IN THE COURT OF APPEALS OF NORTH CAROLINA

No. COA15-1055

Filed: 6 December 2016

Yancey County, No. 10 CVS 279

SETTLERS EDGE HOLDING COMPANY, LLC; MOUNTAIN AIR DEVELOPMENT 

CORPORATION; VIRGINIA A. BANKS; WILLIAM R. BANKS; JEANI H. BANKS; 

MICHAEL R. WATSON; SHEREE B. WATSON; VIRGINIA A. BANKS, WILLIAM 

R. BANKS, AND SHEREE B. WATSON IN THEIR CAPACITY AS TRUSTEES OF 

WILLIAM A. BANKS REVOCABLE TRUST; MORRIS ATKINS IN HIS CAPACITY 

AS TRUSTEE OF WILLIAM BANKS FAMILY IRREVOCABLE TRUST NUMBER 

1; AND MORRIS ATKINS IN HIS CAPACITY AS TRUSTEE OF WILILAM BANKS 

FAMILY IRREVOCABLE TRUST NUMBER 2, Plaintiffs-Appellants,

v.

RES-NC SETTLERS EDGE, LLC, Defendant-Appellee.

Appeal by plaintiffs from orders entered 4 November 2013 and 28 May 2015

by Judges Mark Powell and Marvin P. Pope in Superior Court, Yancey County. Heard 

in the Court of Appeals 10 February 2016.

Rayburn Cooper & Durham, P.A., by G. Kirkland Hardymon, Ross R. Fulton, 

and Benjamin E. Shook, for plaintiffs-appellants.

Nelson Mullins Riley & Scarborough, LLP, by Christopher J. Blake and D. 

Martin Warf, for defendant-appellee.

STROUD, Judge.

Plaintiffs appeal from the trial court’s 4 November 2013 order granting 

defendant RES-NC Settlers Edge, LLC’s motion for partial summary judgment and 

from the order entered 28 May 2015 granting defendant’s motion for lack of subject 
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matter jurisdiction and denying plaintiffs’ motion for summary judgment. On appeal, 

plaintiffs argue that the trial court erred in striking their affirmative defenses for 

lack of subject matter jurisdiction, not granting collateral estoppel effect to a prior 

foreclosure order, and in granting summary judgment in favor of defendant while 

denying summary judgment in favor of plaintiffs. After review, we find that in this 

case, the FDIC effectively repudiated the loan contract by refusing to fund the draw 

requests yet failed to give plaintiffs proper notice of the repudiation. With proper 

notice, plaintiffs could have asserted an administrative claim for damages. Although 

the trial court would lack jurisdiction for any affirmative claim by plaintiffs for 

damages, plaintiffs did not bring any claim for damages, and the trial court does have 

jurisdiction to consider defendant’s counterclaim and thus plaintiffs’ affirmative 

defenses to that counterclaim. 

Although plaintiffs cannot recover damages from defendant, plaintiffs’

affirmative defenses raise the issue of recoupment. Defendant has not demonstrated 

any genuine issue of material fact and all of the evidence, taken in the light most 

favorable to defendant, shows that the FDIC effectively repudiated plaintiff Settlers 

Edge’s loan contract, but this does not necessarily require judgment forgiving the loan 

entirely. Instead, there are genuine issues of material fact as to the amount of 

recoupment, if any, plaintiffs are entitled to, based upon defendant’s repudiation of 

the loan contract. Accordingly, plaintiffs’ affirmative defense of repudiation raised 
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the issue of recoupment based upon defendant’s repudiation of the loan contract. 

Because there are questions of material fact as to recoupment, we reverse and 

remand for further proceedings to determine the amount of damages, if any, 

defendant may recover from plaintiffs on its claim for breach of contract after 

deduction of any damages proven by plaintiffs. 

I. Background

Plaintiffs’ complaint set forth the following facts. Plaintiff Settlers Edge 

(“Settlers Edge”) is a limited liability company organized in 2007 to develop and 

maintain Mountain Air Country Club and residential lots on a parcel of real property 

(“the Property”) in Yancey County, North Carolina. In June 2007, Settlers Edge 

secured a $15,500,000.00 loan from Integrity Bank in Georgia to finance the 

construction of Mountain Air Country Club on the Property. A material term of the 

financing agreement between Settlers Edge and Integrity Bank was that “Settlers 

Edge would receive funding for the approximately $7 million in construction and 

carrying expenses necessary to develop the Property into marketable lots with 

utilities and amenities. This funding took the form of monthly loan draw requests 

submitted by Settlers Edge to Integrity Bank.”

Integrity Bank funded the development of the Property with the monthly loan 

draws as agreed from 20 June 2007 through 28 August 2008, but then on 29 August 

2008, Integrity Bank was placed under the receivership of the Federal Deposit 
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Insurance Corporation (“FDIC”), which assumed all of its assets and obligations. On 

19 September 2008, Settlers Edge submitted a draw request for the month of August 

for $41,677.20. The FDIC refused to disburse the requested funds. After several 

attempts to get the FDIC to pay the loan draw, Settlers Edge sent a formal written 

notice and demand through counsel to the FDIC stating that it was in “material 

breach” of its obligations and demanding performance. The FDIC never responded. 

At some point before 27 October 2009, “the FDIC caused a substitute trustee to be 

appointed to institute foreclosure proceedings on the Deed of Trust.” 

