First Empire Bank-New York v. Federal Deposit Ins. Corp.

• Decision Date: 06 April 1978
• Docket Number: BANK-NEW,Nos. 77-2090 and 77-2147,s. 77-2090 and 77-2147
• Citation: 572 F.2d 1361
• Parties: FIRST EMPIREYORK (by its successor in interest Manufacturers & Traders Trust Co. of Buffalo, New York, a New York Banking Corporation), and Societe Generale, a French Banking Corporation, Plaintiffs-Appellants, v. FEDERAL DEPOSIT INSURANCE CORPORATION and Federal Deposit Insurance Corporation as Receiver of United States National Bank, Defendants-Appellees. FEDERAL DEPOSIT INSURANCE CORPORATION and Federal Deposit Insurance Corporation as Receiver of United States National Bank, Counterclaimants-Cross-Appellants, v. FIRST EMPIREYORK and Societe Generale, Counterdefendants-Cross-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1361

572 F.2d 1361

FIRST EMPIRE BANK-NEW YORK (by its successor in interest Manufacturers & Traders Trust Co. of Buffalo, New York, a New York Banking Corporation), and Societe Generale, a French Banking Corporation, Plaintiffs-Appellants, v. FEDERAL DEPOSIT INSURANCE CORPORATION and Federal Deposit

Insurance Corporation as Receiver of United States

National Bank, Defendants-Appellees.

FEDERAL DEPOSIT INSURANCE CORPORATION and Federal Deposit

Insurance Corporation as Receiver of United States

National Bank, Counterclaimants-Cross-Appellants, v. FIRST EMPIRE BANK-NEW YORK and Societe Generale,

Counterdefendants-Cross-Appellees.

Nos. 77-2090 and 77-2147.

United States Court of Appeals Ninth Circuit.

April 6, 1978.

As Amended April 10, 1978.

Don A. Proudfoot, Jr., Graham & James, Long Beach, Cal., for plaintiffs-appellants.

Charles A. Legge, of Bronson, Bronson & McKinnon, San Francisco, Cal., Richard R. Gore, of Schall, Boudreau & Gore, San Diego, Cal., for defendants-appellees.

Appeal from the United States District Court for the Southern District of California.

Before BROWNING and MERRILL, Circuit Judges, and HARPER, ^* District Judge.

MERRILL, Circuit Judge:

This case arises out of the insolvency and receivership of the United States National Bank of San Diego (USNB). The Federal Deposit Insurance Corporation (FDIC), as Receiver, entered into an agreement with Crocker National Bank for purchase by Crocker of selected assets of USNB and assumption by Crocker of certain of the bank's obligations, including deposits. This suit was brought by creditors of USNB, whose claims had not been assumed by Crocker. They contend that Crocker's assumption, carrying with it assurance of payment in full of the claims assumed, amounted to a distribution by the Receiver in which the plaintiffs were entitled by law to share ratably. Accordingly they seek to recover from the FDIC the amount of their claims in full. They here appeal from judgment rendered by the district court in favor of the FDIC.

Appellants' claims arise out of standby letters of credit issued by USNB in connection with loans made by appellants to customers of USNB. The FDIC contends that these claims were contingent, and were not debts of USNB at the time of its insolvency or at the time it was placed in receivership. The FDIC contends that for that reason the claims were not provable in the receivership. It cross appeals from judgment of the district court holding the claims to be provable.

The facts bearing on the appeal and cross appeal will be more fully discussed below.

I. FACTS

A. The FDIC and Insolvent Banks

The FDIC, under the Federal Deposit Insurance Act (FDIA), is given the duty of insuring to $40,000 each deposit made in national banks that are members of the Federal Reserve System, 12 U.S.C. §§ 1811, 1813(m), 1821(a), (f). From assessments paid by the insured banks an insurance fund has been created, 12 U.S.C. § 1821(a), from which the FDIC meets its responsibilities as insurer. In this respect, § 1821(f) provides in part:

"Whenever an insured bank shall have been closed on account of inability to meet the demands of its depositors, payment of the insured deposits in such bank shall be made by the Corporation as soon as possible * * * either (1) by cash or (2) by making available to each depositor a transferred deposit in a new bank in the same community or in another insured bank in an amount equal to the insured deposit of such depositor."

It is the Comptroller of the Currency who, under the National Bank Act, is empowered to place a national bank in receivership. This he may do whenever he "shall become satisfied of the insolvency" of a bank. 12 U.S.C. § 191. Since enactment of the FDIA the receiver appointed by the Comptroller for national banks must be the FDIC. 12 U.S.C. § 1821(c).

