Federal Deposit Ins. Corp. v. Bank of Boulder

• Decision Date: 28 September 1988
• Docket Number: No. 86-1071,86-1071
• Parties: 7 UCC Rep.Serv.2d 837 FEDERAL DEPOSIT INSURANCE CORPORATION, a United States corporation, Plaintiff- Appellant, v. BANK OF BOULDER, a Colorado corporation, Defendant-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1134

865 F.2d 1134

7 UCC Rep.Serv.2d 837

FEDERAL DEPOSIT INSURANCE CORPORATION, a United States corporation, Plaintiff- Appellant, v. BANK OF BOULDER, a Colorado corporation, Defendant-Appellee.

No. 86-1071.

United States Court of Appeals Tenth Circuit.

Sept. 28, 1988.

Order Granting Rehearing En Banc

Dec. 5, 1988.

Jane Rossowski, of counsel, Federal Deposit Ins. Corp., Washington, D.C. (Lawrence F. Bates, of counsel, Federal Deposit Ins. Corp., Washington, D.C., Robert A. Zupkus and Frederick W. Klann of White & Steele, P.C., Denver, Colo., on the briefs), for plaintiff-appellant.

Richard L. Eason (Dean G. Panos, with him on the brief) of Eason, Sprague & Wilson, P.C., Denver, Colo., for defendant-appellee.

Before McKAY, McWILLIAMS, and BALDOCK, Circuit Judges.

I.

McKAY, Circuit Judge.

On June 30, 1982, Bank of Boulder issued a standby letter of credit in the amount of $27,000.00 to Dominion Bank of Denver, a state-chartered commercial bank with deposits insured by the Federal Deposit Insurance Corporation (FDIC). On September 30, 1983, Dominion Bank was declared insolvent and ordered closed by the Colorado State Banking Commissioner pursuant to Colo.Rev.Stat. Sec. 11-5-102 (1973). Receivership of Dominion Bank was tendered to and accepted by FDIC in accordance with Colo.Rev.Stat. Sec. 11-5-105 (1973) and 12 U.S.C. Sec. 1821(e) (1982). Also on that day, after obtaining court approval, FDIC as receiver (FDIC/Receiver) entered into a Purchase and Assumption transaction (P & A) whereby it sold Dominion Bank to an assuming bank. The assuming bank purchased the "acceptable" assets and assumed the liabilities of Dominion Bank; and FDIC in its capacity as a United States insurance corporation (FDIC/Corporation) purchased the remaining "unacceptable" assets.

One of the "unacceptable" assets acquired by FDIC/Corporation was the letter of credit issued by Bank of Boulder. When FDIC/Corporation subsequently attempted to draw on the letter, Bank of Boulder refused to honor the drafts. Thereafter, FDIC/Corporation brought this action in the United States District Court for the District of Colorado to obtain payment on the letter of credit.

Bank of Boulder filed a motion to dismiss, claiming that (1) the transfer of the letter of credit to FDIC/Corporation was invalid and therefore FDIC/Corporation could not bring an action enforcing the terms of the letter and (2) FDIC/Corporation is proceeding essentially as a receiver of a state bank and therefore can bring an action only in state court. ¹ The district court granted Bank of Boulder's motion, determining that the letter of credit, which transferred by operation of law to the state banking commissioner and to FDIC/Receiver, could not be validly transferred to FDIC/Corporation. 622 F.Supp. 288. Specifically, because the letter of credit did not expressly state that it was transferable or assignable, the district court determined that the right to draw on the letter could not be transferred under state law, Colo.Rev.Stat. Sec. 4-5-116(1) (1973), which provides that "the right to draw under a credit can be transferred or assigned only when the credit is expressly designated as transferable or assignable." ² Also, by its terms, the letter of credit was made subject to the Uniform Customs and Practice for Documentary Credits, International Chamber of Commerce Publication No. 290 (1974 Revision) (UCP). Article 46 of the UCP provides that a letter of credit can be transferred only if it is expressly designated as transferable. Applying these transfer restrictions, the district court concluded that FDIC/Corporation could not acquire or enforce the letter of credit. Rather, FDIC/Receiver would have to bring suit on the letter and could do so only in state court.

On appeal, FDIC/Corporation contends that the district court erred in enforcing the transfer restrictions. According to FDIC/Corporation, federal statutory and common law governs the transfer of assets to FDIC/Corporation in a P & A and dictates that a failed bank's otherwise nontransferable or nonassignable assets may be purchased and acquired by FDIC/Corporation.

The issue presented is whether FDIC/Corporation can purchase and acquire the right to draw on a letter of credit from FDIC/Receiver in the course of a P & A transaction, notwithstanding that the letter is nontransferable under state law or by its own terms.

II.

