Petition — Federal Deposit Insurance v. First Empire Bank-New York

Supreme Court brief1978

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OCTOBER TERM, 1978

FEDERAL DEPOSIT INSURANCE CORPORATION,

PETITIONER

First EMPIRE BANK—NEW YORK, ET AL. ;

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR

THE NINTH CIRCUIT

WADE H. McCREE, JR.,

Solicitor General,

ALLAN A. RYAN, JR.,

Assistant to the Solicitor General,

Department of Justice,

Washington, D.C. 205380. ~

REFORD WEDEL, “

Acting General Counsel, i

‘Federal Deposit Insurance Corporation, f

Washington, D.C. 20429.

CHARLES A. LEGGE,

555 California Street,

San Francisco, California 94104.

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Page

Opinions below ___ cadlakeie eel SOOT RS 1

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Statutory provisions invclved _..._-___»___-______. 2

RSE ST Se Due Se OS 2

Reasons for granting the petition =. 8

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Appendix C __. sidsiectiea toilet iin dgeiligegi caine a inadanalaale 49a

CITATIONS

Cases:

Federal Deposit Insurance Corp. v.

Cloonan, 165 Kan. 68, 193 P.2d 656. 13

Gockstetter v. Williams, 9 F.2d 354 ____. 15

Hulse v. Argetsinger, 18 F.2d 944 15

Moore, Ex Parte, 6 F.2d 905 15

Thomas P. Nichols & Son Co. v. National

City Bank, 313 Mass. 421, 48 N.E. 2d

49, certiorari denied, 320 U.S. 742. 12

White v. Know, 111 U.S. 784. 19

Statutes:

Federal Deposit Insurance Act, 64 Stat.

873, 12 U.S.C. 1811 et seg.: 6

12 U.S.C. 1821(a) _~ eae 18

12U.S.C.1821(c) — .. —s«2, 3,7

Statutes—Continued Page Iu the Supreme Court of the United States

aes Seb) 30 _....2, 18, 16, 19 OCTOBER TERM, 1978

SS niece 7

ISUS6. 188(e) Lites passim

National Bank Act: No.

R.S. 5242, 12 U.S.C. 91 2, 6, 7, 8, 12, FEDERAL DEPOSIT INSURANCE CORPORATION,

13, 14, 15, 16 | PETITIONER

R.S. 5236, 12 U.S.C. 194 _.... 2.6, 7, 8, 12,

13, 14, 15, 16 v.

Eee 15 : Winer Wie a

Fe Ss elineen a emreee 15 PIRE BANK—NEW YORK, ET AL.

63 Stat. 767 <= aie DERE O AR act 15

Miscellaneous: PETITION FOR A WRIT OF CERTIORARI TO THE

83 Cong. Rec. 7191 (1938) —....... VEER Shes 17 UNITED STATES COURT OF APPEALS FOR

121 Cong. Rec. 28854 (1975) 10 THE NINTH CIRCUIT

Hearings on the Failure of the United

States National Bank of San Diego be-

fore the Subcommittee on Bank Super-

vision and Insurance of the House Com-

The Solicitor General, on behalf of the Federal

mittee on Banking and Currency, | 93d Deposit Insurance Corporation, petitions for a writ

Cong., 1st Sess. (1973) Semcon 8 of certiorari to review the judgment of the United

| States Court of Appeals for the Ninth Circuit in this

case.

OPINIONS BELOW

The opinion of the court of appeals (App. A, infra,

pp. la-30a) is reported at 572 F.2d 1361. The opin-

ion of the district court (App. B, infra, pp. 31a-48a)

is not reported.

(1)

JURISDICTION

The judgment of the court of appeals (App. A,

infra, p. 28a) was entered on April 6, 1978. On

June 26, 1978, Mr. Justice Rehnquist extended the

time for filing a petition for a writ of certiorari to

and including August 21, 1978. The jurisdiction of

this Court is invoked under 28 U.S.C. 1254(1).

QUESTION PRESENTED

Whether the Federal Deposit Insurance Corpora-

tion, in arranging the purchase of a failed bank’s as-

sets and the assumption of that bank’s liabilities by

a sound bank under 12 U.S.C. 1823(e), must guar-

antee payment of every obligation of the failed bank.

STATUTORY PROVISIONS INVOLVED

Pertinent provisions of the National Bank Act,

R.S. 5242, and 5236, 12 U.S.C. 91 and 194, and of

the Federal Deposit Insurance Act, 64 Stat. 884, 12

U.S.C. 1821(c), 1821(d), and 1823(e), are contained

in Appendix C, infra, pp. 49a-56a

STATEMENT

1. This case arises out of the second-largest bank

failure in American history—the collapse in 1973 of

the United States National Bank (USNB), which

had 62 offices and nearly $1 billion in 344,000 de

posit accounts (App. A, infra, pp. 6a-7a). At the

time it failed, USNB was insolvent and its liabilities

exceeded its assets by a Substantial amount. Ap-

proximately $300 million in deposits were not insured

(id. at 7a). When it closed, USNB was the obligor

on more than $100 million in letters of credit (App.

B, infra, pp. 35a-36a). Approximately $45 million of

this amount concerned standby letters of credit that

USNB had issued to respondents and others to guar-

antee debts incurred by USNB’s controlling stock-

holder, C. Arnholt Smith, and Smith’s associates (the

“Designated Group” ).’

A standby letter of credit secures the obligation

of the borrower by requiring the issuer (here,

USNB) to pay the debt if the borrower (here, the

Designated Group) should default. See App. A,

infra, pp. 10a-13a. Respondents and other creditors

insisted on standby letters of credit from USNB as

a condition of making loans to members of the Desig-

nated Group because the creditworthiness of those

borrowers was suspect. See id. at 8a-9a, 12a-13a.

Thus the Designated Group, because it controlled

USNB, was able to obtain USNB’s guarantee of their

personal debts—debts they could not have incurred if

they had relied solely on their own creditworthiness.

When the Comptroller of the Currency (Comp-

troller) declared USNB insolvent, he appointed the

Federal Deposit Insurance Corporation (FDIC) re-

ceiver, as 12 U.S.C. 1821(c) requires. The FDIC

could have liquidated USNB’s assets and paid in-

‘ See generally Hearings on the Failure of the United States

National Bank of San Diego before the Subcommittee on Bank

Supervision and Insurance of the House Committee on Bank-

ing and Currency, 93d Cong., 1st Sess. 37-38, 54-99 (1973).

sured depositors the amount of their deposits, up to

the statutory limit then in effect. But the insurance

would have left approximately $300 million unpaid

(App. A, infra, p. 7a), and liquidation would have

seriously disrupted the financial affairs of hundreds

of thousands of entirely innocent persons, including

depositors, borrowers, and those to whom depositors

had given checks (id. at 6a-7a).

The FDIC chose to avoid this disruption by ar-

ranging a purchase and assumption transaction under

12 U.S.C. 1823(e).? It sought to locate a sound bank

that would be able and willing, with the help of the

FDIC, to purchase the assets and assume the li-

abilities of USNB. There was, however, a general

belief in the banking community that USNB’s failure

had been caused in large part by mismanagement of

USNB by the Designated Group;* every qualified

bank that FDIC approached concluded that the Desig-

nated Group members were so unlikely to pay their

2 Such a transaction begins when the FDIC solicits bids from

going banks to take over a failed or failing bank. One going

bank purchases the assets, and assumes certain of the lia-

bilities, of the failed bank. The FDIC (in its corporate ca-

pacity) lends to itself (as receiver) a sum sufficient to bring

the failed bank’s assets and liabilities into balance. As receiver,

it transfers this sum (less whatever the acquiring bank pays

for the failed bank) to the acquiring bank, and FDIC takes

a lien on whatever assets remain in the failed bank’s “estate.”

