Federal Deposit Ins. Corp. v. Jenkins
| Decision Date | 27 November 1989 |
| Docket Number | No. 88-3798,88-3798 |
| Citation | 888 F.2d 1537 |
| Parties | RICO Bus.Disp.Guide 7381, 14 Fla. L. Week. 2329 FEDERAL DEPOSIT INSURANCE CORPORATION, in its corporate capacity, Plaintiff-Appellee, v. Ernest P. JENKINS, et al., Lynne Hardin, Defendants-Appellants. |
| Court | U.S. Court of Appeals — Eleventh Circuit |
Jonathan Cohen, Shutts & Bowen, Don A. Lynn, Miami, Fla., Jenkins, Walters & Kaiser, P.A., St. Petersburg, Fla., for defendants-appellants.
Robert Pass, Carlton, Fields, Ward, Emmanuel, Smith & Cutler, Tampa, Fla., for plaintiff-appellee.
Eric Summergrad, SEC, Joseph O. Click, Paul Gonson, Daniel L. Goelzer and Jacob H. Stillman, Washington, D.C., amicus curiae.
Appeal from the United States District Court for the Middle District of Florida.
Before FAY and HATCHETT, Circuit Judges, and HOFFMAN *, Senior District Judge.
This appeal concerns whether the Federal Deposit Insurance Corporation (FDIC) is entitled to an absolute priority to assets of officers, directors and other third parties who may have been responsible, at least in part, for the failure of Park Bank of Florida (Park Bank) and a purchase and assumption transaction by the FDIC. For the reasons stated below, we find that the FDIC is not entitled to such a priority and accordingly reverse the judgment of the district court. 1
Park Bank, a wholly-owned subsidiary of Florida Park Bank, Inc. (FPBI), was a state-chartered bank regulated by the FDIC and the Florida Department of Banking and Finance (the Department). The FDIC insured Park Bank's deposits.
On February 14, 1986, the Department declared Park Bank insolvent and appointed the FDIC as receiver of the bank. The Circuit Court for Pinellas County, Florida, confirmed the appointment and approved the sale of certain bank assets by the FDIC, in its capacity as receiver, to the FDIC in its corporate capacity. The court also approved a purchase and assumption agreement between the FDIC as receiver and Chase Bank of Florida, N.A. 2
Following the insolvency, several FPBI shareholders filed state lawsuits against several officers and directors of Park Bank, an accounting firm which had performed audits for the bank, and two law firms which had provided legal services to the bank (collectively the "bank-related defendants"). These suits alleged securities fraud claims under the Florida Securities and Investor Protection Act, common law fraud, civil conspiracy, negligence and a claim under Florida's "civil theft" statute. Several shareholders also brought a parallel federal court suit which alleged claims under section 10(b) of the Securities Exchange Act of 1934 and the federal Racketeer Influenced and Corrupt Organizations Act (RICO).
The FDIC, which became sole owner of all claims, actions and judgments of Park Bank after the purchase and assumption agreement, brought belated claims against several defendants alleged to have harmed the Park Bank. These defendants are substantially similar to the bank-related defendants sued by the shareholders. The FDIC seeks $30 million in damages to Park Bank which allegedly resulted from the negligence and breach of fiduciary duty by the bank-related defendants. The FDIC has also brought suit against Park Bank's accounting firm for negligence and breach of fiduciary duties, seeking damages for loan losses resulting from an allegedly fraudulent audit.
The FDIC brought a separate action in the United States District Court, Middle District of Florida, against the shareholders seeking a declaratory judgment that all of the shareholder's claims, except those based on state and federal securities law, were derivative actions, and thus were the property of the FDIC as the assignee of Park Bank. The FDIC also sought a declaration that as a general creditor of Park Bank and assignee of any causes of action owned by Park Bank, the FDIC's claims against the officers, directors and other defendants should have priority over the shareholder's claims against the parties. The FDIC sought to enjoin the shareholders from recovering from these defendants' assets until the FDIC had satisfied its claims. Both the FDIC and the shareholders moved for summary judgment. 3
The district court granted the FDIC's motion for summary judgment in part and denied the shareholders' motion. FDIC v. Jenkins, Case No. 86-566-Civ-T-10, Order at 12-13 (hereinafter "Order"). The court found that despite the claims of the parties to the contrary, none of the cases cited by the parties in their summary judgment briefs held that the FDIC has, or does not have, an absolute priority over claims of allegedly defrauded shareholders after liquidation of a state-chartered bank. Id. at 8. The court found, however, that several policy considerations supported the FDIC's position. Id. at 9. Because of the risks which a shareholder knowingly takes when making an investment, the court found that it would be inequitable to require general creditors to share equally in recovery with shareholders. Id. The FDIC, which the court found to be a general creditor, would be forced to use its insurance fund to finance the risk assumed initially by the shareholders. Id.
