SENIOR UNSECURED CREDITORS'COMMITTEE v. FDIC

• Decision Date: 17 October 1990
• Docket Number: CA3-89-1927-D,Civ. A. No. CA3-88-2871-D,CA3-89-2361-D and CA3-89-2559-D.
• Parties: SENIOR UNSECURED CREDITORS' COMMITTEE OF FIRST REPUBLICBANK CORPORATION, et al., Plaintiffs, v. FEDERAL DEPOSIT INSURANCE CORPORATION, et al., Defendants.
• Court: U.S. District Court — Northern District of Texas

749 F. Supp. 758

SENIOR UNSECURED CREDITORS' COMMITTEE OF FIRST REPUBLICBANK CORPORATION, et al., Plaintiffs, v. FEDERAL DEPOSIT INSURANCE CORPORATION, et al., Defendants.

Civ. A. Nos. CA3-88-2871-D, CA3-89-1927-D, CA3-89-2361-D and CA3-89-2559-D.

United States District Court, N.D. Texas, Dallas Division.

October 17, 1990.

COPYRIGHT MATERIAL OMITTED

William F. Sheehan, Jeffrey C. Martin (argued), Bruce C. Swartz and Christopher E. Palmer of Shea & Gardner, Washington, D.C., Sp. Litigation Counsel, for plaintiffs.

Robert W. Patterson, John L. Rogers, III (argued), Peter F. Lovato, III, William J. McKenna, Robert F. Reklaitis and Lawrence F. Bates of Hopkins, Sutter & Clark, Dallas, Tex., for defendants.

FITZWATER, District Judge:

In 1988 the Federal Deposit Insurance Corporation ("FDIC") undertook "the largest bank rescue effort in history,"¹ providing $1 billion in open bank assistance to the flagship bank of the First RepublicBank Corporation ("FRBC") integrated banking system. The assistance effort proved unsuccessful and the flagship bank failed. FRBC's other 40 subsidiary banks were also declared insolvent and closed. FRBC and its wholly-owned subsidiary, IFRB Corporation ("IFRB"), thereafter filed voluntary chapter 11 bankruptcy petitions. Three statutory creditors' committees of these debtors-in-possession now sue the FDIC, contending it exceeded its statutory authority under and violated the Federal Deposit Insurance Act, and violated the National Bank Act, state banking laws, the United States Constitution, the Bankruptcy Code, and federal and state common law and statutory duties in structuring the assistance. The FDIC moves to dismiss the complaint for failure to state a claim, presenting important and novel questions concerning the authority and obligations of the FDIC.

I

Plaintiffs are the Senior Unsecured Creditors' Committee of FRBC, the Junior Unsecured Creditors' Committee of FRBC, and the Unsecured Creditors' Committee of IFRB. They were appointed as statutory creditors' committees by the U.S. Trustee and represent, among others, corporations, partnerships, and individuals who purchased bonds of, or provided goods and services to, FRBC and/or IFRB. FRBC and IFRB are bank holding companies. The U.S. Bankruptcy Court authorized the committees to institute this lawsuit. This court later withdrew the reference and this civil action — consolidated with three others² — is now pending in this court. Defendants are the FDIC, in its corporate capacity and as receiver for the 41 subsidiary banks of FRBC, and Delaware Bridge Bank, N.A. ("Delaware Bridge Bank").³

In 1988 First RepublicBank Dallas, N.A. (the "Dallas Bank") approached the FDIC for financial aid.⁴ The FDIC agreed to provide open bank assistance, conditioned on several requirements. FRBC, IFRB, and certain subsidiaries were obligated to enter a Note Purchase Agreement (the "Agreement") with the FDIC. FRBC was required to execute a pledge agreement. Pursuant to the Agreement the FDIC made six-month subordinated loans to the Dallas Bank, in the amount of $800 million, and to First RepublicBank Houston, N.A. (the "Houston Bank"), in the amount of $200 million. The two banks executed notes payable to the FDIC in these respective amounts plus interest. The Agreement required that the $200 million sum advanced to the Houston Bank be transferred immediately to the Dallas Bank by means of a deposit or sale of federal funds. The FDIC assistance was therefore effectively a $1 billion loan to the Dallas Bank.⁵

The FDIC also imposed the requirement that the Dallas Bank use the loan proceeds to repay $1 billion of its outstanding borrowings to the Federal Reserve Bank of Dallas ("FRB-Dallas"). The Agreement required FRBC and IFRB to guarantee unconditionally payment of the two notes. These guaranties were senior to any general obligations of the two companies. FRBC secured its guarantee by entering into an agreement that pledged all the shares then held by it in approximately 30 subsidiary banks and by delivering other property to the FDIC.