12 U.S.C. 1823(e). The text describes the operation of this

procedure in USNB’s case.

® Both the Securities and Exchange Commission and the In-

ternal Revenue Service then were investigating Smith and his

associates (App. A, infra, p. 8a).

debts that the assumption of the standby letters of

credit which USNB had issued on their behalf (and

at their behest) presented unacceptable banking risks

(App. A, infra, pp. 7a-8a). Prospective purchasers

therefore refused to take over USNB unless FDIC

either guaranteed USNB’s obligations concerning the

Designated Group or eliminated those obligations *

from the transaction (id. at 8a). Rather than plac-

ing its insurance fund behind these suspect letters of

credit, the FDIC excluded them from the obligations

to be assumed by a purchasing bank.

FDIC then sought bids from interested banks.

Crocker National Bank was the highest bidder, and

most of USNB’s assets (approximately $855 million)

and liabilities (approximately $1.073 billion) were

transferred to Crocker for $89.5 million (App. A,

infra, p. 9a). FDIC also transferred to Crocker

some $128 million, which was the difference between

the assets Crocker had purchased and the liabilities

it had assumed, less the amount of its bid (ibid.).

Following this transfer, all domestic USNB offices

continued in operation as branches of Crocker with-

out interruption in services. FDIC took a first lien

on all unpurchased assets of USNB (see 12 U.S.C.

1823(e)). Because this lien dwarfed USNB’s re-

maining assets, the standby letters of credit became

worthless.

* And the corresponding assets, which included the Desig-

nated Group’s personal promises to make USNB whole for any

eye boas suffer in making payments on the standby letters

of c

2. Respondents, two creditors of the Designated

Group, filed this suit against the FDIC in the United

States District Court for the Southern District of

California. They alleged that the purchase and as-

sumption transaction was illegal because it violated

two sections of the National Bank Act. First, it al-

legedly gave USNB creditors whose claims Crocker

assumed preference over the respondents and was

therefore contrary to 12 U.S.C. 91, which voids “all

payments of money * * * made after the Gommission

of an act of insolvency * * * with a view to the pref-

erence of one creditor to another * * *.” Respondents

also alleged that the purchase and assumption was a

dividend of USNB’s assets to those whose claims

Crocker had assumed, and that the distribution was

therefore not “ratable’ under 12 U.S.C. 194, which

requires the Comptroller to “make a ratable dividend

of the money * * * paid over to him by [the insolvent

bank’s] receiver on all such claims as may have been

proved to his satisfaction * * *.”

The FDIC contended that a purchase and assump-

tion transaction is not governed by Sections 91 and

194 but instead is controlled by provisions of the

Federal Deposit Insurance Act, 64 Stat. 873, 12

U.S.C. 1811 et seq., that authorize the FDIC to imple-

ment purchase and assumption transactions “upon

such terms and conditions as it may determine * * *.”

12 U.S.C. 1823(e).

The district court, following a non-jury trial, held

that the purchase and assumption transaction was au-

thorized by 12 U.S.C. 1823(e) and did not violate

either 12 U.S.C. 91 or 12 U.S.C. 194 (App. B, infra,

p. 47a). The court also concluded that the FDIC’s

actions were “reasonable, not arbitrary or capricious

and were founded on a rational basis” (id. at 48a).’

3. The court of appeals reversed. It recognized

that, because the FDIC is both an insurer of deposits

in a failed national bank (see 12 U.S.C. 1821(f))

and the receiver of such a bank (see 12 U.S.C. 1821

(c)), it is “in the unusual position of acting in two

capacities with respect to national banks closed by

the Comptroller: in its corporate capacity, as in-

surer of deposits (* * *‘the Corporation’), and in its

capacity as receiver (* * * ‘the Receiver’). This

duality requires the FDIC frequently to deal with

itself, ¢.9., to lend or sell to itself” (App. A, infra,

p. 4a). The court also acknowledged that, under the

Federal Deposit Insurance Act, the FDIC in its cor-

porate capacity may arrange purchase and assump-

tion transactions such as that involved in this case

and lend to itself, as receiver, an amount of money

sufficient to bring the purchase and assumption trans-

action into balance (id. at 4a-5a).

The court nevertheless held that 12 U.S.C. 1823

(e) “cannot be read to excuse the FDIC as the Re-

ceiver from complying with” the ratable distribution

and anti-preference provisions of the National Bank

5 The district court rejected FDIC’s defense that the standby

letters of credit were not provable against it as receiver

(App. B, infra, pp. 45a-47a), and the court of appeals agreed

with this holding (App. A, infra, pp. 13a-19a). We do not

present this aspect of the decision for review by this Court.

Act (App. A, infra, p. 22a). The court stated that

Section 1823(e)’s provision enabling the FDIC to

arrange purchase and assumption transactions “upon

such terms and conditions as it may determine” re-

fers to the FDIC only in its corporate capacity; when

the FDIC also acts as a receiver, it must comply with

the restrictions that 12 U.S.C. 91 and 194 place on

receivers (App. A, infra, pp. 22a-23a). The court

concluded that (id. at 25a):

the responsibility lies on the FDIC under § 194

to compensate [respondents] for its failure as

Receiver to make distributions ratably. | Had it

insisted that these [respondents] be included in

the purchase and assumption agreement as

creditors with claims assumed by Crocker, as it

should have done, it would then have had to

satisfy Crocker by adding to the amount bor-

rowed from the Corporation and paid to Crocker

the full amount of the claims. That sum [re-

spondents] are now entitled to receive from the

FDIC." |

REASONS FOR GRANTING THE PETITION

1. The court of appeals has significantly restricted

the authority that Congress has granted the Federal

Deposit Insurance Corporation to deal with the con-

sequences of bank failure. The decision in this case

* The court of appeals also held that respondents are “en-

titled to recover interest accruing on each letter from the date

of its maturity, the dates on which the distribution would

have been made had all the claims been ratably treated” (App.

A, infra, p. 27a).

requires the FDIC’s deposit insurance fund to guar-

antee the commercial risks that respondents, as pro-

fessional banks, took in lending money to members

of the Designated Group. This result may well en-

courage lenders to make loans to a bank’s controlling

shareholders, with little or no regard for the fi-

nancial stability of either the borrowers or the bank;

such loans, which could jeopardize the credit of the

controlled bank, might contribute to additional bank

failures. But even if the decision does not contribute

to financial mismanagement of banks, it turns the

FDIC’s insurance fund, which Congress created to

protect innocent depositors in the event of failure,

into a guarantor of loans made by professional

bankers to other bankers.

Although there has been little appellate litigation

concerning the FDIC’s purchase and assumption

transactions, the question presented by this case arises

frequently and is important to the FDIC’s operations

and to the ability of the agency to prevent financial

disruptions that otherwise would be caused by bank

insolvency. Since 1970, sixty-one banks, with some

$4 billion in deposits insured by the FDIC, have

closed.’ The FDIC arranged purchase and assump-

tion transactions in more than two-thirds of these

cases. The court of appeals’ decision in this case

* The court of appeals was mistaken in stating that “[s]ince

passage of the FDIA very few national banks have failed”

(App. A, infra, p. 27a). The FDIC informs us that more than

500 federally-insured banks have failed since passage of the

Federal Deposit Insurance Act. Of these, 101 were national

banks.

alone would require the FDIC to pay more than $36

million to the creditors of the Designated Group.*

The FDIC has excluded some standby letters of credit

from purchase and assumption transactions concern-

ing failed banks in New York, Ohio, and Wisconsin;

the holders of these letters have filed suit against

the FDIC. More than 40 other cases in the lower

courts involve the FDIC’s authority to exclude li-

abilities from purchase and assumption transactions.

