SVB Financial Must Wait in Line for Its $2 Billion, FDIC Says

(Bloomberg) -- Before SVB Financial Group bondholders can collect the billions they are owed, the bankrupt company may have to file a claim with the Federal Deposit Insurance Corp. to recover $2 billion worth of deposits trapped by the receivership of Silicon Valley Bank.

That’s because the cash can only be returned to the bank holding company through the receivership process set up after federal regulators seized Silicon Valley Bank, the FDIC argued in court papers Wednesday.

SVB Financial has been sparring with the agency over the $2 billion since filing for bankruptcy in March. The dispute has already bogged down the Chapter 11 case and threatens to pit the bankruptcy process against the receivership process the FDIC uses to repay creditors.

“Although the FDIC approved additional funding under the systemic risk exception to protect SVB’s depositors, nothing that has transpired since March 10 altered the debtor-creditor relationship that exists” between the former parent company and the FDIC, lawyers representing the agency wrote in court papers filed Wednesday.

US Bankruptcy Judge Martin Glenn last week ordered the FDIC to file a statement explaining the agency’s authority to withhold the $2 billion. “I’ve been asking this question basically since day one and haven’t received any answers,” Glenn said during that hearing.

The agency argues that once it took over Silicon Valley Bank, it became the owner of the $2 billion, in the same way that all banks take ownership of any cash deposits. As a result, SVB Financial is merely a creditor which owns the right to try to collect the $2 billion, the FDIC says.

In addition, the FDIC said it’s still looking into whether SVB Financial owes money to the agency. The FDIC may be entitled to keep part of the cash in order to offset those liabilities, lawyers for the agency said.

“The FDIC-R continues to investigate the underlying claims and causes of action that provide the amounts subject to setoff,” its lawyers wrote.

A representative for SVB Financial declined to comment.

The bankruptcy is SVB Financial Group, 23-10367, US Bankruptcy Court for the Southern District of New York.