In the foreclosure proceeding, plaintiffs herein raised the defense of material 

breach of the loan agreement by the FDIC. The Yancey County Clerk of Superior 

Court entered an order on 11 February 2010 denying the FDIC’s request for 

foreclosure, finding plaintiffs were “not in default under the Loan Documents,” so the 

FDIC did not “have the right to institute foreclosure proceedings against the property 

described in the Deed of Trust.” The FDIC then “appealed the ruling, then claimed 

to have assigned all of its rights, title and interest in the Development Financing to 

a new entity, Multibank 2009-1 RES-ADC Venture, LLC (‘Multibank’).” Multibank 

eventually “claim[ed] to have assigned its right, title and interest in the Development 

Financing to defendant RES-NC.” The FDIC, through RES-NC1, after being assigned 

 

1 We use the FDIC and defendant RES-NC interchangeably throughout the body of this 

opinion, as defendant RES-NC eventually stepped in the shoes of the FDIC when it was assigned the 

FDIC’s rights, title, and interest in the Development Financing agreement.
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the rights to the Development Financing from Multibank, dismissed the FDIC’s 

appeal to the Yancey County Superior Court on 6 May 2010.

On 15 October 2010, plaintiffs filed this action for a declaratory judgment, 

claiming:

that (a) the FDIC committed a material breach of the terms 

of the Construction Loan Agreement; (b) that pursuant to 

North Carolina law, this material breach excused their 

further performance under the various component 

agreements which comprise the Development Financing; 

(c) that this issue has been previously litigated and 

actually adjudicated and that RES-NC is collaterally 

stopped from re-litigating this issue; and (d) that Plaintiffs 

have no obligation to pay RES-NC any funds. 

Defendant filed its answer and counterclaim on 31 July 2013, denying the allegations 

in plaintiffs’ complaint and asserting as affirmative defenses that the Yancey County 

Clerk of Court’s order has no preclusive effect and that the Yancey County Clerk of 

Court lacked jurisdiction or authority to enter an order excusing plaintiffs’ 

performance under the loan agreement. Defendant also alleged a counterclaim for 

breach of contract against plaintiffs to recover the full amount of the loan, plus fees 

and interest.

Defendant filed a motion for partial summary judgment on 19 September 2013 

asserting that there were “[n]o genuine issues of material fact” regarding plaintiffs’ 

material breach and collateral estoppel claims and defendant’s affirmative defenses. 

Furthermore, defendant stated that the claims and defenses “are legal issues that 
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require no discovery and are ripe for adjudication by the Court.” On 30 September 

2013, plaintiffs filed their reply to defendant’s counterclaim, arguing that defendant’s 

counterclaim fails to state a claim upon which relief can be granted and asserting the 

following affirmative defenses: 1) material breach of contract; 2) counterclaim barred 

under Equal Credit Opportunity Act (“ECOA”); 3) laches; 4) estoppel; 5) waiver; 6) 

release; 7) unclean hands; 8) repudiation; 9) material modification and release; 10)

failure to mitigate damages; 11) collateral estoppel and res judicata; 12) lack of 

standing and not the real party in interest; 13) lack of consideration; and 14) 

reservation of any additional defenses that may be revealed during discovery or after 

receiving additional information.

After a hearing on 7 October 2013, the trial court entered an order on 4 

November 2013 granting defendant’s motion for partial summary judgment. The 

court concluded that defendant’s claim was not precluded by the Yancey County Clerk 

of Court’s order denying foreclosure and that the order “does not have preclusive 

effect with respect to the issues of (a) whether the FDIC breached the loan documents; 

(b) whether the FDIC’s breach was material; and (c) whether Plaintiffs’ obligations to 

Defendant under the loan documents are excused.” Plaintiffs filed a notice of appeal 

from the court’s order on 4 December 2013, but their appeal was dismissed as 

interlocutory by this Court on 16 December 2014.
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On 14 May 2015, defendant filed a motion to dismiss plaintiffs’ declaratory 

judgment for lack of subject matter jurisdiction and motion for summary judgment 

as to defendant’s counterclaim. In support of the motion to dismiss for lack of subject 

matter jurisdiction, defendant argued that the trial court lacked jurisdiction “over 

Plaintiffs’ claims as a matter of federal law under the requirements of 12 U.S.C. § 

1821(d)(13)(D).” Defendant also asked for summary judgment, alleging that there 

was no genuine issue of material fact regarding (a) plaintiffs’ default of the loan, (b)

plaintiffs’ failure to repay any amounts borrowed under the loan, and (c) plaintiffs 

indebtedness to defendant “in the total outstanding amount of $20,523,921.31.”

On 15 May 2015, plaintiffs also filed a motion for summary judgment, noting

that:

1. Plaintiffs commenced this action by filing their 

Complaint against Defendant . . . on October 15, 2010 

seeking a declaratory judgment that, due to the prior 

material breach by the Defendant’s predecessor-ininterest, Plaintiffs were excused from further performance 

under the loan documents at issue in this case.

2. Following consolidation of this action with a 

separate action commenced by Defendant in the Superior 

Court for Alexander County, North Carolina, Defendant 

filed its Answer and Counterclaim on July 31, 2013 seeking 

to recover from Plaintiffs based on Plaintiffs’ alleged 

breach of the Loan Documents at issue.