The holding here makes it attractive for bank

insiders to guarantee their own debts with their

banks’ credit, and so the question presented is likely

to be of still greater importance in years to come.

This decade has seen a dramatic increase in the use

of standby letters of credit; the Chairman of the

Senate Committee on Banking and Currency has

predicted that there will be approximately $100

billion in standby letters of credit and similar guaran-

tees in the near future. 121 Cong. Rec. 28854 (1975)

(Sen. Proxmire). Because the issue in the case is

clearly drawn, the Court is unlikely to be assisted by

further appellate decisions. It should grant review

now so that the FDIC may learn, as quickly as pos-

sible, its duties in purchase and assumption trans-

actions.

2. No one disagrees with the FDIC’s decision here

to arrange a purchase and assumption transaction.

The purchase and assumption protected the depositors

* The present case involves some $11 million; other creditors

of the Designated Group have brought suits whose outcomes

will be controlled by the result in this case.

and borrowers of USNB and was far preferable to the

alternative of liquidating the Bank and reimbursing

depositors (perhaps many years later) for part of

their losses. As the court of appeals observed, “[t]he

consequences of liquidation were awesome” (App. A,

infra, p. 6a). All 62 of USNB’s offices would have

been closed, all checks drawn on its accounts would

have been dishonored, all borrowers’ credit would

have been extinguished, and all funds deposited in

the bank would have been effectively frozen until

FDIC could arrange for the insurance to be paid.

Even then, as the court of appeals noted, “[i]nsured

depositors would receive only a maximum of $20,000

and a large percentage of the deposits were over that

amount” (ibid.). Congress authorized the FDIC to

arrange purchases and assumptions by going banks

in order to avoid such disruptions and losses. Here,

as the court of appeals observed, the FDIC’s efforts

allowed USNB to be taken over by the Crocker Na-

tional Bank with no interruption in services and not

a penny lost to any customer of USNB (id. at 9a).

It was clear from the outset of FDIC’s efforts,

however, that no bank would assume the huge con-

tingent liability represented by the standby letters of

credit USNB had issued to back up the loans of the

Designated Group. USNB’s liability on these letters

depended on whether the Designated Group could

(or would) make good its debts. But these persons

were considered unreliable, and their personal for-

tunes depended substantially on the status of USNB.

With the collapse of the Bank, they were thought

likely to default on their obligations to respondents,

and because their assets were “of questionable value,”

there was a substantial likelihood that they would

not meet their obligations (App. A, infra, p. 8a).’

Prospective purchasers therefore informed the FDIC

that they would not bid on USNB’s assets unless the

FDIC either excluded the Designated Group’s obli-

gations from the transaction or guaranteed those

obligations (id. at 8a-9a). The FDIC chose the

former course, and the district court held that this

was a reasonable decision (App. B, infra, pp. 47a-

48a). The court of appeals did not question the find-

ing that the decision was reasonable; it held, instead,

that the decision was unlawful without regard to its

reasonableness.

38. The court of appeals concluded that Section

1823(e) does not authorize the FDIC to conduct pur-

chase and assumption arrangements unless it also

complies with the requirements that 12 U.S.C. 91

and 194 place on receivers (App. A, infra, pp. 22a-

23a). The court’s error lies in its failure to recognize

the broad authority Congress granted to the FDIC

in Section 1823(e).”

® In fact, members of the Designated Group did subsequently

default on their loans. App. A, infra, p. 18a.

1 In a similar case, the Supreme Judicial Court of Massa-

chusetts held that, in a purchase and assumption transaction

under the predecessor of 12 U.S.C. 1823(e), the acquiring

bank need not assume all the liabilities of the failing bank.

Thomas P. Nichols & Son Co. Vv. National City Bank, 315

Mass. 421, 48 N.E. 2d 49, 58, certiorari denied, 320 U.S. 742.

In that case the plaintiff creditor was excluded from the pur-

Nothing on the face of either Section 91 or Section

194 supports the court of appeals’ conclusion. Section

194 applies only to the Comptroller, who “shall make

a ratable dividend of the money paid over to him”

by the bank’s receiver. Its substantive rule applies

to the FDIC only to the limited extent provided by

Section 1821(d), which states that the FDIC shall

comply “with the provisions of law relating to the

liquidation of closed national banks except as herein

otherwise provided” (emphasis added). Section 91,

moreover, deals only with “payments of money * * *

made with a view to prevent the application of [the

bank’s] assets in the manner prescribed by this chap-

ter, or with a view to the preference of one creditor

to another * * *.” A purchase and assumption trans-

action arranged by the FDIC under Section 1823(e)

could not “prevent” the proper application of funds,

especially if our construction of Section 194 is cor-

rect. Moreover, the principal “payment of money”

in a Section 1823(e) purchase and assumption is the

payment of money out of the FDIC’s insurance fund;

it is quite improbable that Section 91 has anything

to do with the distribution of the FDIC’s insurance

fund.

chase and assumption in the mistaken belief that a local court

had dismissed his claim. Nonetheless, the Massachusetts court

held that the FDIC’s power to arrange purchase and assump-

tion transactions “upon such terms and conditions as it may

determine” precluded relief to the creditor, and that that stat-

ute overrode whatever rights the creditor might have to a

“ratable distribution of the assets.” See also Federal Deposit

Insurance Corp. V. Cloonan, 165 Kan. 68, 193 P.2d 656, 672.

This is not to say that 12 U.S.C. 194 has no appli-

cation to the assets of failed banks that are the sub-

ject of a purchase and assumption transaction; that

section comes into play after the purchase and as-

sumption is completed. Section 194 requires a ratable

dividend of the “money” and the “proceeds of the

assets” of the failed bank—the distribution which

the receiver makes after having liquidated into cash

whatever assets remain.” Section 194 could not apply

to the assets and liabilities that are transferred to

the going bank, because they are not reduced to

“money.” 12

Section 194’s requirement that ratable distributions

be made from the “proceeds of the assets” of the

failed bank bears out our position. The money that

the FDIC put into the transaction was not in any

sense an “asset” of USNB; it therefore cannot be

distributed, ratably or otherwise, under Section 194.

The fact that the statutory infusion of money to pro-

tect the bank’s depositors enables them to be paid at

100 percent does not make the distribution of the

bank’s assets non-ratable.

Sections 91 and 194 thus could require the FDIC

to guarantee all of the failed bank’s liabilities only if

1 Because Section 1823(e) gives the FDIC a first lien on

these assets, it may turn out that a ratable distribution inures

entirely to the benefit of the FDIC’s insurance fund.

1% Of course, if there is no purchase and assumption, but

merely a liquidation, Section 194 comes into play when the

assets in the failed bank’s “estate” are reduced to money and

distributed.

something in their legislative history, or the history

of Section 1823(e), plainly required that result. The

legislative history, however, does not support the

court of appeals’ position.

4, Sections 91 and 194 were enacted in 1864 as

part of the National Bank Act. Their legislative his-

tory does not discuss how, if at all, they affect the

role of the FDIC, because the FDIC did not then

exist, and neither did purchase and assumption trans-

actions. Purchase and assumption transactions be-

came possible only in 1935, when Congress enacted

the Federal Deposit Insurance Corporation Act; 12

U.S.C. 1823(e) authorized the FDIC, as receiver, to

borrow money from itself and to use these funds to

enable a going bank to purchase a failed bank.”

