Citibank (South Dakota), NA v. FDIC

• Decision Date: 14 April 1993
• Docket Number: Civ. A. No. 92-0162.
• Citation: 827 F. Supp. 789
• Parties: CITIBANK (SOUTH DAKOTA), N.A., Plaintiff, v. FEDERAL DEPOSIT INSURANCE CORPORATION in its own capacity and as Receiver for Bank of New England, N.A., The Connecticut Bank and Trust Company, N.A., and Maine National Bank, Defendants.
• Court: U.S. District Court — District of Columbia

827 F. Supp. 789

CITIBANK (SOUTH DAKOTA), N.A., Plaintiff, v. FEDERAL DEPOSIT INSURANCE CORPORATION in its own capacity and as Receiver for Bank of New England, N.A., The Connecticut Bank and Trust Company, N.A., and Maine National Bank, Defendants.

Civ. A. No. 92-0162.

United States District Court, District of Columbia.

April 14, 1993.

John A. Buchman, Alston & Bird, Washington, DC, for plaintiff.

Lloyd H. Randolph, White & Case, J. Christopher Kohn, U.S. D.O.J., Commercial Branch, Washington, DC, for defendants.

MEMORANDUM OPINION

THOMAS F. HOGAN, District Judge.

On March 26, 1993, this Court conducted a hearing to consider whether, as a matter of law, the Financial Institutions Reform and Recovery Act ("FIRREA") protects the Federal Deposit Insurance Corporation ("FDIC") from liability for damages caused by repudiation of a non-compete provision.¹ Based on the arguments and authorities presented by the parties in their briefs and during the hearing, the Court found that the non-compete provision could have value prior to repudiation and that the FDIC could be held liable for damages as a result. Accordingly, the Court granted plaintiff's motion for partial summary judgment and denied defendants' motion. This Opinion memorializes this Court's March 26, 1993 bench ruling.

I. BACKGROUND

Citibank (South Dakota), N.A. ("Citibank"), brings this case against the FDIC in its capacity as the appointed receiver for Bank of New England, N.A., The Connecticut Bank and Trust Company, N.A., and Maine National Bank (collectively referred to as the "BNE" Banks).²

On January 28, 1990, prior to the FDIC's appointment as receiver of the BNE Banks, Citibank entered into a contract, the Credit Card Portfolio Purchase and Sale Agreement ("the Agreement"), to purchase certain assets and assume certain liabilities associated with the credit card businesses of the BNE Banks. Although the book value of the credit card receivables was approximately $640 million, Citibank paid a total of approximately $820 million for the portfolio. Citibank claims that part of the $180 million premium represents a payment for contractual rights, including a covenant preventing the BNE Banks and their successors from soliciting credit card business from former BNE cardholders. Citibank calculates that $36.1 million of the $180 million premium was attributable to the non-compete provision, and it seeks $27.899 million in damages as the present value of that $36.1 million.³

It is undisputed that Citibank requested the four year non-compete provision as a condition to the sale. FDIC notes, however, that a monetary value was never assigned to the provision. Citibank never recorded the provision as a separate asset on its books, despite its own internal accounting practices requiring that "any intangible assets that can be identified and valued be allocated a separate portion of the purchase price."⁴

On January 6, 1991, the Comptroller of the Currency declared the BNE banks insolvent and named the FDIC as receiver. In preparation for sale of the BNE Banks' assets, the FDIC repudiated the Agreement pursuant to 12 U.S.C. § 1821(e)(1). Less than one month later, the FDIC announced the sale of the BNE Banks to Fleet/Norstar Financial Corporation ("Fleet") without the encumbrance of the non-compete provision. Citibank, believing it was entitled to compensation for the value of the repudiated non-compete provision, filed timely proof of its claims with the FDIC. The FDIC disallowed the claims on January 3, 1992. Citibank now brings suit, pursuant to 12 U.S.C. § 1821(d)(6), for a judicial determination of its claims.

II. DISCUSSION

A. Legal Standard

Federal Rule of Civil Procedure 56(c) permits a court to grant summary judgment when the evidence in the record shows that "there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). The moving party bears the burden of showing that there is no genuine issue of material fact⁵ or that the opposing party has failed to make a showing sufficient to establish the existence of an element essential to that party's case. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986). When the moving party has carried its burden, the burden shifts to the nonmoving party to "come forward with `specific facts showing that there is a genuine issue for trial.'" Matsushita Elec. Industrial Co. v. Zenith Radio, 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (citations omitted) (emphasis in original). The nonmoving party "must do more than simply show that there is some metaphysical doubt as to the material facts." Id. at 586, 106 S.Ct. at 1356. In reviewing the evidence, a court must draw all reasonable inferences in favor of the nonmovant. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 2513, 91 L.Ed.2d 202 (1986). Then, only when "the record taken as a whole could not lead a rational trier of fact to find for the non-moving party," Matsushita, 475 U.S. at 587, 106 S.Ct. at 1356, is summary judgment appropriate.

