Federal Deposit Ins. Corp. v. Liberty Nat. Bank & Trust Co.

• Decision Date: 26 November 1986
• Docket Number: Nos. 84-2147,84-2148,s. 84-2147
• Citation: 806 F.2d 961
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver of Penn Square Bank, N.A., Plaintiff-Appellant, v. The LIBERTY NATIONAL BANK & TRUST CO., Defendant-Appellee. FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver of Penn Square Bank, N.A., Plaintiff-Appellant, v. UTICA NATIONAL BANK AND TRUST COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 961

806 F.2d 961

55 USLW 2382

FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver of Penn

Square Bank, N.A., Plaintiff-Appellant, v. The LIBERTY NATIONAL BANK & TRUST CO., Defendant-Appellee.

FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver of Penn

Square Bank, N.A., Plaintiff-Appellant, v. UTICA NATIONAL BANK AND TRUST COMPANY, Defendant-Appellee.

Nos. 84-2147, 84-2148.

United States Court of Appeals, Tenth Circuit.

Nov. 26, 1986.

David L. Bryant (Charles C. Baker, also of Gable & Gotwals, Tulsa, Okl., with him on the briefs in No. 84-2147; Ross A. Plourde and V. Burns Hargis of Reynolds, Ridings & Hargis, Oklahoma City, Okl., on the briefs in No. 84-2148), for plaintiff-appellant Federal Deposit Ins. Corp.

D. Kent Meyers (Harvey D. Ellis, Jr., also of Crowe & Dunlevy, Oklahoma City, Okl., with him on the brief), for defendant-appellee The Liberty Nat. Bank and Trust Company of Oklahoma City.

William E. Hughes (Lewis N. Carter and Charles S. Plumb, also of Doerner, Stuart, Saunders, Daniel & Anderson, Tulsa, Okl., with him on the brief), for defendant-appellee Utica Nat. Bank & Trust Co.

Before McKAY and LOGAN, Circuit Judges, and CROW, District Judge. ^*

LOGAN, Circuit Judge.

These two consolidated appeals raise substantially identical questions regarding the rights of standby letter of credit beneficiaries in bank insolvency proceedings. In both cases, the Federal Deposit Insurance Corporation (FDIC) appeals from summary judgments entered against it as receiver of the insolvent Penn Square Bank, N.A. (Penn Square).

The issues on appeal are: (1) whether Utica National Bank and Trust Company (Utica) and The Liberty National Bank and Trust Company (Liberty) possess provable claims against the FDIC under standby letters of credit issued by Penn Square, even though they did not attempt to draw on the letters of credit until after Penn Square was declared insolvent; (2) whether Utica and Liberty properly set off their claims against correspondent accounts maintained by Penn Square at the respective banks; and (3) whether Utica is entitled to recover $100,000 in deposit insurance proceeds from the FDIC in the FDIC's capacity as insurer.

I

The material facts in these cases are not in dispute. We present them separately.

A FDIC v. Utica

On July 5, 1982, the Comptroller of the Currency declared Penn Square insolvent and appointed the FDIC as its receiver. Before that date, Penn Square had issued thirty-seven standby letters of credit to Utica as beneficiary to serve as collateral for loans which Utica made to its loan customers. Each letter of credit was payable upon Utica's presentment of a draft accompanied by a certification that the loan secured by the letter was in default. The letters of credit were backed by promissory notes executed by Penn Square's customers. On July 5, 1982, the aggregate, undrafted balance under the letters of credit was $2,962,889.44. Between July 14 and July 23, 1982, the FDIC sent notices to Utica purporting to disaffirm all obligations of Penn Square under the letters of credit. Taking the position that the loans were all in default on July 5, 1982, most because Penn Square's insolvency rendered questionable the collateral securing the loans, Utica presented complying drafts to the FDIC for payment of the remaining balance under the letters, before Penn Square made any distributions to creditors. The FDIC refused to honor the drafts. Utica then notified the FDIC that it had set off as much of the amounts claimed under the letters of credit against Penn Square's correspondent account at Utica as it could, reducing the account balance to zero.

Thereafter, the FDIC sued Utica to recover $1,609,261.93, which the FDIC claimed to be the amount properly remaining in Penn Square's correspondent account at Utica. ¹ Utica asserted its right to setoff as a defense and counterclaimed for deposit insurance and the balance due under the letters of credit. The district court declared Utica's setoff proper and awarded Utica $100,000 in deposit insurance and a receiver's certificate in the amount of $1,478,762.04 for the uninsured balance.

B FDIC v. Liberty

On July 5, 1982, the date Penn Square was declared insolvent, Liberty was the named beneficiary of four standby letters of credit issued by Penn Square, each in the amount of $400,000. Liberty was also entitled to draw under a fifth letter of credit in the amount of $28,125, which had been transferred to it by the named beneficiary. These letters of credit were payable upon Liberty's presentment of a draft and a certificate of default. Liberty asserts, and the FDIC does not dispute, that the obligations secured by these five letters were in default on or before July 5, 1982, by reason of Penn Square's insolvency or otherwise. Between July 8 and July 13, 1982, Liberty presented drafts totalling $1,455,058.54 to the FDIC for payment under the five letters. The FDIC dishonored these drafts, and Liberty set off the total amount against Penn Square's correspondent account.

