SILICON VALLEY BANK AND SIGNATURE BANK: WHAT YOU NEED TO KNOW ON PRE-CLOSURE CONTRACTUAL OBLIGATIONS

The recent closures of Silicon Valley Bank and Signature Bank—the second and third largest bank failures in U.S. history—have raised a myriad of questions amongst borrowers and other counterparties as to the contractual obligations and roles held by the two failed banks. On March 14, 2023, the FDIC released a statement clarifying how financial institutions and other counterparties of the failed banks should regard their obligations now that contracts have been transferred to the bridge banks. In addition, Silicon Valley Bridge Bank, N.A. (“SVBNA”) released a statement confirming, among other things, that all commitments to advance funds under existing credit agreements will be honored and that it will perform any other duties or roles under such agreements.

Background

Following the placement of Silicon Valley Bank and Signature Bank into receivership, the FDIC announced that it had transferred all deposits and substantially all of the assets of the failed banks into two newly created, full-service bridge banks. SVBNA, the bridge bank for the former Silicon Valley Bank, and Signature Bridge Bank, N.A., the bridge bank for the former Signature Bank, have been formed to protect depositors and preserve the value of the assets and operations of the failed banks in order to improve recoveries. However, until today, it had not been clear whether and to what extent the bridge banks would honor the failed banks’ pre-closure contractual obligations, particularly funding requests under commitments that had been transferred by the FDIC.^[1] In addition, a number of questions have emerged over the last several days as to the rights and obligations of borrowers under existing contracts.

FDIC Statement on Meeting Contractual Obligations with Failed Banks

On March 14, 2023, the FDIC clarified that it had transferred all of the failed banks’ contracts to the bridge banks and that the bridge banks must meet their obligations under these contracts. In a financial institution letter titled “Financial Institutions are Required to Meet Contractual Obligations with Bridge Banks,” the FDIC states that:

• The FDIC as receiver transferred to the bridge banks “all contracts” into which vendors and counterparties had entered into with the failed banks.
• Vendors and counterparties are legally obligated to perform under these contracts.
• The bridge banks are obligated to and have the “full ability to make timely payments…and otherwise perform” their obligations under these contracts.
• All obligations of the bridge are backed by the FDIC and the full faith and credit of the U.S. government.
• The bridge banks are performing “under all failed bank contracts” and expect all counterparties to perform their obligations.
• Vendors should continue to provide services.
• Authorized signers, account details, Tax ID numbers, wire/ACH instruction, and pre-failure processes remain in effect, so vendors should continue to use such processes until notified by the bridge bank.
• The FDIC has statutory authority to enforce and transfer the failed institutions’ contracts, notwithstanding any contractual limitations on such transfer.
• Vendors and counterparties “are legally obligated to continue to perform under the contract, and the bridge is obligated to and has the full ability to make timely payments to vendors and counterparties and otherwise perform its obligations under the contract.”
• Any vendor or counterparty that fails to “meet these obligations” may face legal action by the U.S. government.

SVBNA’s Statement on Contractual Obligations and Roles

On March 14, 2023, SVBNA released a statement (i) confirming that it had “fully stepped into the shoes” of the former Silicon Valley Bank and (ii) clarifying that:

• SVBNA has assumed all loan positions as lender, issuing bank, administrative agent, and any other function that the former Silicon Valley Bank was performing pre-closure.
• All commitments to advance under existing credit agreements will be honored in accordance with and pursuant to the terms of such agreements.
• SVBNA will perform any other duties or roles under existing credit agreements in accordance with and pursuant to the terms of such agreements.
• All counterparties of the former Silicon Valley Bank may transact, settle transactions, and otherwise conduct business with SVBNA.
• SVBNA has assumed the obligations and commitments of the former Silicon Valley Bank.
• SVBNA is not in FDIC receivership.

Shearman & Sterling is closely monitoring the fast-moving and evolving developments surrounding the recent bank failures and related regulatory actions. This summary does not constitute legal advice, so please reach out to us with any questions regarding your particular situation.