B. Measure of Damages under FIRREA

FIRREA gives the receiver of a failed bank the right to repudiate any contract or lease:

(A) to which such institution is a party; (B) the performance of which the conservator or receiver, in ... their discretion, determines to be burdensome; and (C) the disaffirmance ... of which will promote the orderly administration of the institution's affairs.⁶

12 U.S.C. § 1821(e)(1). Section 1821(e)(3) lessens the impact of repudiation by allowing certain damage claims against receiver. While actual compensatory damages are permitted, punitive, exemplary and lost profits damages are specifically excluded. § 1821(e)(3)(B); see also Howell v. FDIC, 986 F.2d 569 (1st Cir.1993).

Under § 1821(e)(3)(A)(ii), damages caused by repudiation are measured on the date the receiver was appointed, not on the date of repudiation. Office and Professional Employees Int'l Union, Local 2 v. FDIC, 813 F.Supp. 39 (D.D.C.1993). Damages caused by repudiation which are fixed and determined on the date of receivership are recoverable.⁷ Id. at 43 (recoverable damages are those which are determined as opposed to determinable; only actual and not hypothetical claims are allowed under FIRREA); Pioneer Bank & Trust Co. v. Resolution Trust Corp., 793 F.Supp. 828, 831 (N.D.Ill.1992) (holding receiver liable for existing obligations of insolvent institution for which there were no remaining contingencies). A recoverable claim must represent an amount due and owing at the time of the declaration of insolvency, although the specific amount of the claim may be established later. Debabneh v. FDIC, 971 F.2d 428, 434 (10th Cir. 1992) (citing Kennedy v. Boston-Continental Nat'l Bank, 84 F.2d 592, 596 (1st Cir.1936)). The Court must first consider whether the contractual right at issue vested prior to the appointment of the FDIC as receiver.

Defendants contend that Citibank's claim was contingent on the date of insolvency because it did not arise until the FDIC repudiated the Agreement. Although superficially such reasoning appears consistent with § 1821(e), this argument conflicts with the statutory intent of FIRREA to allow claims for contracts in force prior to insolvency. Defendants' reasoning could be extended to deny any contractual claim arising from repudiation. Such claims are always contingent on the date of insolvency because a receiver cannot repudiate a contract until after it is appointed.

In the Court's view, the crucial question is whether Citibank had an unqualified right to expect performance of the non-compete provision on the date of receivership. See Local 2, 813 F.Supp. at 45 (questioning whether bank had obligated itself to honor claims prior to insolvency). Citibank's claim meets this test. The non-compete provision was a valuable contractual right that was fully paid for and operative prior to the date the BNE Banks declared their insolvency. Prior to the date of receivership, Citibank had an unqualified right to expect that the BNE Banks and all other successors in interest to the BNE Banks would perform their obligations under the non-compete provision. There were no contingencies or conditions to the banks' obligations to perform.

Defendants attempt to equate the non-compete provision at issue with a penalty clause in a lease or employment contract. This analogy is misplaced. Such cases involve contingent claims which do not become fixed until after repudiation.⁸Kennedy v. Boston-Continental Nat'l Bank illustrates this distinction. 84 F.2d 592 (1st Cir.1936). In Kennedy, the First Circuit denied a claim for liquidated damages against a receiver because it found that the insolvent bank's liability had not arisen and become fixed prior to receivership. Activation of the liquidated damages clause contained in the lease required written notice and re-entry as conditions precedent, neither of which occurred prior to the bank's insolvency. Id. at 597. Unlike the plaintiff in Kennedy, Citibank had an unconditional right to performance under the non-compete provision prior to receivership.

Defendants further argue that Citibank knew of and assumed the risk of repudiation because it signed the Agreement after FIRREA came into effect. The mere fact that Citibank was aware of a risk of repudiation, however, does not excuse the FDIC from its statutory duty to compensate for damages caused by the repudiation of contracts in force on the date of receivership. Leaving such injured parties uncompensated would greatly affect the amount that troubled, but still solvent, banks receive for selling assets to stay afloat. The risk of uncompensated FDIC repudiation would devalue assets and raise the cost of bailout if the bank did not survive.⁹

C. Type of Damages Available under § 1821(e)

To succeed, Citibank's claim must overcome the damage limitations codified...