The FDIC additionally required that FRBC and IFRB agree to obligate their subsidiary banks⁶ to enter into the Agreement and all subsequently did. The subsidiary banks were also required by the Agreement to guarantee payment of the two notes to the extent of the lesser of their primary capital or 95% of their adjusted net worth. These guaranties were subordinated to certain senior obligations of the banks. Moreover, all indebtedness of the Dallas and Houston Banks to the other subsidiary banks existing on March 18, 1988 or subsequently incurred was subordinated to the two banks' general and subordinated obligations, including those to the FDIC.

The Agreement gave the FDIC substantial control over FRBC, IFRB, and the subsidiary banks, preventing them from undertaking numerous transactions and actions without FDIC approval, subjecting them to FDIC-approval of directors and certain officers, granting the FDIC authority to require FRBC and IFRB to merge subsidiary banks, and precluding the subsidiary banks from declaring dividends without FDIC permission.

The Agreement also precluded the Dallas and Houston Banks from reducing the aggregate amounts of their outstanding debt to other subsidiary banks.⁷ As of March 18, 1988 the Dallas Bank had outstanding debt of more than $6 billion payable to various subsidiaries and approximately $1.4 billion payable to non-affiliated banks that had sold federal funds to the Dallas Bank. These federal funds purchases amounted to unsecured borrowings by the Dallas Bank. The indebtedness to the non-affiliated banks was paid off at approximately this time, while the $6 billion indebtedness to the subsidiary banks was effectively transformed from a general to highly subordinated liability of the Dallas Bank.

On April 30, 1988 the FDIC caused the merger of several subsidiary banks into five existing subsidiary banks. In each merger the relative book values of the stock of the surviving and non-surviving banks did not reflect the relative market, liquidation, and other values of the stocks.

Shortly after the FDIC executed the Agreement, it began soliciting proposals from banks or investor groups interested in taking over some or all of the subsidiary banks. NCNB Corporation ("NCNB"), a bank holding company with principal executive offices in Charlotte, North Carolina, was one bidder.

Acting in concert with one another, NCNB and the FDIC requested a private letter ruling from the Internal Revenue Service ("IRS"). The IRS issued the ruling on June 10, 1988, six weeks before the Comptroller of the Currency ("Comptroller") closed the subsidiary banks of FRBC and IFRB. The letter ruling was grounded on nine factual assumptions and made seven pertinent rulings. NCNB and the FDIC used the factual predicates set forth in the letter ruling to obtain a tax ruling that no other bidder for the banking subsidiaries was able to procure. The ruling also permitted the FDIC to shift part of the costs for resolving problems with the insured banks (particularly the Dallas Bank) from the FDIC insurance fund onto the U.S. Treasury in general.

NCNB's bid was accepted on July 29, 1988. A bid from FRBC management was rejected in part because it would have permitted creditors of the holding companies to retain some of the value of their investments. The FDIC had predetermined well in advance of July 29, 1988 not to accept any permanent restructuring proposal that involved keeping the subsidiary banks open, because this would impede the FDIC's objective of wiping out holding company creditors. The IRS letter ruling was a significant factor in the FDIC's selection of NCNB on the announced ground that NCNB's proposal represented the least costly alternative.

At the time the FDIC provided assistance to the Dallas and Houston Banks, it knew the banks would not be able to repay the sum of $1 billion. The payment was therefore actually a contribution by the FDIC to the Dallas Bank, not a loan, and was structured as a loan to facilitate the FDIC's attempt to capture the value of unassisted and solvent subsidiary banks of FRBC and IFRB. The FDIC took this approach to offset its ultimate costs in meeting its obligations as insurer of the deposits of the Dallas Bank.

On July 29, 1988 the FDIC accepted NCNB's bid to acquire the voting stock of a newly-established bridge bank that would succeed to the assets of all the subsidiary banks. The FDIC then notified the Comptroller and the Banking Commissioner of Texas that the FDIC would provide no further assistance to the Dallas Bank and would not renew the $1 billion loan when it became due. The Comptroller notified FRB-Dallas that the Dallas Bank was no longer a viable institution. FRB-Dallas then demanded immediate repayment of the Dallas Bank's borrowings. The Dallas Bank could not comply, and the Comptroller then closed the Dallas Bank and appointed the FDIC as its receiver.

The FDIC intended initially to use the guaranty of First RepublicBank Delaware ("Delaware Bank") to force the closure of that bank as in the case of the other subsidiary banks. The Delaware Banking Commissioner (the "Commissioner"), however, precluded this by issuing a cease and desist order that prevented the Delaware Bank from paying assets to anyone, including the FDIC, and directed the bank to institute legal action to obtain a declaration that the guaranty was illegal under Delaware law. Both the Commissioner and the Delaware Bank instigated actions to enjoin the FDIC from attempting to collect any of the bank's assets on the basis of the guaranty or the Agreement.

The Delaware Bank, FRBC, and IFRB took steps to ensure that the solvent Delaware Bank would be able to meet its short-term liquidity needs. Because the bank did not accept retail demand deposits, it had recurrent and typical requirements for such funding to satisfy obligations to merchants. The Delaware Bank had in the...