3. On or about September 30, 2013, Plaintiffs filed 

their Reply to Defendants Counterclaims and asserted, 

among others, affirmative defenses based on (1) the prior 

material breach of the loan documents by Defendant’s 
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predecessor-in-interest, (2) the repudiation of the loan 

documents by Defendant’s predecessor-in-interest, and (3) 

the material modification of the underlying loan obligation.

4. Pursuant to Rule 56 of the North Carolina Rules of 

Civil Procedure, “the pleadings, depositions, answers to 

interrogatories, and admission on file, together with the 

affidavits . . . show that there is no genuine issue as to any 

material fact,” and that Defendant is entitled to judgment 

dismissing Defendant’s Counterclaim in its entirety as a 

matter of law based on the aforementioned defenses. 

N.C.R. Civ. P. 56 (2015).

The trial court heard the parties respective motions at a hearing on 25 May 

2015 and subsequently entered an order and judgment on 28 May 2015 granting 

defendant’s motion to dismiss for lack of subject matter jurisdiction and defendant’s

motion for summary judgment. Specifically, the court concluded:

1. As a matter of federal law, under the requirements 

of the Financial Institutions Reform, Recovery, and 

Enforcement Act (“FIRREA”), 12 U.S.C. § 1821(d)(13)(D), 

this Court lacks subject matter jurisdiction over: (a) 

Plaintiffs’ claim for declaratory relief set forth in Plaintiffs’ 

Complaint in this action; and (b) Plaintiffs’ First, Sixth, 

Eighth, Ninth, Tenth, and Eleventh Affirmative Defenses 

set forth in Plaintiffs’ Reply to Counterclaim in this action. 

Defendant’s Motion to Dismiss for Lack of Subject Matter 

Jurisdiction is, therefore, GRANTED, and Plaintiffs’

Complaint and the First, Sixth, Eighth, Ninth, Tenth, and 

Eleventh Affirmative Defenses set forth in Plaintiffs’ Reply 

to Counterclaim are hereby DISMISSED.

2. Defendant has established that there are no genuine 

issues of material fact with respect to its Counterclaim for 

breach of contract, and that Defendant is entitled to 

judgment as a matter of law. Plaintiffs have failed to raise 

any genuine issue of material fact with respect to
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Defendant’s Counterclaim for breach of contract, or with 

respect to Plaintiffs’ Second, Third, Fourth, Fifth, Seventh, 

Twelfth and Thirteenth Affirmative Defenses set forth in 

Plaintiffs’ Reply to Counterclaim in this action. 

Defendant’s Motion for Summary Judgment on its 

Counterclaim for breach of contract is, therefore, 

GRANTED.

3. Plaintiffs are not entitled to summary judgment as 

a matter of law. Plaintiffs’ Motion for Summary Judgment 

is, therefore, DENIED.

The court denied plaintiffs’ motion for summary judgment and entered final 

judgment against plaintiffs on defendant’s counterclaim, jointly and severally, for 

$20,523,921.31. Plaintiffs filed a notice of appeal on 26 June 2015. 

II. FIRREA and Affirmative Defenses

Plaintiffs first argue on appeal that the trial court erred in striking their 

affirmative defenses for lack of subject matter jurisdiction and denied plaintiffs due 

process. Specifically, plaintiffs contend that the Financial Institutions Reform, 

Recovery, and Enforcement Act (“FIRREA”), 12 U.S.C.A. § 1821(d)(13)(D) (2014), 

upon which defendant and the trial court relied, does not bar affirmative defenses.

FIRREA sets out the authority and procedures for the FDIC to follow when a 

depository institution, such as Integrity Bank, becomes insolvent and grants the 

FDIC broad powers and duties as a “conservator or receiver” of the depository 

institution. See 12 U.S.C.A. § 1821(d)(2)(A). Generally, the FDIC becomes the 

“Successor to institution” and has “by operation of law”: 
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(i) all rights, titles, powers, and privileges of the 

insured depository institution, and of any stockholder, 

member, accountholder, depositor, officer, or director of 

such institution with respect to the institution and the 

assets of the institution; and

(ii) title to the books, records, and assets of any 

previous conservator or other legal custodian of such 

institution.

Id.

The FDIC is granted authority, among other things, to “[o]perate the 

institution” (B); exercise the functions of any member, stockholder, director, or officer 

of the institution (C); take any actions “necessary to put the insured depository 

institution in a sound and solvent condition” (D); to liquidate the depository 

institution and “proceed to realize upon the assets of the institution” (E); and to pay 

“all valid obligations of the insured depository institution in accordance with the 

prescriptions and limitations of this chapter.” (H). 12 U.S.C.A. § 1821(d)(2)(B)-(E), 

(H). In a case “involving the liquidation or winding up of the affairs of a closed 

depository institution,” the receiver is required to 

(i) promptly publish a notice to the depository 

institution’s creditors to present their claims, together with 

proof, to the receiver by a date specified in the notice which 

shall be not less than 90 days after the publication of such 

notice; and

(ii) republish such notice approximately 1 month 

and 2 months, respectively, after the publication under 

clause (i). 

12 U.S.C.A. § 1821(d)(3)(B).
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FIRREA also sets out the administrative process for a debtor to bring “any 

claim against a depository institution[.]” See 12 U.S.C.A. § 1821(d)(4)(A)- rulemaking 

authority. Thus, FIRREA contemplates that the claims arising out the failure of a 

depository institution will be resolved by the receiver, and if a debtor raises a claim 

against the institution, that claim will be determined in the federal administrative 

process established for this purpose. Therefore, judicial review by the courts is quite 

limited.