This places the FDIC in the unusual position of acting in two capacities with respect to national banks closed by the Comptroller: in its corporate capacity, as insurer of deposits (in which respect we, as does the FDIA, shall refer to the FDIC as "the Corporation"), and in its capacity as receiver (in which respect we shall refer to it as "the Receiver"). This duality requires the FDIC frequently to deal with itself, e. g., to lend or sell to itself. The prayer of the complaint in this case seeks to require the FDIC as the Corporation to stand good for acts of the FDIC as the Receiver.

Under the FDIA the Corporation, through its board of directors, is authorized to take action to assist a failing bank with the hope that it may be able to avert the bank's closure and the drastic economic effect that closure might have on the community served by the bank. 12 U.S.C. § 1823(c) and (e). One form of relief often resorted to for this purpose is the purchase and assumption agreement. By such an agreement the Corporation encourages the failing bank to agree to a takeover of its business by a sound bank. This involves an assumption by the acquiring bank of the failing bank's deposit and commercial obligations and a purchase of its assets. Where the assets are found to be less in value than the outstanding obligations, the Corporation is authorized by the FDIA to lend to the failing bank such a sum of money, to be passed on to the acquiring bank, as would bring the assumption and purchase into balance. 12 U.S.C. § 1823(e). The Corporation may take a lien on any assets remaining in the receivership to secure its loan. Id.

The Corporation realistically recognizes that it may not come out in the black on such a transaction. However, the question faced by the Corporation's board of directors is whether the arrangement is likely to be less costly than the bank's closure, which otherwise is the probable result, with the expense to the Corporation of compensating the insured depositors which would necessarily follow. 12 U.S.C. § 1823(e); see Bransilver, Failing Banks: FDIC's Options and Constraints, 27 Ad.L.Rev. 327 (1975).

The purchase and assumption agreement also can be resorted to by a bank already failed and in receivership, in which case the Corporation deals not with the failing bank but with itself as Receiver. This is what occurred in the case of USNB.

B. The Insolvency of USNB

In August, 1973, the Comptroller advised the FDIC that USNB was in poor financial condition and might have to be closed. The FDIC was provided with examination reports of USNB and other financial information available through the Comptroller's office. After analyzing the financial information, and information regarding the control of USNB, the FDIC decided that it had two relevant alternatives under the Act: (1) it could simply wait until USNB was closed by the Comptroller, and then pay the insured depositors up to the then $20,000 statutory limit and liquidate the bank; or (2) it could attempt to find a bank to purchase USNB's assets and assume its liabilities.

The consequences of liquidation were awesome. All of USNB's sixty-two offices, located throughout five southern California counties, would have to be closed and the value of uninterrupted operation of the offices would be lost. All checks drawn on USNB accounts would have to be dishonored, causing harm not only to the account holders but also to those persons to whom the account holders had written checks. The accounts of over 300,000 depositors in USNB would have to be held in suspense for a time long enough to permit the FDIC to compile records, offset the deposits with the liabilities, 12 U.S.C. § 1813(m), and pay the insurance, 12 U.S.C. § 1821(f). Insured depositors would receive only a maximum of $20,000, and a large percentage of the deposits were over that amount. Depositors and creditors would then receive only distributions from the liquidation of USNB's assets over a lengthy period of years. USNB had approximately one billion, two hundred and fifty million dollars in book values of assets and liabilities. It had deposits of $930 million. It had a trust department with assets under management of approximately $156 million. It had 344,000 separate deposit accounts. Approximately $300 million of those deposits were not insured. Innumerable legitimate borrowers were relying on USNB as a continuing source of credit to finance their businesses.

Faced with these consequences, the Board of Directors of the FDIC decided to attempt to find another bank to participate in a purchase and assumption transaction on such terms as would reduce the risk of loss to the Corporation.

It was first necessary to formulate the transaction in such a manner as would prove attractive to interested banks, so that competitive bidding among such banks would minimize the losses of the FDIC. To this end representatives of qualified and interested banks were invited to join with the Corporation in a discussion designed to fix the conditions of a purchase and assumption agreement. It became immediately apparent that certain assets and liabilities of USNB were not readily acceptable to the banks. These were assets and liabilities connected with the bank's controlling shareholder, C. Arnholt Smith, and certain USNB shareholders and companies associated with him. The banking transactions of the members of this group, referred to by the FDIC as the "Designated Group," were regarded as suspect. Many interested persons attributed USNB's failure in large part either to mismanagement by the Designated Group or to their misuse of official power for personal gain, and charges were then under investigation by the Securities and Exchange Commission and the Internal Revenue Service. The members of the Designated Group individually were substantially indebted to USNB and the bank had issued standby letters of credit on their behalf to other banks that had lent money to group members. The consensus of the banks consulted by the Corporation was that the financial status of the Designated Group members was such that their obligations to USNB were of...