In addition, Liberty was a "confirming bank" with respect to a sixth letter of credit in the amount of $175,000, issued by Penn Square to the First National Bank and Trust Company of Oklahoma City. This letter of credit also was payable upon presentment of a draft referring to and accompanied by the letter. On July 9, 1982, Liberty paid a $175,000 draft drawn on it as confirming bank under this letter and, on the same day, presented its draft in that amount to the FDIC. When this draft was also dishonored by the FDIC, it was set off by Liberty against Penn Square's account. On July 14, 1982, Liberty wired to Penn Square $656,356.19 as the final balance in its correspondent account after the setoffs.

Thereafter the FDIC sued Liberty to recover $1,632,172.12, the total amount debited against Penn Square's correspondent account after the date of insolvency. ² The district court declared Liberty's setoffs proper and granted its motion for summary judgment.

II

The FDIC first argues that because Utica and Liberty (defendants) did not draw on the letters of credit until after Penn Square was declared insolvent, their claims were not "fixed" but "contingent" at the date of insolvency, and therefore are not provable against the FDIC as receiver.

The FDIC relies upon statements in many cases to the effect that "the rights and liabilities of a bank and the bank's debtors and creditors are fixed at the declaration of the bank's insolvency," see, e.g., American National Bank v. FDIC, 710 F.2d 1528, 1540 (11th Cir.1983) (quoted in FDIC v. McKnight, 769 F.2d 658, 661 (10th Cir.1985), cert. denied, --- U.S. ----, 106 S.Ct. 1184, 89 L.Ed.2d 300 (1986)), and that no additional rights can be created after insolvency. See, e.g., Merrill v. National Bank of Jacksonville, 173 U.S. 131, 143, 19 S.Ct. 360, 365, 43 L.Ed. 640 (1899). ³ An early Supreme Court case, United States ex rel. White v. Knox, 111 U.S. 784, 4 S.Ct. 686, 28 L.Ed. 603 (1884), stated the principle as follows:

"The business of the bank must stop when insolvency is declared. R.S., sec. 5228. No new debt can be made after that. The only claims the Comptroller can recognize in the settlement of the affairs of the bank are those which are shown by proof satisfactory to him or by the adjudication of a competent court to have had their origin in something done before the insolvency."

Id. at 787, 4 S.Ct. at 687, 28 L.Ed. at 603 (emphasis added).

To ensure a "ratable" distribution of assets, as required by 12 U.S.C. Sec. 194, the Supreme Court has held that the amount of each claim is to be determined as of the date of insolvency. Knox, 111 U.S. at 785-88, 4 S.Ct. at 686-87, 28 L.Ed. at 603-04; American Surety Co. v. Bethlehem National Bank, 314 U.S. 314, 317-18, 62 S.Ct. 226, 228, 86 L.Ed. 241 (1941). Neither interest accruing after insolvency, Knox, 111 U.S. at 785-88, 4 S.Ct. at 686-87, 28 L.Ed. at 603-04; Fash v. First National Bank, 89 F.2d 110, 112 (10th Cir.1937), nor any realization by a creditor of less than full payment of the debt on collateral or other security supporting the bank's obligation, Merrill, 173 U.S. at 146-47, 19 S.Ct. at 366-67; American Surety Co., 314 U.S. at 318, 62 S.Ct. at 228, alters the extent of a creditor's participation in the insolvent bank's assets.

But the FDIC, by arguing that a claim must be "absolutely" owing on the date of deemed insolvency, seeks too narrow an interpretation of the rule. Nothing in Sec. 194 or the opinions cited above requires us to hold that a bank's obligation to pay a fixed amount of money upon the occurrence of a specified event is rendered entirely null and void if the bank's insolvency intervenes before the triggering event occurs. It is as much the purpose of the insolvency statutes to preserve rights existing at the time of insolvency as to prevent new rights from arising thereafter. See Merrill, 173 U.S. at 147, 19 S.Ct. at 367 ("The requirement of equality of distribution among creditors by the national banking act involves no invasion of prior contract rights of any of such creditors, and ought not to be construed as having, or being intended to have, such a result."); Scott v. Armstrong, 146 U.S. 499, 509, 13 S.Ct. 148, 151, 36 L.Ed. 1059, 1063 (1892).

The Ninth Circuit rejected the argument the FDIC presents here in First Empire Bank-New York v. FDIC, 572 F.2d 1361 (9th Cir.), cert. denied, 439 U.S. 919, 99 S.Ct. 293, 58 L.Ed.2d 265 (1978). It held that beneficiaries of standby letters of credit possess provable claims even when no drafts are presented prior to insolvency, if three conditions are met: first, the claims must have been in existence before insolvency and must not be dependent on new contractual obligations arising after insolvency; second, total liability must be certain at the time the beneficiaries sue the issuer's receiver; and third, the claims must be made in a timely manner, before assets are distributed from the...