(D) Limitation on judicial review

Except as otherwise provided in this subsection, no court 

shall have jurisdiction over--

(i) any claim or action for payment 

from, or any action seeking a determination of 

rights with respect to, the assets of any 

depository institution for which the 

Corporation has been appointed receiver, 

including assets which the Corporation may 

acquire from itself as such receiver; or

(ii) any claim relating to any act or 

omission of such institution or the 

Corporation as receiver.

12 U.S.C.A. § 1821(d)(13)(D) (emphasis added). 

Here, the FDIC was appointed as receiver for Integrity Bank on 29 August 

2008 and assumed all of Integrity Bank’s assets and liabilities at that time --

including the obligation to fund plaintiffs’ draw requests. The FDIC sent a letter on 

2 September 2008 informing Settlers Edge that Integrity Bank had been closed and 
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the FDIC had taken over as receiver. The FDIC suggested Settlers Edge seek 

refinancing of the loan documents. Settlers Edge submitted a draw request for 

August 2008 on 19 September 2008 for $41,677.20 and received no response from the 

FDIC. The FDIC sent additional letters on 20 October 2008 to the guarantors of 

Integrity Bank’s loan to Settlers Edge notifying the guarantors that they had 30 days 

to strictly comply with the terms and provisions of the loan agreement. On 4 

December 2008, Settlers Edge sent written notice to the FDIC of material breach. 

Further, the exhibits submitted with the record on appeal include the 

“Supplemental Brief in Opposition to Foreclosure Proceeding” filed by Settlers Edge, 

which contains facts indicating that “the FDIC never took the good faith step of 

acknowledging the obligations it assumed from Integrity Bank, nor did it exercise its 

statutory right to ‘repudiate’ those obligations. Instead, the FDIC took a ‘heads I win, 

tails you lose’ position leaving Settlers Edge in limbo.” Settlers Edge noted that in 

this case, “the FDIC made unsuccessful efforts to quickly sell off the Loan Documents 

with the goal of making the draw request funding the loan purchaser’s problem. 

Doubtless, the FDIC also acted on the hope that Settlers Edge would either quietly 

accept this situation or that it would go bankrupt and that an appointed trustee 

would lack the resources to bring the estate’s claims to recover for the breach.”

In a deposition on 6 March 2015, William R. Banks, plaintiffs’ representative, 

was asked whether Settlers Edge understood “that there was a deadline by which to 
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submit claims against the FDIC in connection with the receivership of Integrity 

Bank?” Mr. Banks replied, “Not to my knowledge.” The record on appeal does not 

contain documents from that time period regarding when or whether plaintiffs 

received notice of the receivership or whether plaintiffs filed any claim as provided 

by statute. Plaintiffs filed this lawsuit on 31 July 2013.

Plaintiffs’ declaratory judgment claim in this case does “seek[ ] a determination 

of rights,” 12 U.S.C.A. § 1821(d)(13)(D), regarding the assets of the depository 

institution so this portion of Plaintiffs’ claim would be barred by FIRREA. But 

plaintiffs argue that even if the declaratory judgment action is barred by FIRREA, 

their affirmative defenses to defendant’s counterclaims are not. Plaintiffs sought to 

raise affirmative defenses of material breach and material modification to

defendant’s counterclaims seeking recovery against Plaintiffs for breach of contract. 

Thus, plaintiffs contend that while the limitation of judicial review in 12 

U.S.C.A. § 1821(d)(13)(D) applies to claims for payment or for a determination of 

rights against the receiver, it does not apply to plaintiffs’ affirmative defenses. 

Although this issue has not been specifically addressed by a court in North Carolina, 

other states have dealt with similar cases. The results vary depending upon the facts 

and procedural postures of the cases, including rules which may be unique to the 

particular state. We have therefore sought to find cases which address the issue in a 

context which is most similar to this case. The Nevada Supreme Court considered 
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this issue in a similar context and determined that affirmative defenses are not 

barred. See Schettler v. Ralron Capital Corp., 275 P.3d 933 (Nev. 2012). In Schettler, 

the defendant borrower and Silver State Bank 

executed a Business Loan Agreement (the Loan) and a 

Promissory Note (the Note), under which Silver State 

provided Schettler with a $2,000,000 revolving line of 

credit. Schettler agreed to pay interest on the loan monthly 

until the loan’s maturity date, at which time he would be 

required to pay all outstanding principal and any 

remaining unpaid accrued interest. The original maturity 

date of the Loan and the Note was September 15, 2007. On 

that date, Schettler and Silver State entered into a Change 

in Terms Agreement that modified the maturity date to 

September 15, 2008. That same day, Schettler also 

executed a Commercial Guaranty in his capacity as 

Trustee for the Vincent T. Schettler Living Trust, 

guaranteeing to pay all of the Loan obligations. It is 

undisputed that the Loan, the Note, and the Commercial 

Guaranty (loan agreement) were valid and enforceable

contracts at their inception.

Id. at 934-35.