Congress thus gave the FDIC in 1935 a power that

no ordinary receiver ever had.“ In Section 1823(e)

18 Although the court of appeals was technically correct in

stating that the Federal Deposit Insurance Act (FDIA) “did

not create the concept of a purchase and assumption agree-

ment” (App. A, infra, p. 28a), pre-FDIA “purchase and as-

sumption agreements” were simply cases where a new bank

was organized to take over the assets and liabilities of a failed

bank. See Gockstetter v. Williams, 9 F.2d 354, 355 (C.A. 9);

Hulse Vv. Argetsinger, 18 F.2d 944 (C.A. 2); Ex Parte Moore,

6 F.2d 905, 906 (E.D. S.C.). In none of those cases could the

new bank fully protect the depositors of the old, because

the new bank began with only the assets of the failed bank.

The FDIA did “create the concept” of a receiver able to pro-

tect all depositors by using the assets of a quasi-public insur-

ance fund to induce a going bank to assume both the assets

and the liabilities of an insolvent bank.

’ This authority was originally temporary, 49 Stat. 699, 49

Stat. 1237, and was made permanent in 1938, 52 Stat. 767.

Congress authorized the FDIC to use the deposit in-

surance fund to arrange purchase and assumption

transactions “upon such terms and conditions as it

may determine.” If Congress had intended the

FDIC’s authority to be subject to the requirements

that Sections 91 and 194 placed on the Comptroller

and receivers in liquidations, it would not have used

such broad language in Section 1823(e). Nor would

it have provided, as it did, that the FDIC must

“wind up the affairs of [a closed national] bank in

conformity with the provisions of law relating to the

liquidation of closed national banks, except as herein

otherwise provided” (12 U.S.C. 1821(d); emphasis

added).

In the House debate on the bill that made the

statute permanent, Representative Williams, a mem-

ber of the House Banking and Currency Committee,

testified that Section 1823(e) would allow the FDIC

to do what it has done here—to discriminate between

the “good” and “bad” parts of a failing bank, and

to transfer only the good parts to the acquiring bank:

This provision permits the [FDIC] to lift from

* * * a [weak] bank, while it is still a going

concern, its bad assets either by a loan or by

purchase and to liquidate those assets, while the

good assets may be transferred to another in-

sured bank. This will permit the liquidation of

the bad assets and save the good assets from go-

ing through the wringer. Under this method

only the bad assets are taken over by the [FDIC]

and handled and adjusted by its liquidating

agent, while the good assets pass to another

bank. * * * [U]nder this procedure there will

be less loss to the [FDIC] and to the community

and much of the inconvenience, disturbance, an-

xiety, apprehension, and all those attendant evils

resulting from a general bank failure and liqui-

dation will be avoided. [83 Cong. Rec. 7191

(1938).]

Indeed, by providing FDIC with a lien on the assets

remaining in the bank’s estate controlled by the re-

ceiver, Section 1823(e) recognizes that purchase and

assumption transactions need not include all the

failed bank’s assets and liabilities; there is no reason

to provide for the subordination of other creditors to

the FDIC if all of the failed bank’s assets must be

purchased, and all of its liabilities assumed, by the

acquiring bank.

The reason that 1823(e) allows the FDIC to “save

[only] the good assets from going through the

wringer” of liquidation is well illustrated by this case.

Respondents took a banking risk that USNB would

pay the debts of Smith and his associates, if they

themselves did not. Respondents relied on USNB ap-

parently because they doubted the creditworthiness of

the Designated Group. Once USNB failed, its promise

to pay became of only limited value; if USNB’s assets

had been liquidated, it is most unlikely that respond-

ents would have received full payment, or anything

close to it, on their contingent claims. The holding of

the court of appeals means that, as the price of ar-

ranging a purchase and assumption transaction to

protect USNB’s depositors, the FDIC was required

to ensure payment in full of any claims respondents

might make. In other words, the FDIC was required

to eliminate the banking risk respondents took in

making their loans to the Designated Group.

But the FDIC’s deposit insurance fund is designed

to protect depositors of, and the communities served

by, banks that fail. See 12 U.S.C. 1821(a). It is

not designed to protect loans and guarantees made

by the failed bank, and it is certainly not designed

to protect loans made by other banks such as respond-

ents, thus insulating professional bankers from the

business risks which they assumed in lending money.

By requiring the FDIC to guarantee the payment

of respondents’ loans, the court of appeals has forced

the FDIC to choose between liquidating failed banks,

thus causing loss to the depositors, and arranging

purchase and assumption transactions that eliminate

the commercial risk voluntarily assumed by other

banks. Section 1823(e) was designed to free the

FDIC from this choice between unacceptable alter-

natives.

The court of appeals thought that its decision left

the FDIC free to exclude some assets and liabilities

from purchase and assumption transactions (App.

A, infra, 25a; emphasis added) :

This is not to say that every purchase and as-

surention agreement must include every creditor

in order to be valid. If the purchase leaves suf-

ficient assets in the receivership to allow dis-

tribution to unassumed creditors equal to that

undertaken by the acquiring bank as to the

me °

creditors it has accepted, distribution still could

be ratable. See White v. Knox, 111 U.S. 784,

785 (1884). The FDIC may prefer to take this

chance. It must, however, stand ready to render

the distribution ratable—to supplement the re-

maining assets should they fall short and to sur-

render its lien when necessary. [Emphasis

added. ]

This is plainly no solution at all. If the depositors are

to be fully protected,” then the “distribution * * *

undertaken by the acquiring bank” to those de-

positors is 100 percent. But the very fact that the

bank has failed demonstrates that there are not suf-

ficient assets to allow full distribution both to de-

positors and other creditors. Thus, the court of

appeals’ “solution” offers no way out of the dilemma

it has created. Under the court’s decision, the FDIC

can protect the accounts of depositors only to the

extent it protects the loans of professional bankers.

** Depositors are creditors of the bank holding their de-

posits. See, e.g., 12 U.S.C. 1821(d) (FDIC as receiver shall

pay to “depositors and other creditors” amounts available for

distribution) ; 12 U.S.C. 1828(e) (FDIC loans are subordinate

to “rights of depositors and other creditors’’).

** White v. Knox, 111 U.S. 784, cited by the court of appeals,

sheds little light on the problem. In that case the Comptroller

liquidated a national bank and paid all creditors a dividend of

65 percent of their claims as of the date of failure. White’s

claim on the date of failure was $60,000, but it was not re-

duced to judgment against the defunct bank until eight years

later; the court included interest from the date of the claim

and thus entered judgment in favor of White for $104,523.

This Court held that the Comptroller must pay White only 65

percent of $60,000.

20:

This is what Congress intended to avoid in authoriz-

ing the FDIC to arrange purchase and assumption

transactions.

CONCLUSION

The petition for a writ of certiorari should be

granted.

Respectfully submitted.

WADE H. MCCREE, JR.,

Solicitor General.

ALLAN A. RYAN, JR.,

Assistant to the Solicitor General.

REFORD WEDEL,

Acting General Counsel,

Federal Deposit Insurance Corporation.

CHARLES A. LEGGE,

555 California Street,

San Francisco, California 94104.

AuGust 1978.

APPENDIX A

IN THE

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

[Filed Apr. 6, 1978]

No. 77-2090

FIRST EMPIRE BANK—NEW YORK (by its successor in

interest) MANUFACTURERS & TRADERS TRUST Co.

of Buffalo, New York, a New York banking cor-

poration, and SOCIETE GENERALE, a French bank-

ing corporation, Plaintiffs-Appellants

v8.