The FDIC is an instrumentality created by Congress to promote stability and restore and maintain confidence in the nation's banking system. See FDIC v. Philadelphia Gear Corp., 476 U.S. 426, 432-35, 106 S.Ct. 1931, 1935-1936, 90 L.Ed.2d 428 (1986); S.Rep. No. 1269, 81st Cong., 2d Sess. 2-3, reprinted in, 1950 U.S.Code Cong. Serv. 3765, 3765-66 (FDIC's purpose is to bring depositors sound, effective, and uninterrupted operation of banking system with resulting safety and liquidity of bank deposits). To achieve this objective, FDIC insures bank deposits. One of its primary duties as insurer is to pay depositors when an insured bank fails. Gunter v. Hutcheson, 674 F.2d 862, 865 (11th Cir.), cert. denied, 459 U.S. 826, 103 S.Ct. 60, 74 L.Ed.2d 63 (1982), overruled on other grounds, Langley v. FDIC, 484 U.S. 86, 108 S.Ct. 396, 98 L.Ed.2d 340 (1987); FDIC v. Godshall, 558 F.2d 220, 221 (4th Cir.1977). In fulfilling this duty, FDIC has various options available to it. One option is to close the failed bank, liquidate its assets, and pay the depositors their insured amounts, covering any shortfall with insurance funds. This procedure, however, has several disadvantages. The sight of a closed bank does not promote stability or confidence in the banking system. "Accounts are frozen, checks are returned unpaid, and a significant disruption of the intricate financial machinery results." Gunter, 674 F.2d at 865; accord FDIC v. Merchants National Bank, 725 F.2d 634, 637 (11th Cir.) (lost jobs, checks returned unpaid, interruption of banking services in community, erosion in public confidence, adverse impact on affiliated or independent banks), cert. denied, 469 U.S. 829, 105 S.Ct. 114, 83 L.Ed.2d 57 (1984). Additionally, paying the deposit liabilities of the failed bank may result in a substantial loss to FDIC's insurance fund; and depositors may have to wait for some time to recover even the insured portion of their deposits. Uninsured funds may be irretrievably lost since uninsured deposit liabilities and debts owed to other creditors are paid on a pro rata basis only after the receivership liquidates all of the assets and covers all costs of liquidation. Merchants National Bank, 725 F.2d at 637.

To avoid the significant problems associated with full-scale liquidation, FDIC whenever feasible employs a P & A transaction, a dramatically effective and cost-efficient way to protect depositors, the banking system, and the resources of the insurance fund. Generally, a P & A involves three entities: the receiver, the assuming bank, and FDIC as insurer. When FDIC is appointed as receiver, it acts simultaneously in two separate capacities: as receiver of the failed bank and as insurer of the deposits. See Gunter, 674 F.2d at 865; FDIC v. Ashley, 585 F.2d 157, 160 (6th Cir.1978); Godshall, 558 F.2d at 222 n. 4, 223; Freeling v. Sebring, 296 F.2d 244, 245 (10th Cir.1961); FDIC v. Hudson, 643 F.Supp. 496, 498 (D.Kan.1986).

In a P & A, the assuming bank purchases the failed bank, assuming deposit and other liabilities, and immediately reopens the failed bank with no interruption in vital banking operations and no loss to depositors. Merchants National Bank, 725 F.2d at 638; Gunter, 674 F.2d at 865. The possibility that depositors will not receive their full deposit is averted since the assuming bank is able to pay deposits upon demand. FDIC v. Wood, 758 F.2d 156, 160-61 (6th Cir.), cert. denied, 474 U.S. 944, 106 S.Ct. 308, 88 L.Ed.2d 286 (1985). The insurance fund is also protected and the risk of loss to FDIC is generally reduced.

A P & A "must be consummated with great speed, usually overnight." Gunter, 674 F.2d at 865, cited in Langley, 108 S.Ct. at 401; see Wood, 758 F.2d at 160; Gilman v. FDIC, 660 F.2d 688, 694 (6th Cir.1981). Indeed, because speed is the essential predicate and most striking advantage of a P & A, FDIC is able to preserve and realize upon a valuable asset that would otherwise be lost--the going concern value of the failed bank. Also, as mentioned, FDIC is able to avoid interrupting banking services for even one day.

Because time constraints often prohibit an assuming bank from fully evaluating its risks, and so that P & A's are an attractive deal, the assuming bank need only purchase those assets which are of the highest banking quality, i.e., the "acceptable" assets. Consequently, when the assumed liabilities exceed the value of the assets purchased, FDIC/Receiver agrees to pay the assuming bank the difference in cash, less a credit for the going concern value of the failed bank. The cash is paid from FDIC/Corporation's insurance fund in consideration for which FDIC/Corporation acquires the assets not transferred to the assuming bank, i.e., the "unacceptable" assets. As a critical part of the P & A, FDIC/Corporation thereby finances the P & A and facilitates its implementation by providing FDIC/Receiver with the cash needed to consummate the P & A. See Langley, 108 S.Ct. at 401 (Court recognizes FDIC/Corporation's important role in financing P & A's); Merchants National Bank, 725 F.2d at 637-38.

FDIC/Corporation's purchase of the failed bank's "unacceptable assets" is authorized under 12 U.S.C. Sec. 1823(c)(2)(A) (1982) (emphasis added), which provides: "In order to facilitate ... the sale of assets of such insured bank and the assumption of such insured bank's liabilities by an insured institution ... [FDIC/Corporation] is authorized ... to purchase any such assets [of the failed bank]...." Additionally, 12 U.S.C. Sec. 1823(d) (1982) states that a receiver of a failed...