On 14 August 2008, Silver State notified Schettler that it had frozen the funds 

remaining on the line of credit because of a change in his financial condition or that 

Silver State believed his “prospect of performance on the Note was impaired.” Id. at 

935. Silver State also informed Schettler that 

it had decided to cancel any current commitments until 

Schettler cured the defaults, but that until that time, 

Schettler was responsible for payment of interest on the 

loan. At the time of the default notice, however, Schettler 

was current on his payments, and the loan had an 

outstanding principal balance of $1,114,000.
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Id. (quotation marks and brackets omitted). 

A few weeks later, Silver State went into receivership and the FDIC was 

appointed as receiver. Id. RalRon later acquired Schettler’s loan agreement and 

demanded full payment of principal, interest, and late fees from Schettler; upon 

Schettler’s failure to pay, RalRon filed a lawsuit in Nevada state court seeking 

recovery upon the loan agreement. Id. Schettler filed an answer which raised several 

counterclaims and affirmative defenses for “breach of contract, breach of the implied 

covenant of good faith and fair dealing, and estoppel.” Id. RalRon filed a motion for 

summary judgment on its claims for breaches of contract and personal guaranty, 

claiming that Schettler’s counterclaims and affirmative defenses “were barred 

because Schettler failed to file any administrative claims with the FDIC as required 

by FIRREA, and that RalRon was a holder in due course immune from Schettler’s 

defenses.” Id. The trial court agreed and 

granted summary judgment in favor of RalRon on its 

claims for breach of contract and breach of personal 

guaranty. In so doing, the district court barred Schettler’s 

affirmative defenses and dismissed his counterclaims, 

reasoning that, because they were all essentially claims 

against the FDIC and Schettler had failed to follow the 

claims administration process, they were barred by 

FIRREA.

Id. at 935-36.
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Schettler appealed, and the Nevada Supreme Court reversed because it 

determined that Schettler’s affirmative defenses were not barred by FIRREA and 

that genuine issues of material fact remained as to the determination of damages. 

Id. at 942. We find the Nevada court’s rationale to be persuasive.

Convincingly, a majority of courts addressing this 

issue have held that while FIRREA’s jurisdictional bar 

applies to claims and counterclaims, it does not apply to 

defenses and affirmative defenses.

The Third Circuit Court of Appeals, which has 

examined this issue in detail, has explained that FIRREA’s 

jurisdictional bar only applies to four categories of actions: 

(1) claims for payment from assets of any 

depository institution for which the FDIC has 

been appointed receiver; (2) actions for 

payment from assets of such depository 

institution; (3) actions seeking a 

determination of rights with respect to assets 

of such depository institution; and (4) a claim 

relating to any act or omission of such 

institution or the FDIC as receiver. 

The court held that these categories did not include a 

defense or an affirmative defense because those are neither 

an action nor a claim, but rather a response to an action or 

a claim. Therefore, it held, the jurisdictional bar contained 

in § 1821(d)(13)(D) does not apply to defenses or 

affirmative defenses. To support its conclusion, the court 

explained that interpreting FIRREA’s jurisdictional bar to 

include defenses and affirmative defenses would, in a 

substantial number of cases, result in an unconstitutional 

deprivation of due process. Specifically, if parties were 

barred from presenting defenses and affirmative defenses 

to claims which have been filed against them, they would 

not only be unconstitutionally deprived of their 
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opportunity to be heard, but they would invariably lose on 

the merits of the claims brought against them. Beyond 

constitutional concerns, the court also explained that 

because a defendant is unable to know what his or her 

defense will be before hearing the claim, it seems that it 

would be nearly impossible for a party to submit future 

hypothetical defenses to the administrative claims 

procedure -- defenses to lawsuits which may not yet have 

been brought against a party or which may never be 

brought at all. We join in the majority’s reasoning and 

conclude that while FIRREA’s jurisdictional bar applies to 

claims and counterclaims, it does not apply to defenses or 

affirmative defenses. 

Id. at 939-40 (citations, quotation marks, brackets, and ellipses omitted). See also, 

e.g., Nat’l Union Fire Ins. Co. v. City Savings, F.S.B., 28 F.3d 376, 393 (3d. Cir. 1994) 

(“[T]he plain meaning of the language contained in § 1821(d)(13)(D) indicates that 

the statute does not create a jurisdictional bar to defenses or affirmative defenses 

which a party seeks to raise in defending against a claim.”); Resolution Trust Corp. v. 

Love., 36 F.3d 972, 977-78 (10th Cir. 1994) (“[I]f Congress had intended to remove 

from the jurisdiction of the courts any and all actions, claims or defenses which might 

diminish the assets of any depository institution . . . or [which might] diminish or 

defeat any claims of the [FDIC] in any capacity, it would [have] been simple to so 

provide. But Congress did not so provide. Instead, the act gives the [FDIC] authority 

over any claim by a creditor or claim of security, preference or priority. Clearly, an 

affirmative defense asserted by a defendant in an action brought by the [FDIC] is none 

of these.” (Citations and quotation marks omitted) (Emphasis added)).
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But plaintiffs argue that the FDIC’s refusal to pay the monthly draws was 

essentially a repudiation of the agreement, although the FDIC did not formally 

repudiate the loan, even if it had a statutory right to repudiate the loan. Although 

the lender in Schettler similarly failed to fund his loan, repudiation was not 

specifically addressed in Schettler.

2 Under 12 U.S.C.A. § 1821, plaintiffs would have 

a limited right to recover in the administrative forum for repudiation of the loan. 

