A federal appeals court ruled Wednesday that the Federal Deposit Insurance Corp. may keep $1.71 billion in seized deposits from Silicon Valley Bank's bankrupt parent company, dealing another blow to creditors seeking to recover funds from the bank's 2023 collapse.

A three-judge panel of the Second Circuit Court of Appeals in Manhattan affirmed a lower bankruptcy court decision, rejecting arguments that the regulator forfeited its setoff rights-the legal ability to cancel mutual debts between two parties-by failing to file a proof of claim in bankruptcy court. The decision allows the FDIC to apply the seized cash toward losses stemming from SVB's failure.

Representatives for SVB Financial's liquidation trust didn't immediately respond to requests for comment.

The ruling effectively closes off one of the largest asset pools targeted by distressed-debt investors who bought up SVB Financial debt at a discount following the 2023 bank run, betting on recovering cash through the bankruptcy process.

Wednesday's decision followed a ruling last month by a federal judge in San Jose, Calif., who determined that SVB Financial officers' "imprudent actions" inflicted at least $5.4 billion in damages on the bank. Because the damages far exceeded the $1.71 billion deposit, the FDIC is allowed to retain the sum to offset any liability.

When the FDIC took over Silicon Valley Bank following the 2023 bank run, the regulator said that depositors would be able to access all of their funds, rather than the standard $250,000 deposit guarantee. But the agency later seized SVB Financial's $1.71 billion deposit, triggering legal battles.

SVB Financial, which filed for bankruptcy in March 2023, attempted in its reorganization plan to extinguish any setoff rights unless the regulator filed a formal proof of claim. The plan went into effect in July 2024, but the bankruptcy court rejected the parent company's attempt, setting up Wednesday's appellate decision.

The liquidation trust later argued in California court filings that its creditors relied on the FDIC's emergency pledge to guarantee recovery of all Silicon Valley Bank deposits. The FDIC argued that it was entitled to keep the deposit to cover the costs of the bank failure.