Federal Deposit Ins. Corp. v. Bank of Boulder

• Decision Date: 20 August 1990
• Docket Number: No. 86-1071,86-1071
• Citation: 911 F.2d 1466
• Parties: , 12 UCC Rep.Serv.2d 321 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 1466

911 F.2d 1466

59 USLW 2139, 12 UCC Rep.Serv.2d 321

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.

Aug. 20, 1990.

Ira H. Parker, Federal Deposit Ins. Corp., Washington, D.C., of counsel (John M. Palmeri and Frederick W. Klann of White and Steele, P.C., Denver, Colo., with him on the briefs), for plaintiff-appellant.

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

(John J. Gill and Michael F. Crotty of American Bankers Ass'n, Washington, D.C., on the brief, for amicus curiae American Bankers Ass'n.)

Before HOLLOWAY, Chief Judge, McKAY, LOGAN, SEYMOUR, ANDERSON, TACHA, BALDOCK, and BRORBY, Circuit Judges.

McKAY, Circuit Judge.

This case involves an action by the Federal Deposit Insurance Corporation (FDIC) seeking to enforce a letter of credit issued by the defendant Bank of Boulder.

I. Facts

On June 30, 1982, the Bank of Boulder issued a standby letter of credit to Dominion Bank of Denver in the amount of $27,000. On September 30, 1983, Dominion Bank of Denver was declared insolvent and ordered closed by the Colorado State Banking Commissioner pursuant to Colo.Rev.Stat. Sec. 11-5-102 (1973 & Supp.1989). The Commissioner then tendered to FDIC an appointment as liquidator of Dominion Bank of Denver pursuant to Colo.Rev.Stat. Sec. 11-5-105 (1973 & Supp.1989). FDIC accepted this appointment pursuant to 12 U.S.C. Sec. 1821(e) (1988).

In furtherance of its role as receiver/liquidator of the bank, FDIC consummated a Purchase and Assumption (P & A) transaction pursuant to authority granted by 12 U.S.C. Sec. 1823(c)(2)(A) (1988). This P & A transaction allowed certain assets of the failed bank to be sold to a healthy bank; and other assets, including the Dominion Bank letter of credit, to be transferred by FDIC as Receiver (FDIC/Receiver) to the FDIC in its corporate capacity (FDIC/Corporation). The assuming bank essentially purchased only those assets in which it was interested and assumed all of the liabilities of Dominion Bank. FDIC/Corporation purchased the remaining assets of the failed Dominion Bank and provided the funds with which FDIC/Receiver paid the assuming bank for the difference between the assets it purchased and the liabilities it assumed. As required, the entire P & A transaction received the approval of the District Court for the City and County of Denver.

On October 5, 1984, FDIC/Corporation attempted to draw on the letter of credit that it had acquired during the P & A transaction. However, Bank of Boulder twice refused to honor the demand for payment. On March 18, 1985, the FDIC brought suit against Bank of Boulder in order to obtain payment on the letter of credit. On April 10, 1985, Bank of Boulder filed a motion to dismiss which was granted by the district court. FDIC v. Bank of Boulder, 622 F.Supp. 288 (D.Colo.1985). The district court concluded that the letter of credit could not legally be transferred to FDIC/Corporation; and, thus, there was no federal jurisdiction for the claim. Id. at 290.

FDIC/Corporation then filed an appeal of the district court's decision in this court. The panel that heard the appeal reversed the district court's decision, though a dissent was filed. The majority concluded that federal common law allowed the transfer of the letter of credit to FDIC/Corporation. FDIC v. Bank of Boulder, 865 F.2d 1134 (10th Cir.1988). Bank of Boulder then filed a petition for rehearing and a suggestion for rehearing en banc. The en banc court voted to grant the suggestion for rehearing en banc.

The only issue now before the en banc court is whether FDIC/Corporation can purchase a letter of credit from FDIC/Receiver in the course of a P & A transaction, notwithstanding that the letter is nontransferable under state law. After full briefing by both parties and oral argument before the en banc court, we have determined that the original panel majority was correct and that the decision of the district court must be reversed.

II. Standard of Review

The question of whether FDIC/Corporation has the authority to purchase a letter of credit in the course of a P & A transaction is a question of law. We review questions of law de novo. In re Ruti-Sweetwater, Inc., 836 F.2d 1263, 1266 (10th Cir.1988). Thus, we are not constrained by the conclusions of the trial court; we are required to review the record in light of our own independent judgment. State Distrib., Inc. v. Glenmore Distilleries, 738 F.2d 405, 412 (10th Cir.1984); Ocelot Oil Corp. v. Sparrow Indus., 847 F.2d 1458, 1464 (10th Cir.1988).