FEDERAL DEPOSIT INSURANCE CORPORATION and FEp-

ERAL DEPOSIT INSURANCE CORPORATION AS RE-

CEIVER OF UNITED STATES NATIONAL BANK,

Defendants-Appellees

No. 77-2147

FEDERAL DEPOSIT INSURANCE CORPORATION and FEp-

ERAL DEPOSIT INSURANCE CORPORATION AS RE-

CEIVER OF UNITED STATES NATIONAL BANK,

Counterclaimants-Cross-Appellants

v8.

FIRST EMPIRE BANK—NEW YORK and

SOCIETE GENERALE,

Counterdefendants-Cross-A ppellees

OPINION

On Appeal from the United States District Court

for the Southern District of California

Before: BROWNING and MERRILL, Circuit Judges,

and HARPER,* District Judge

MERRILL, Circuit Judge:

This case arises out of the insolvency and receiver-

ship of the United States National Bank of San

Diego (USNB). The Federal Deposit Insurance Cor-

poration (FDIC), as Receiver, entered into an agree-

ment with Crocker National Bank for purchase by

Crocker of selected assets of USNB and assumption

by Crocker of certain of the bank’s obligations, includ-

ing deposits. This suit was brought by creditors of

USNB, whose claims had not been assumed by

Crocker. They contend that Crocker’s assumption,

carrying with it assurance of payment in full of the

claims assumed, amounted to a distribution by the

Receiver in which the plaintiffs were entitled by law

to share ratably. Accordingly they seek to recover

from the FDIC the amount of their claims in full.

They here appeal from judgment rendered by the

district court in favor of the FDIC.

Appellants’ claims arise out of standby letters

of credit issued by USNB in connection with loans

made by appellants to customers of USNB. The

* Honorable Roy W. Harper, Senior United States District

Judge for the Eastern District of Missouri, sitting by desig-

nation.

FDIC contends that these claims were contingent,

and were not debts of USNB at the time of its in-

solvency or at the time it was placed in receiver-

ship. The FDIC contends that for that reason the

claims were not provable in the receivership. It cross

appeals from judgment of the district court holding

the claims to be provable.

The facts bearing on the appeal and cross appeal

will be more fully discussed below.

I. FACTS

A. The FDIC and Insolvent Banks

The FDIC, under the Federal Deposit Insurance

Act (FDIA), is given the duty of insuring to $40,000

each deposit made in national banks that are mem-

bers of the Federal Reserve System, 12 U.S.C.

§§ 1811, 1818(m), 1821(a), (f). From assessments

paid by the insured banks an insurance fund has

been created, 12 U.S.C. § 1821{a), from which the

FDIC meets its responsibilities as insurer. In this

respect, § 1821(f) provides in part:

“Whenever an insured bank shall have been

closed on account of inability to meet the de-

mands of its depositors, payment of the insured

deposits in such bank shall be made by the Cor-

poration as soon as possible * * * either (1) by

cash or (2) by making available to each de-

positor a transferred deposit in a new bank in

the same community or in another insured bank

in an amount equal to the insured deposit of

such depositor.”

It is the Comptroller of the Currency who, under

the National Bank Act, is empowered to place a

national bank in receivership. This he may do when-

ever he “shall become satisfied of the insolvency” of

a bank. 12 U.S.C. § 191. Since enactment of the

FDIA the receiver appointed by the Comptroller for

national banks must be the FDIC. 12 U.S.C. § 1821

(c).

This places the FDIC in the unusual position of

acting in two capacities with respect to national

banks closed by the Comptroller: in its corporate

capacity, as insurer of deposits (in which respect we,

as does the FDIA, shall refer to the FDIC as “the

Corporation”), and in its capacity as receiver (in

which respect we shall refer to it as “the Receiver’’).

This duality requires the FDIC frequently to deal

with itself, e.g., to lend or sell to itself. The prayer

of the complaint in this case seeks to require the

FDIC as the Corporation to stand good for acts of

the FDIC as the Receiver.

Under the FDIA the Corporation, through its board

of directors, is authorized to take action to assist a

failing bank with the hope that it may be able to

avert the bank’s closure and the drastic economic ef-

fect that closure might have on the community served

by the bank. 12 U.S.C. §1823(c) and (e). One

form of relief often resorted to for this purpose is

the purchase and assumption agreement. By such

an agreement the Corporation encourages the failing

bank to agree to a takeover of its business by a

sound bank. This involves an assumption by the

acquiring bank of the failing bank’s deposit and

commercial obligations and a purchase of its assets.

Where the assets are found to be less in value than

the outstanding obligations, the Corporation is au-

thorized by the FDIA to lend to the failing bank such

a sum of money, to be passed on to the acquiring

bank, as would bring the assumption and purchase

into balance. 12 U.S.C. § 1823(c). The Corporation

may take a lien on any assets remaining in the re-

ceivership to secure its loan. Id.

The Corporation realistically recognizes that it

may not come out in the black on such a transaction.

However, the question faced by the Corporation’s

board of directors is whether the arrangement is

likely to be less costly than the bank’s closure, which

otherwise is the probable result, with the expense

to the Corporation of compensating the insured de-

positors which would necessarily follow. 12 U.S.C.

§ 1823(e); see Bransilver, Failing Banks: FDIC’s

Options and Constraints, 27 Ad.L.Rev. 327 (1975).

The purchase and assumption agreement also can

be resorted to by a bank already failed and in re-

ceivership, in which case the Corporation deals not

with the failing bank but with itself as Receiver.

This is what occurred in the case of USNB.

B. The Insolvency of USNB

In August, 1973, the Comptroller advised the

FDIC that USNB was in poor financial condition and

might have to be closed. The FDIC was provided with

examination reports of USNB and other financial

information available through the Comptroller’s of-

fice. After analyzing the financial information, and

information regarding the control of USNB, the

FDIC decided that it had two relevant alternatives

under the Act: (1) it could simply wait until USNB

was closed by the Comptroller, and then pay the in-

sured depositors up to the then $20,000 statutory

limit and liquidate the bank; or {2) it could attempt

to find a bank to purchase USNB’s assets and as-

sume its liabilities.

The consequences of liquidation were awesome.

All of USNB’s sixty-two offices, located throughout

five southern California counties, would have to be

closed and the value of uninterrupted operation of

the offices would be lost. Ali checks drawn on USNB

accounts would have to be dishonored, causing harm

not only to the account holders but also to those

persons to whom the account holders had written

checks. The accounts of over 300,000 depositors in

USNB would have to be held in suspense for a time

long enough to permit the FDIC to compile records,

offset the deposits with the liabilities, 12 U.S.C.

§ 1813(m), and pay the insurance, 12 U.S.C. § 1821

(f). Insured depositors would receive only a maxi-

mum of $20,000, and a large percentage of the de-

posits were over that amount. Depositors and

creditors would then receive only distributions from

the liquidation of USNB’s assets over a lengthy

period of years. USNB had approximately one bil-

lion, two hundred and fifty million dollars in book

values of assets and liabilities. It had deposits of

$930 million. It had a trust department with assets

under management of approximately $156 million.

It had 344,000 separate deposit accounts. Approxi-

mately $300 million of those deposits were not in-

sured. Innumerable legitimate borrowers were rely-

ing on USNB as a continuing source of credit to

finance their businesses.

Faced with these consequences, the Board of Di-

rectors of the FDIC decided to attempt to find an-

other bank to participate in a purchase and assump-

tion transaction on such terms as would reduce the

risk of loss to the Corporation.