FIRREA provides the FDIC or a receiver does have “Authority to repudiate 

contracts”:

In addition to any other rights a conservator or 

receiver may have, the conservator or receiver for any 

insured depository institution may disaffirm or repudiate 

any contract or lease--

(A) to which such institution is a party;

(B) the performance of which the conservator 

or receiver, in the conservator’s or receiver’s 

discretion, determines to be burdensome; and

(C) the disaffirmance or repudiation of which 

the conservator or receiver determines, in the 

conservator’s or receiver’s discretion, will promote 

the orderly administration of the institution’s 

affairs.

12 U.S.C.A. § 1821(e)(1)(A)-(C).

 

2 In Schettler, Silver State announced that it would no longer perform under the contract on 

14 August 2008, even before going into receivership, claiming concern over Schettler’s ability to pay. 

275 P.3d at 935. At the time of Silver State’s default notice to Schettler, however, “Schettler was 

current on his payments, and the loan had an outstanding principal balance of $1,114,000.” Id. Silver 

State was not placed into receivership until 5 September 2008, a few weeks after the default notice. 

Id. Here, the repudiation at issue occurred after Integrity Bank failed and the FDIC did have a right 

to repudiate plaintiffs’ loan. 
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The conservator or receiver for an insured depository institution is required to 

“determine whether or not to exercise the rights of repudiation under this subsection 

within a reasonable period following such appointment.” 12 U.S.C.A. § 1821(e)(2). 

Damages in a claim for repudiation are generally 

(i) limited to actual direct compensatory damages; 

and

(ii) determined as of--

(I) the date of the appointment of the 

conservator or receiver; or

(II) in the case of any contract or agreement 

referred to in paragraph (8), the date of the 

disaffirmance or repudiation of such contract or 

agreement.

12 U.S.C.A. § 1821(e)(3)(A). The claimant cannot recover any “(i) punitive or 

exemplary damages; (ii) damages for lost profits or opportunity; or (iii) damages for 

pain and suffering.” 12 U.S.C.A. § 1821(e)(3)(B). For repudiation of a “qualified 

financial contract[,]” compensatory damages are 

(i) deemed to include normal and reasonable costs of 

cover or other reasonable measures of damages utilized in 

the industries for such contract and agreement claims; and

(ii) paid in accordance with this subsection and 

subsection (i) of this section except as otherwise specifically 

provided in this section.

12 U.S.C.A. § 1821(e)(3)(C).

In the present case, the FDIC did not formally repudiate the plaintiffs’ loan 

but by its actions the FDIC repudiated the agreement by refusing to honor the terms 

of the loan agreement and to pay the monthly draws as required by the agreement.
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See 12 U.S.C.A. § 1821(e) (“Provisions relating to contracts entered into before 

appointment of conservator or receiver”). In Westberg v. F.D.I.C., 741 F.3d 1301 (D.C. 

Cir. 2014), the D.C. Circuit Court of Appeals addressed a situation somewhat similar 

to the one before us. The appellants, husband and wife, obtained a residential 

construction loan from a bank that soon collapsed. Id. at 1302. The FDIC was 

appointed as receiver and repudiated their loan agreement, “but notified the 

Westbergs that they were obligated to continue making payments on the portion of 

the loan that had been disbursed to them before [the bank]’s failure.” Id. The D.C. 

Circuit found that “the Westbergs’ claim for declaratory relief is inextricably related 

to the FDIC’s act of repudiation. Although it is formally brought against Multibank, 

it is functionally against the FDIC. It is therefore a ‘claim’ . . . that must first be 

resolved in the administrative claims process.” Id. at 1308. Therefore, while 

Westberg addresses repudiation, it involved a claim brought by the debtor against the 

bank, not an affirmative defense. Also, in Westberg, the FDIC did formally repudiate 

the contract, and the formal repudiation was important to the D.C. Circuit’s holding 

that the claim should have been in the administrative process. Id. Here, by contrast, 

the FDIC never gave any notice of repudiation of the contract and plaintiffs have 

raised it as an affirmative defense to defendant RES-NC’s counterclaim.

The FDIC did, however, effectively repudiate it by refusing to fund Settlers 

Edge’s draw requests, which is quite similar to Silver State’s action in Schettler. 275 
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P.3d at 935. See also Lawson v. F.D.I.C., 3 F.3d 11, 15 (1st. Cir. 1993) (“In other 

words, the FDIC did not transfer the Lawsons’ CD contracts intact to a new obligor; 

it effectively repudiated those contracts when it declined either to pay the promised 

interest itself or to oblige anyone else to do so. The repudiation may have been 

informal but there was certainly no ambiguity[.]”). Here, Settlers Edge submitted a 

draw request on 19 September 2008 for $41,677.20 for August 2008 and received no 

response from the FDIC. The FDIC refused to fill that request, and on 4 December 

2008, Settlers Edge sent written notice to the FDIC of material breach. Thus, the 

question is whether the plaintiffs’ rights are limited to those under 12 U.S.C.A. § 

1821(e) where the FDIC has effectively repudiated the contract by its actions, 

although it failed to formally notify plaintiffs of repudiation. As in Lawson, the 

FDIC’s actions here, though informal, clearly constituted a repudiation. Id. (“At the 

same time, it was a repudiation and breach of the contracts represented by the CDs 

since the FDIC, which had inherited the contracts, effectively declined to pay the 

promised interest in the future or commit Fleet Bank to do so.”). 