III. The Mechanics of a Purchase and Assumption Transaction

When a state agency declares a bank insolvent and appoints the FDIC as receiver, FDIC/Receiver may choose among several alternative ways to either liquidate the bank or sell the bank to another bank as a going concern. The two major alternatives include a straight liquidation, in which FDIC simply sells the assets of the bank and pays off the depositors of the bank from the proceeds and from the FDIC insurance fund, and a P & A transaction, in which an assuming bank purchases most of the failed bank's assets and continues to operate the bank as a going concern. Liquidation has several bad effects on the banking community, as the result of the closure of the bank. Depositors lose confidence in the specific failed bank. The public in general loses confidence in the entire banking community. Liquidation also generally involves a major loss to the FDIC's insurance fund. Thus, liquidation is not the favored alternative.

The other major alternative, the purchase and assumption transaction, ¹ involves three parties: the receiver, the assuming bank, and FDIC as insurer. When FDIC is appointed receiver, it simultaneously acts as the receiver of the failed bank and as the insurer of the deposits. See FDIC v. All Souls Episcopal Church, 769 F.2d 658, 662 (10th Cir.1985), cert. denied, 475 U.S. 1010, 106 S.Ct. 1184, 89 L.Ed.2d 300 (1986); FDIC v. Leach, 772 F.2d 1262, 1264 (6th Cir.1985); 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. Ashley, 585 F.2d 157, 160 (6th Cir.1978); FDIC v. Godshall, 558 F.2d 220, 222 n. 4 (4th Cir.1977); Freeling v. Sebring, 296 F.2d 244, 245 (10th Cir.1961); FDIC v. Hudson, 643 F.Supp. 496, 498 (D.Kan.1986). When a state bank fails and FDIC is tendered the appointment as receiver, it is statutorily obligated to accept the appointment. See 12 U.S.C. Sec. 1821(e) (1988). Thus, FDIC cannot avoid acting in two capacities in a P & A transaction.

In a P & A transaction, the assuming bank buys the assets of the failed bank that are of the highest banking quality. The assuming bank also assumes the deposit liabilities of the failed bank. As a result, the amount of deposit liabilities that the bank assumes is greater than the value of the assets it purchases. In order to make the purchase of the failed bank attractive to the assuming bank, FDIC/Receiver pays cash to the assuming bank in an amount sufficient to cause the assets the bank purchases to be equal to the liabilities it assumes, less some credit for the going concern value of the failed bank. The cash paid by FDIC/Receiver to the assuming bank is paid from FDIC/Corporation's insurance fund. In consideration for these funds, FDIC/Corporation acquires the assets of the failed bank that are not transferred to the assuming bank. FDIC/Corporation's "purchase" of the nontransferred assets is authorized by 12 U.S.C. Sec. 1823(c)(2)(A) (1988). FDIC/Receiver is authorized to offer the assets of the failed bank for sale to FDIC/Corporation by 12 U.S.C. Sec. 1823(d) (1988). Ultimately, then, FDIC/Corporation finances the P & A transaction by providing the funds with which FDIC/Receiver pays the assuming bank. Cf. Langley v. FDIC, 484 U.S. 86, 108 S.Ct. 396, 401, 98 L.Ed.2d 340 (1987).

After FDIC/Corporation acquires the nontransferred assets in the P & A, it attempts to enforce and liquidate these assets to recoup its cash outlay and thereby minimize the loss to the insurance fund. In so doing, FDIC/Corporation may bring actions and prosecute claims in its own right. See FDIC v. Braemoor Assoc., 686 F.2d 550, 552 (7th Cir.1982); FDIC v. Ashley, 585 F.2d 157, 159-64 (6th Cir.1978); FDIC v. Godshall, 558 F.2d 220, 222-23 (4th Cir.1977); Hudson, 643 F.Supp. 496, 497 (D.Kan.1986).

In order for a P & A to be implemented by FDIC, the P & A must be less costly than the other major alternative of liquidating the failed bank. ² 12 U.S.C. Sec. 1823(c)(4)(A) (1988). Making the determination of whether a P & A would be less expensive than a simple liquidation requires a quick review of the failed bank's books and records. This review of assets must be quick--usually overnight--because a P & A transaction requires the bank to reopen quickly in order to maintain the going concern value of the failed bank. Langley, 108 S.Ct. at 401. ³ In this case FDIC chose to proceed through the mechanism of a P & A transaction. As a result of this transaction, FDIC/Corporation acquired the letter of credit from the failed bank. We believe that the transfer of this letter of credit to FDIC/Corporation must be upheld for two independent reasons. We hold that both the federal statutory law and the federal common law allow the transfer of the letter of credit to FDIC/Corporation.

IV. Federal Jurisdiction

The district court dismissed the instant case on two grounds. First, it concluded that the letter of credit could not be transferred to FDIC/Corporation; therefore, FDIC/Corporation could not sue to enforce the letter of credit. Second, the district court found...