The court further stated that forcing the FDIC to share the risks of loss with the shareholders would make the FDIC's decision concerning the course to be taken upon bank failure exceedingly difficult as the FDIC would be unable to accurately determine the amount of assets available to satisfy the bank's debt. Id. at 9-10.
The court enjoined the shareholders from attempting to collect the proceeds of any settlement with, or garnish or levy on any judgments against the bank-related defendants, and enjoined the bank-related defendants from paying any funds or delivering any consideration to the shareholders in settlement or discharge of the asserted claims. FDIC v. Jenkins, Case No. 86-566-Civ-T-10, Final Judgment at 3-4 (M.D.Fla. August 30, 1988). The court also ordered that any judgment obtained by the shareholders should state on its face that it is subordinate to judgments obtained by the FDIC against the bank-related defendants. Id. at 4.
This appeal followed.
The issue before this Court is whether the FDIC is entitled to priority, either through its status as insurer of the failed Park Bank or through general principles of priority following insolvency, over the Park Bank shareholders for claims against solvent third parties. Both of these potential sources of priority will be addressed below.
The FDIC was created by Congress during the Depression in an effort to safeguard bank depositors from the dangers of bank failures. FDIC v. Philadelphia Gear Corp., 476 U.S. 426, 432-35, 106 S.Ct. 1931, 1935-37, 90 L.Ed.2d 428 (1986) (quoting 77 Cong.Rec. 3837, 3840 (1933)). The cornerstone of Congress's bank protection system was the deposit insurance program which insured depositors against potential loss from a bank failure up to a stated monetary amount. See 12 U.S.C. section 1821(a).
When a bank fails, the FDIC will generally be appointed as a receiver. 12 U.S.C. section 1821(c), (e) (1982). The FDIC will then proceed to determine the future course for the failed bank. The FDIC has two alternatives: (1) a "deposit payoff" or liquidation where the bank is closed and the FDIC pays the depositors up to the $100,000 per account limit out of the deposit insurance fund, see 12 U.S.C. section 1821(d) (1982); or (2) a "purchase and assumption" transaction where the FDIC arranges for the sale of the failed bank's assets and deposit liabilities to another solvent bank. See 12 U.S.C. section 1823(c)(2), (c)(4)(A) (1982). The failed bank reopens in the solvent bank's name, and depositors are benefited by uninterrupted banking service. See Gunter v. Hutcheson, 674 F.2d 862, 865 (11th Cir.1982).
Before engaging in a purchase and assumption transaction, the FDIC must determine that the deposit insurance fund would suffer a greater loss in liquidation than in the purchase and assumption transaction. See 12 U.S.C. section 1823(c)(4)(A) (1982). This is done by performing a "cost test" where the benefit of a purchase and assumption transaction is measured by the value of the bids which are made by solvent banks for the failed bank's assets and deposit liabilities. 4
A purchase and assumption transaction is considered more desirable than a liquidation for several reasons, including that a bank closing deteriorates public confidence in the banking system, that closing a bank disrupts the operation of other solvent banks, that a liquidation may force depositors to wait for months to recover the insured portion of their funds, and that uninsured portions may never be recovered. Gunter, 674 F.2d at 865.
If the purchase and assumption transaction is the course chosen by the FDIC, then FDIC will sell the assets and deposit liabilities of the failed bank to the assuming bank. The assuming bank has the option to return to the FDIC in its receiver capacity those assets which the assuming bank finds to be of limited value. Id. The FDIC in its "corporate" capacity then purchases the returned assets from the receiver FDIC, which transfers the purchase price of the returned assets to the assuming bank. Id. The corporate FDIC attempts to collect on the returned assets, and proceeds from these collections are applied to replenish the insurance fund. As this Court stated in Gunter, through a purchase and assumption transaction, the FDIC "minimizes its loss, the purchasing bank receives a new investment and expansion opportunity at low risk, and the depositors of the failed bank are protected from the vagaries of the closing and liquidation procedure." Id. at 865-66.
The FDIC takes the position that a necessary element of a purchase and assumption transaction is an absolute priority for the FDIC in suits against third parties. Such a priority, the FDIC...
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