ misconduct also benefited them personally because they owned holding company stock and received compensation based on the holding company’s financial performance. Last, FDIC argued the holding company was liable for the bank officers’ breaches of their fiduciary duties to the bank because it aided and abetted those breaches and because the officers acted as agents of the holding company in doing so.

The parties filed pre- and post-trial briefs. Having considered the evidence and arguments of counsel, the relevant law, and the record, the court entered findings of fact and conclusions of law.

Aiding and abetting. The court concluded FDIC proved the setoff for aiding and abetting breach of fiduciary duties affirmative defense. The court had already held that officers and directors of a federally insured bank owe duties of care and loyalty to the bank. The Trust did not dispute that the holding company and bank CFO and global treasurer common to both the holding company and the bank and the other members of the ALCO were officers that owed fiduciary duties. The trust only disputed breach, but the court found as a matter of law that the CFO, global treasurer, and other ACLO members breached their fiduciary duties and were negligent by, among other things:

1. causing the bank to take excessive interest rate risk and liquidity risk for the benefit of the holding company and adverse to the bank by repeatedly breaching economic value of equity sensitivity (EVE) at-risk limits by buying long-term, fixed-rate securities and designating the majority of them as hold-to-maturity (HTM);

2. terminating interest rate hedges, which would have locked-in-yield without realizing losses from selling available-for-sale (AFS) securities, while retaining the underlying, previously hedged (AFS) securities;

3. approving the $294 million dividend to the holding company while the bank was in dire financial condition and in need of liquidity.

The court found the CFO, global treasurer, and other members of the ALCO all made material decisions that were breaches of fiduciary duty, as FDIC claimed. They took the actions they did to bolster the short-term income of the holding company, boost its share price, and ultimately realize personal financial gain in the form of compensation from the holding company. Ordinarily prudent bankers would have known that the long-term, fixed-rate securities would decline in value in the event of rising interest rates from historically low levels at time of purchase.

The California business judgment rule did not protect these officers, as explained at the summary judgment stage, because the rule did not apply to officer conduct. Only ordinary negligence would apply to officers, regardless of involvement of another corporate decision maker.

As for aiding and abetting, members of the finance, risk, and compensation committees, the CEO common to both the holding company and the bank, and the Chief Risk Officer common to both, knew of and substantially assisted and encouraged the breaches of fiduciary duty on a regular basis. Among other things, members of the finance and risk committees and the CEO substantially assisted the breaches by supporting the 2022 termination of the hedges while retaining the underlying securities, thereby removing protection against further losses from rising interest rates. Encouragement of the breaches was a substantial factor in causing harm to the bank.

The court also rejected the Trust’s contentions that the agency immunity rule precluded liability and that California law did not recognize aiding-and-abetting liability for negligence.

Setoff. The court concluded FDIC proved the setoff for agency liability for breach of fiduciary duties affirmative defense. The CFO and the global treasurer of both the holding company and bank and the other ALCO members acted with actual authority as holding company officers and within the scope of that authority when carrying out the challenged actions. The court accordingly agreed with FDIC that the holding company was liable as a principal for the acts of its agents under a “straightforward application of agency law, notwithstanding the Trust’s attempt to carve out an exception for bank holding companies.”

Unclean hands. The court concluded the FDIC failed to prove by clear and convincing evidence that the holding company acted with ill intent or otherwise had unclean hands with respect to its claim for breach of contract. FDIC failed to present evidence of a “willful act” by the officers or directors that violated conscience or good faith beyond mere negligence. Nor did FDIC show a direct connection between holding company misconduct and the Trust’s breach of contract claim for recovery.

Voidable transfer. The court concluded FDIC proved by a preponderance of the evidence that the dividend was voidable transfer because the bank had unreasonably small assets at time of dividend approval and did not receive reasonably equivalent value in exchange for $294 million “upstreamed” to the holding company.

Proximate cause. The FDIC demonstrated that the CFO, global treasurer, and other ALCO members’ breaches of fiduciary duties caused FDIC’s losses. FDIC proved the bank incurred actual economic losses before the bank’s failure. Despite Trust attempts to disguise its argument as an attack on FDIC causation evidence, it was at bottom a superseding cause affirmative defense. The Trust did not come close to proving it.

Damages. The court concluded FDIC proved its damages with reasonable certainty based on the uncontroverted testimony of the FDIC damages expert. But-for early termination of the interest rate hedges, the bank would have avoided more than $600 million in additional damages by selling its AFS portfolio before failure. The Court found FDIC established damages arising out of its affirmative defenses based on aiding-and-abetting liability and agency liability for the CFO, global treasurer, and the other ALCO members’ tortious conduct far greater than the Trust’s $1.71 billion claim. The damages provided a complete setoff of the Trust’s claim.

The case is No. 5:24-cv-01321-BLF.

Judge: Freeman, B.

Attorneys: Adam Seth Paris (Sullivan & Cromwell LLP) for SVB Financial Trust. Raymond A. Cardozo (Reed Smith LLP) for Federal Deposit Insurance Corp., as Receiver for Silicon Valley Bank and Federal Deposit Insurance Corp., as Receiver for Silicon Valley Bridge Bank, N.A.

Companies: SVB Financial Trust; Federal Deposit Insurance corp., as Receiver for Silicon Valley Bank; Federal Deposit Insurance corp., as Receiver for Silicon Valley Bridge Bank, N.A.

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