It was first necessary to formulate the transac-

tion in such a manner as would prove attractive to

interested banks, so that competitive bidding among

such banks would minimize the losses of the FDIC.

To this end representatives of qualified and interested

banks were invited to join with the Corporation in

a discussion designed to fix the conditions of a pur-

chase and assumption agreement. It became im-

mediately apparent that certain assets and liabilities

of USNB were not readily acceptable to the banks.

These were assets and liabilities connected with the

bank’s controlling shareholder, C. Arnholt Smith, and

certain USNB shareholders and companies associated

with him. The banking transactions of the members

of this group, referred to by the FDIC as the “Des-

ignated Group,” were regarded as suspect. Many

interested persons attributed USNB’s failure in large

part either to mismanagement by the Designated

Group or to their misuse of official power for per-

sonal gain, and charges were then under investiga-

tion by the Securities and Exchange Commission and

the Internal Revenue Service. The members of the

Designated Group individually were substantially in-

debted to USNB and the bank had issued standby

letters of credit on their behalf to other banks that

had lent money to group members. The consensus of

the hanks consulted by the Corporation was that the

financial status of the Designated Group members was

such that their obligations to USNB were of ques-

tionable value as assets, and that the assumption of

liability on the standby letters of credit presented

an unacceptable banking risk. Accordingly, the banks

rejected such obligations as purchasable assets unless

the Corporation would guarantee their value; they re-

fused to assume the letters of credit as obligations

unless in each case they had from the Corporation

a guarantee of the obligation of the account party

to the creditor bank as an offsetting asset.

The Corporation, faced with this ultimatum, re-

fused to guarantee the value of these obligations.’

It did not question the legal enforceability of the

letters against USNB. However, it did not regard

this as the controlling consideration. Instead it

focused on the desirability of permitting the account

parties to have their debts to the creditor banks paid

1The Corporation is authorized to make such a guarantee

under 12 U.S.C. § 1823(e), which provides that “the Corpora-

tion * * * may guarantee any other insured bank against

loss by reason of its assuming the liabilities and purchasing

the assets of an open or closed insured bank.”

out of the Corporation’s jealously guarded deposit in-

surance fund. It felt that by guaranteeing the letters

of credit it would be using the deposit insurance fund

to make good “tainted” transactions of the Desig-

nated Group. Consequently, the purchase and as-

sumption agreement as ultimately formulated did not

include as purchased assets the obligations of mem-

bers of the Designated Group or, as assumed obliga-

tions, the standby letters of credit issued to creditors

of the group members. The transaction thus formu-

lated was offered to the banks for competitive bid.

On October 18, 1973, USNB was closed by the

Comptroller and the FDIC was appointed Receiver.

Crocker National Bank, bidding $89.5 million for the

value of USNB as a going concern, emerged as the

acquiring bank and the following morning all USNB

facilities, except its Nassau, Bahamas office, opened

as branches of Crocker National Bank.

To implement the purchase and assumption agree-

ment the Corporation lent to the Receiver the sum

of $128,780,000 representing the difference between

the amount of obligations assumed by Crocker and

the value of the assets purchased, less the premium

paid. To secure this loan the Corporation took a lien,

prior to the claims of the remaining creditors of the

receivership, on the unpurchased assets remaining in

the receivership. The sum so lent was passed to

Crocker by the Receiver along with the purchased

assets.

10a

Il. CROSS APPEAL OF FDIC

The FDIC has cross appealed from the rejection

of its counterclaim against appellants and from the

holding that appellants’ claims were provable against

the receivership estate. We consider this issue first

because if the FDIC prevails and the letters are held

not to be provable, appellants are without standing

to advance the contentions they make in their appeal.

When USNB closed, the Receiver made demands

upon appellants for deposits of USNB held by the

appellant banks. Appellants refused to meet the Re-

ceiver’s demands and retained the deposits to offset

them against the amounts owed to them by USNB

on the standby letters of credit. The FDIC filed a

counterclaim in this action for the return of the

deposits. The district court, holding the letters of

credit to be provable, allowed appellants to set off

their obligations against the amounts due on the let-

ters of credit and rejected the counterclaim. The

Receiver contends that this was error. It seeks not

only to avoid liability on the letters of credit but

also to recover from appellants the sums owed to

USNB on the offset claims.

A. Nature of Letters of Credit

Preliminarily a word should be said with respect

to the nature of the standby letter of credit—the

commercial instrument upon which appellants’ claims

are based.

lla

The Receiver has acknowledged that some letters

of credit issued by USNB did create provable claims

and included these letters in the obligations assumed

by Crocker in the purchase and assumption agree-

ment. These were primarily traditional or commer-

cial letters of credit.’ This type of instrument de-

veloped as a means of facilitating international trade

between distant buyers and sellers not commercially

acquainted with each other.

“Stripped to its essentials, the transaction runs

as follows: the buyer arranges for a bank—

whose credit the seller will accept—to issue a

letter of credit in which the bank agrees to pay

drafts drawn on it by the seller if, but only if,

such drafts are accompanied by specified docu-

ments, such as bills of lading or air freight re-

ceipts, representing title to the goods that are

the subject matter of the transaction between

buyer and seller. The bank undertakes this ob-

ligation for a specified period of time.”

Verkuil, Bank Solvency and Guaranty Letters of

Credit, 25 Stan.L.Rev. 716, 718 (1973) (hereinafter

Verkuil’).

This letter of credit creates an absolute, inde-

pendent obligation and payment must be made upon

? Letters of credit of this type were the subject of an earlier

action against the Receiver in the USNB receivership that

ultimately reached this court. International Westminster Bank,

Ltd. v. FDIC, 509 F.2d 641 (9th Cir. 1975). The questions

presented by this appeal were not reached in that case which

was concerned only with whether the complaint adequately

alleged equity jurisdiction to justify the injunctive and de-

claratory relief sought. 509 F.2d at 644-45.

12a

presentation of the proper documents regardless of

any dispute between the buyer and seller concerning

their agreement, such as a dispute over the quality

of the goods delivered. See, Battaile, Guaranty Let-

ters of Credit: Problems and Possibilities, 16 Ariz.

L.Rev. 823, 825 (1974) (hereinafter “Battaile’’) ;

Asociacion de Azucareros de Guatemala v. United

States Nat’l Bank of Oregon, 423 F.2d 638, 641 (9th

Cir. 1970).

In recent years instruments operating as letters

of credit (in that they operate to create an absolute

obligation upon presentation of specified documents)

and termed “standby” to distinguish them from the

traditional letters of credit have been used as security

devices in a variety of contexts outside the tradi-

tional area of the international sale of goods. They

have been used to insure construction loans, as quasi-

performance bonds, to support the issuance of com-

mercial paper and to secure the performance of

purely monetary obligations such as those involved

in this case. See Battaile, swpra at 822-26; Verkuil,

supra at 717, 721-22. Standby letters are convenient

and inexpensive and are being adapted to many uses

at this time. See Verkuil, swpra at 717. The prin-

cipal difference between the traditional letter of

credit and these newer standby letters is that ‘“where-

as in the classical setting, the letter of credit con-

templates payment upon performance, ‘the standby

credit,’ * * * ‘contemplates payment upon failure to

perform.’” Katskee, The Standby Letter of Credit

Debate—the Case for Congressional Resolution, 92

13a

Banking L.J. 697, 699 (1975) (hereinafter ‘Kats-

kee’’).

This has created an awkward situation for na-

tional banks, since the standby letter of credit pos-

sesses more of the characteristics of a guarantee and

national banks are not authorized to enter into guar-

antees. See Katskee, supra at 712-14; Harfield, The

Standby Letter of Credit Debate, 94 Banking L.J.