As no formal repudiation appears in the record on appeal and defendant seeks 

to recover damages from plaintiffs for breach of contract, plaintiffs were free to raise 

repudiation as an affirmative defense to defendant’s counterclaim. The receiver 

cannot use FIRREA as both a sword and shield at the same time; if it wants the 

benefit of the limited damages and administrative procedure that FIRREA provides, 
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then it must “determine whether or not to exercise the rights of repudiation” under 

12 U.S.C.A. § 1821(e)(2) “within a reasonable period” of its appointment and give 

notice of repudiation. Once the receiver has given notice of repudiation, then the 

debtor must proceed under FIRREA or lose its rights to assert any claims. The facts 

regarding the FDIC’s actions as noted herein are undisputed, and the record does not 

show, nor does defendant argue, that any formal repudiation was ever made. It is 

also undisputed that the FDIC effectively repudiated the contract by its failure to pay 

the loan draw requests, so the trial court erred when it denied plaintiffs the 

opportunity to raise repudiation as an affirmative defense.

Although we have determined that the FDIC effectively repudiated the 

contract and that plaintiffs are entitled to raise the repudiation as an affirmative 

defense, the question remains of the proper remedy. Plaintiffs argue that the 

repudiation is a material breach which excuses them from any performance 

whatsoever under the loan contract and thus requires dismissal of defendant’s 

counterclaim for breach of contract. But this argument ignores the fact that the 

FDIC did have a right to repudiate the loan contract and that a debtor’s right to 

recover damages, even if properly brought as an administrative claim under FIRREA, 

is limited.

In Schettler, the Nevada court addressed how the debtor’s affirmative defense 

may be used to offset any claim by the lender and determined that on remand the 
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trial court must consider recoupment. 275 P.3d at 941-42. Neither plaintiffs nor 

defendant specifically requested recoupment here, but the same was true in Schettler. 

Id. at 941, n. 7. The Nevada court noted that fair notice of the defense was raised by 

the pleadings in Schettler, and the same is true here. Id. (“Although Schettler did 

not specifically allege that he was entitled to ‘recoupment’ in his answer to RalRon’s 

complaint, when construed as a whole, his answer sufficiently encompassed the 

concept of recoupment. Recoupment must be plead affirmatively, and if it is not 

raised it is ordinarily deemed waived. However, if a plaintiff had notice that a 

defendant was relying on recoupment, the affirmative defense will be allowed. Fair 

notice was given because it was specifically raised on reconsideration, which is a part 

of the issues on appeal. Accordingly, we will not treat recoupment as waived.” 

(Citations, quotation marks, and brackets omitted)). 

Recoupment is a right of the defendant to have a deduction 

from the amount of the plaintiff’s damages, for the reason 

that the plaintiff has not complied with the crossobligations or independent covenants arising under the 

same contract. Recoupment must arise out of the same 

transaction and involve the same parties; thus, it does not 

apply when the defendant’s allegations arise out of a 

transaction extrinsic to the plaintiff’s cause of action. 

While the defendant may thus defend against the 

plaintiff’s claim by asserting competing rights arising out 

of the same transaction and thereby extinguish or reduce 

any judgment awarded to the plaintiff, recoupment does 

not allow the defendant to pursue damages in excess of the 

plaintiff’s judgment award. Thus, by its very nature and 

regardless of whether the same facts could constitute a 

separate claim for damages, recoupment seeks to challenge 
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the foundation of the plaintiff’s claim and, consequently, 

we recognize recoupment as an affirmative defense not 

barred by FIRREA. Here, based on his allegations, 

Schettler may be able to demonstrate that he is entitled to 

recoup against any amount awarded RalRon on its claims, 

up to the amount awarded.

Id. at 941 (citations, quotation marks, and brackets omitted).

Recoupment has not been addressed as extensively or recently in North 

Carolina as in Nevada, but North Carolina’s law of recoupment is essentially the 

same. 

A recoupment is a defence by which a defendant, 

when sued for a debt or damages, might recoup the 

damages suffered by himself from any breach by the 

plaintiff of the same contract. And . . . it [has been] held 

that where a justice has jurisdiction of the principal matter 

of an action, he also has jurisdiction of incidental questions 

necessary to its determination, and hence may even admit 

an equity to be set up as a defence. 

There are many resemblances and dissimilarities 

between these several defences. In a counter-claim to an 

action upon a contract, where a judgment is prayed against 

the defendant, he may recover the excess, if any. If no 

judgment or relief is prayed, it is a set-off, if it is a claim 

distinct from and independent of the action. But if it is a 

matter growing out of or connected with the subject of the 

action, then it is recoupment. 

In our case the defendants pleaded “set-off and 

counter-claim,” but they demanded no relief against the

plaintiffs, and the defense set up arose out of the contract 

set forth in the complaint, and their defence therefore fell 

under the head of recoupment. 

Hurst v. Everett, 91 N.C. 399, 404-05 (1884) (citations omitted).
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Recoupment is limited to a set-off against the defendant’s counterclaim, so 

plaintiffs cannot recover any damages, even if they were to present evidence of 

greater damages than what they would owe on defendant’s counterclaim for breach 

of contract. In addition, since defendant had a legal right to repudiate the loan 

agreement, the measure of damages which plaintiffs may assert as recoupment 

should be limited by the compensatory damages which they would have been allowed 

to prove under a FIRREA claim, as set forth in 12 U.S.C.A. § 1821(e)(3)(A). 