293, 301-03 (1977). No contention is made here,

however, that issuance of the letters of credit in ques-

tion was ultra vires. The Receiver has not asserted

that defense and the Comptroller appears to have

chosen instead to recognize the widespread bank use

and commercial usefulness of the instrument and to

attempt, by regulation, to eliminate the abuses which

the failure of USNB has demonstrated can result

from unregulated and excessive use. FDIC Reply

Brief at 5-6; see, eg., 12 C.F.R. § 7.7016 (1977).

B. Provability of Standby Letters of Credit

The Receiver contends, nevertheless, that standby

letters of credit, whether ultra vires or not, are not

provable in a national bank receivership, since, it

asserts, claims against the receiver of a national bank

are not provable if they were contingent on the date

of the bank’s insolvency. Although the case law is

quite limited, where commentators have made such

statements of the law, e.g., 9 C.J.S. Banks and Bank-

ing § 755, they are found to rest on cases involving

a lessor of property leased to the bank who is assert-

14a

ing a claim against the receiver to recover liquidated

damages for loss of future rent.

Kennedy v. Boston-Continental Nat'l Bank, 84 F.

2d 592 (1st Cir. 1986), cert. dismissed, 300 U.S.

684 (1937), was such a case. There the lessor, fol-

lowing default by the national bank lessee, sought to

exercise an option given him by the lease to obtain

as liquidated damages the difference between the fair

rental value of the property for the balance of the

lease and the rental provided by the lease, The

court held the claim not provable, relying on con-

tract principles which reasoned that exercise of the

option by the lessor created a new contract which

came into being at the time of re-entry by the lessor.

This court has followed Kennedy in a case also deal-

ing with an exercise of option to obtain liquidated

damages for loss of future rent, Argonaut Savings

and Loan Ass’n v. FDIC, 892 F.2d 195, 197 (9th

Cir.), cert. denied, 3938 U.S. 889 (1968). Accord,

FDIC v. Grella, 558 F.2d 258, 262 (2d Cir. 1977).

Although these cases use broad language, indicat-

ing that the bank’s liability on any claim must have

accrued and be unconditionally fixed at the date of

insolvency, they are, by virtue of their dependence

on the “new contract” principle, distinguishable from

cases not dealing with lease options exercised after

insolvency. The claims here are based on letters of

credit that were in existence before insolvency and

are not dependent on any new contractual obligations

arising later.

lba

We note that at the time Kennedy was decided

claims for future rent in bankruptcy were handled

in a manner different from that by which other con-

tingent obligations were handled. Although contin-

gent contract liabilities were provable in bankruptcy,

“the courts stopped short of extending the same lib-

erality of view to claims based on leases.”’ 3A Collier

on Bankruptcy § 63.32[3] at 1927. This “remnant

of medieval theory” is the basis for the statement in

Kennedy that exercise of the right to re-entry

amounted to creation of a new contract arising after

insolvency. Jd, at 1927-28. Shortly after the decision

in Kennedy, the bankruptcy rules were liberalized to

allow proof of a landlord’s claim, although leases re-

mained (and still remain) in a category apart from

other contract claims, even in the present bankruptcy

rules. See id. at § 68.31[1] at 1915-16, § 68.32[5]

at 1931-82; 11 U.S.C. § 108(a) (9).

The dissenting judge in Kennedy noted that the

allowance of the claim “depends on whether the

equity rule or bankruptey rule of provability should

be followed” in a national bank’s receivership. 84

F.2d at 598. His statement and the cases cited in the

opinion indicate that the majority was relying on the

now outdated bankruptcy rules in reaching its de-

cision that the claims were not provable.

We conclude that the holdings of Kennedy and

Argonaut should be limited to cases involving leases

and loss of future rent and should not be extended

to other contingent obligations. To follow those cases

here would amount to extending into new areas a

l6a

rule that now appears to be outmoded, based as it is

on a bankruptcy rule that today has been repealed in

favor of the contrary equity rule.

Although the authority against the provability of

these letters is thus distinguishable, there is little

positive authority to support a holding that they are

provable in national bank receiverships. There is au-

thority holding such claims provable in general equity

receiverships and in bankruptcy, as we shall discuss,

but the only case dealing with the question in the

context of national bank receiverships is Pinckney

v. Wylie, 86 F.2d 541 (5th Cir. 1986). There a

claim based on a bank’s obligation as a surety for

another’s debt was asserted against a receiver of a

national bank. The principal issue was whether the

claimant was entitled to a ratable distribution based

on the full amount of the debt or on the amount of

the debt after crediting the proceeds from the sale

of the security for the loan. 86 F.2d at 542. In

deciding the amount of the claim, the court necessarily

recognized that a claim based on a bank’s obligation

as surety or guarantor is provable, although it did

not discuss the issue.

The result in Pinckney is consistent with the bank-

ruptey rules and equitable receivership principles

governing the provability of contingent claims. Claims

based on surety or guarantee obligations of a bank-

rupt are clearly provable as contingent contract obli-

gations, 11 U.S.C. § 108(a) (8). 3A Collier on Bank-

ruptey, § 63.19 at 1876. Even before the bankruptcy

statute was amended to specifically state that con-

17a

tingent contract claims are provable, courts held

suretyship and guarantee claims provable, stating

“even though not due until after the year allowed for

proof of claims, if proved in time, such a claim may

be liquidated as are other unmatured claims.” May-

nard v. Elliott, 283 U.S. 278, 279 (1981) (and see

cases cited therein).

This bankruptcy rule of provability seems consist-

ent with the principles governing equitable receiver-

ships. Under equitable principles the court must

consider:

“* * * on the one hand, the substantial right

of all creditors to share in their debtor’s property,

and, on the other, the necessity for expeditious

administration and, giving due consideration to

both, must make rules which are practicable as

well as equitable,”

Penn, Steel Co. v. New York City Ry. Co., 198 F.

721, 7388 (2d Cir. 1912). The court in Penn. Steel

divided all claims into three classes:

(1) Claims which at the commencement of

proceedings furnish a present cause of action;

(2) Claims which at that time are certain but

which are not matured;

(3) Claims which are contingent,”

Id, at 738. The first two classes are clearly provable

but the third class of contingent claims must be di-

vided into two subclasses:

(1) Claims of which the worth or amount

can be determined by recognized methods of com-

ees

—

18a

putation at a time consistent with the expeditious

settlement of the estates;

(2) Claims which are so uncertain that their

worth cannot be so ascertained.”

Id. at 739-40. The latter class cannot be proved, but

the claims in the former class are provable. Jd.

The court in Penn. Steel found no equitable reason

why the time of appointment of the receiver should

determine the provability of claims, and held that:

“Claims which when presented within the time

limited by the court for their presentation are

certain or are capable of being made certain by

recognized methods of computation, should be

allowed. Claims which are not then certain

should be disallowed because they afford no basis

for making dividends. But there is no equitable

reason why claims which are certain when pre-

sented and which are presented in time should

have been certain at some arbitrary anterior

period.”

Id. at 741-42 (emphasis supplied). We agree with

that statement.

The claims at issue here would be considered prov-

able under these equitable principles because the lia-

bility on the standby letters of credit was absolute

and certain in amount when this suit was filed against

the Receiver. By that time, the principals had de-

faulted on the primary loan obligations. The claims

against the Receiver were made in a timely manner,

well before any distribution of the assets of the re-

ceivership, other than the distribution made through

the purchase and assumption agreement.