Depending upon the amount of compensatory damages shown by plaintiffs, the 

recoupment could offset all of the damages claimed by defendant, but cannot exceed 

the amount of defendant’s damages. Because the trial court erred by barring 

plaintiffs’ affirmative defense and there are genuine issues of material fact regarding 

the amount of recoupment plaintiffs may be entitled to as an offset against 

defendant’s claim for breach of the loan agreement, we reverse the trial court’s order 

granting summary judgment and remand for further proceedings consistent with the 

opinion. 

III. Collateral Estoppel Effect

Next, plaintiffs argue that the trial court erred in not granting collateral 

estoppel effect to the foreclosure order entered by the Clerk of Court which found that 

Settlers Edge was not in default of the loan. Plaintiffs contend:

Here, it is undisputed that Defendant dismissed the 

appeal of the Foreclosure Order, rendering it a final, 
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binding order. It is also undisputed that the Clerk 

determined that Settlers Edge was not in default, that the 

parties to the Foreclosure and this action are the same or

are in privity with each other, and that entering the Second 

Order necessarily required finding Settlers Edge in 

default.

Moreover, there is no dispute that, at the time of the 

Foreclosure, the maturity date of the Note had passed, 

Settlers Edge had not repaid amounts otherwise due under 

the Note, and the Note had been declared in default by the 

FDIC. In Defendant’s Motion and materials submitted in 

support, Defendant states no basis for default other than 

Settlers Edge’s failure to pay the Note in full prior to the 

maturity date. . . . This case has remained substantially 

static, factually and legally, since the Foreclosure Order, 

and the Trial Court’s determination that Settlers Edge was 

in default is inconsistent with the Foreclosure Order. The 

Trial Court erred, first, by entering the First Order 

denying collateral estoppel effect to the Foreclosure Order, 

and, second, by finding Settlers Edge in default in the 

Second Order despite the prior, contrary finding by the 

Clerk in the Foreclosure Order.

But based upon the prior appeal to this Court, we cannot find that the Clerk’s 

foreclosure order may have any collateral estoppel effect. The issue actually decided 

by the Yancey County Clerk of Court is not clear from the foreclosure order, which 

contains conclusions that seem to go both ways. Nevertheless, we are bound by this 

Court’s prior opinion regarding the foreclosure order:

The application of the preclusive doctrines of 

collateral estoppel and res judicata must be narrowly 

construed and cannot be left to uncertain inference. Here, 

given that the order denying foreclosure (1) did not include 

specific findings expressly determining that a material 

breach had occurred; and (2) did find that a valid debt 
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existed between Plaintiffs and the FDIC, we are unable to 

conclude that the Clerk actually determined that a material 

breach had occurred. Such a conclusion would force us to 

speculate as to the Clerk’s thought processes in rendering 

its findings, which we are not permitted to do. 

Settlers Edge Holding Co., LLC, v. RES-NC Settlers Edge, LLC (“Settlers Edge I”), 

238 N.C. App. 198, 768 S.E.2d 66, 2014 WL 7149116, *5, 2014 N.C. App. LEXIS 1291, 

*12-13 (2014) (unpublished) (citations and quotation marks omitted) (emphasis 

added). This Court previously decided that the basis for the Clerk’s order is unclear,

and we are bound by that ruling. In addition, even assuming that a material breach 

occurred, as discussed above, this breach was a repudiation and plaintiffs are limited 

to asserting their affirmative defense and offsetting defendant’s damages by 

recoupment. We therefore decline to address this issue further. 

IV. Summary Judgment

Finally, plaintiffs contend that the trial court erred in granting summary 

judgment in favor of defendant and denying summary judgment in favor of plaintiffs 

“due to its failure to consider the legal and undisputed factual merits of plaintiffs’ 

affirmative defenses.” As we have already concluded that the trial court had 

jurisdiction to consider plaintiffs’ affirmative defenses and that the contract was 

effectively repudiated, we agree that the trial court should not have granted summary 

judgment in favor of defendants, and we reverse its order doing so. But this does not 

mean that we can grant summary judgment in favor of plaintiffs, since on remand 
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the trial court must consider the proper measure of offset for the defendant’s breach 

of contract in recoupment. 

V. Conclusion

In sum, while we decline to find any collateral estoppel effect from the Clerk’s 

prior order and cannot grant summary judgment in favor of plaintiffs at this time, we 

conclude that the FDIC effectively repudiated the contract and plaintiffs are entitled 

to raise the repudiation as an affirmative defense. But because the FDIC had a right 

to repudiate, plaintiffs’ right to recover damages is limited. Since we have concluded 

that the trial court erred by barring plaintiffs’ affirmative defense, and since there 

are genuine issues of material fact remaining in regards to the amount of recoupment 

plaintiffs may be entitled to as an offset against defendant’s claim for breach of the 

loan agreement, we reverse the trial court’s order granting summary judgment and 

remand for further proceedings consistent with this opinion to determine the amount 

of damages defendant may recover from plaintiffs, if any, for its breach of contract 

claim.

REVERSED AND REMANDED.

Judges ELMORE and DIETZ concur.