19a

Finally we note that the Receiver seems already

to have acted upon the assumption that standby let-

ters of credit are, in principle, provable. Some such

instruments were actually assumed by Crocker with

FDIC approval, and thus those creditors were as-

sured payment in full. These were letters where

Crocker was willing to accept the obligation of the

account party to the creditor bank as in offsetting

asset. Thus, it was not the “taint” of membership

in the Designated Group that rendered the letters of

appellants unacceptable to Crocker. It was the fact

that the obligation was certain to accrue. It was in

such cases that Crocker insisted upon the FDIC’s

guarantee.

We conclude that the claims of appellants were

provable in face amount in the receivership.

III. APPEAL OF FIRST EMPIRE BANK

AND SOCIETE GENERALE

A. Ratable Distribution Under the NBA

Appellants contend that the purchase and assump-

tion agreement amounted to a preference of the

creditors whose obligations were assumed, contrary to

the provisions of the National Banking Act (NBA),

12 U.S.C. § 91, which provides in part: “All pay-

ments of money * * * made after the commission of

an act of insolvency, or in contemplation thereof,

made with a view to prevent the application of its

assets in a manner prescribed by this chapter, or

with a view to the preference of one creditor to an-

other * * * shall be utterly null and void * * *.”

20a

Appellants further contend that the purchase and

assumption agreement amounted to a distribution to

those whose claims were assumed by Crocker, and

that such distribution was not “ratable” as required

by the NBA, 12 U.S.C. § 194, which reads in part as

follows:

“From time to time, after full provision has

been first made for refunding to the United

States any deficiency in redeeming the notes of

such association, the comptroller shall make a

ratable dividend of the money so paid over to

him by such receiver on all such claims as may

have been proved to his satisfaction or adjudi-

cated in a court of competent jurisdiction * * *.”

(emphasis supplied).

Appellants contend that under the FDIA, §8§ 91

and 194 of the NBA apply to the FDIC as Receiver.

Section 1821(d) of the FDIA provides in part:

“Notwithstanding any other provision of law, it

shall be the duty of the Corporation as such

receiver * * * to wind up the affairs of such

closed bank in conformity with the provisions of

law relating to the liquidation of closed national

banks, except as herein otherwise provided.”

(emphasis supplied).

The Receiver contends that § 91 does not apply to

banks in receivership, but only to preclosure transac-

tions. It contends that § 194 does not apply to it®

’The FDIC also suggests that since this was not the

ordinary kind of distribution of assets in a receivership but

a method of satisfying claims which is expressly authorized by

21a

and that § 1821(d) excuses it from the provisions of

§ 194 when it is engaged in assisting in the takeover

of a closed bank. It points out that the language of

§ 1821(d) (on which appellants rely as applying the

NBA to the Receiver) contains an exception “except

as herein otherwise provided.” As provision to the

contrary, the Receiver relies on § 1823(e), which ex-

plicitly authorizes the Corporation to make loans im-

plementing purchase and assumption agreements and

which provides in part:

“Whenever in the judgment of the Board of

Directors such action will reduce the risk of a

threatened loss to the Corporation and * * * will

facilitate the sale of assets of an open or closed

bank to and assumption of its liabilities by an-

other insured bank, the Corporation may upon

such terms and conditions as it may determine,

make loans secured in whole or in part by assets

of an open or closed insured bank, which loans

may be in subordination to the rights of deposi-

tors and other creditors * * *[.] Any insured na-

tional bank or District bank, or the Corporation

the FDIA, the NBA requirement of ratable distribution should

not apply. It contends that only those few assets remaining

in the receivership are subject to the ratable distribution

requirement. We cannot agree. It is the proceeds of a pur-

chase of receivership assets that must be ratably distributed

under §194. Here receivership assets (including the cash

borrowed from the Corporation) were sold in exchange for

Crocker’s assumption of debts. That assumption, then, as

proceeds of the sale, constitutes a distribution of assets which

must give ratable recognition to the rights of creditors of the

receivership. Ex parte Moore, 6 F.2d 905, 909 (E.D.S.C. 1925) ;

see Gocksetter Vv. Williams, 9 F.2d 354 (9th Cir. 1925).

22a

as receiver thereof, is authorized to contract for

such sales or loans and to pledge any assets of

the bank to secure such loans.” (emphasis sup-

plied).

The FDIC contends that under this language, when

engaged as the Corporation or as Receiver, in accom-

plishing a takeover by a purchase and assumption

agreement, it is authorized to act upon such terms

and conditions as it may determine without any re-

striction such as is imposed by § 91 or 194. It con-

cedes that it must act “reasonably.” It contends that

in rejecting the claims of banks that were so unwise

as to extend credit to members of the Designated

Group on standby letters of credit issued by USNB,

and in refusing to subject its deposit insurance fund

to payment of sums owed by members of that group,

it was acting reasonably.

The district court agreed that the FDIC had acted

reasonably and held that the purchase and assumption

agreement did not violate § 91 and § 194 of the NBA.

No relevant authority has been cited to us and we

have found none. Since passage of the FDIA very

few national banks have failed, due, without doubt,

to the efficient operations of the Comptroller and the

FDIC. Court-made law is, accordingly, sparse. How-

ever, we are unable to accept the contentions of the

FDIC.

In our judgment § 1823(e) cannot be read to ex-

cuse the FDIC as the Receiver from complying with

the provisions of the NBA. The clause emphasized,

upon which the Receiver relies, refers to the FDIC in

28a

its corporate capacity. The terms and conditions it

has reference to are those conditions of loans and

sales that would, in the judgment of the board of

directors, qualify the agreement as action that would

“reduce the risk of loss or avert a threatened loss to

the Corporation.” The FDIC points to the final sen-

tence of the first paragraph of § 1823(e), set forth

above, as indicating that the subsection has the Re-

ceiver in mind throughout and that the emphasized

clause thus should apply to acts of the Receiver. We

do not so read it. That sentence serves to enable

closed or failing banks to contract with the Corpora-

tion and includes in its enablement the FDIC as Re-

ceiver of such banks. Thus the Receiver is taken note

of only in so far as to recognize that it can contract

with the Corporation. It is not, however, excused

from behaving like a receiver when it does so act.

The FDIA did not create the concept of a purchase

and assumption agreement. Before the FDIC was

created, receivers of insolvent banks had entered into

purchase and assumption agreements under the pro-

visions of the NBA authorizing receivers to deal with

receivership assets: 12 U.S.C. §§ 1922, 194. See,

Gockstetter v. Williams, 9 F.2d 354, 355-56 (9th Cir.

1925); Ex parte Moore, 6 F.2d 905, 906-07 (E.D.

S.C. 1925); Hulse v. Argetsinger, 18 F.2d 944 (2d

Cir. 1927). Congress in enacting the FDIA thus

noted a pre-existing practice. We find nothing to

suggest that in doing so Congress intended the FDIC

to be free from the requirements of § 91 and § 194

by which prior receivers had been bound in the formu-

lating and execution of agreements.

24a

To accede to the FDIC’s contentions would seriously

undermine the policy firmly set forth in § 91 that

some creditors are not to be preferred over others,

and of § 194 that when distributions are made they

shall be ratably made. Under its interpretation of

the statutes, the FDIC could (subject only to its con-

cession that it must act “reasonably,” but without any

apparent applicable standard), pick and choose which

creditors should be preferred, or permit the acquiring

bank to pick and choose.

In this case the extraordinary extent of the lack of

equal treatment is emphasized by the fact that the

unassumed creditors, left with only a claim against

the undesirable assets of USNB remaining in the

receivership, do not even have that questionable source

of recovery unimpaired. They are subordinated to

the lien of the Corporation to secure its loan of money

to the Receiver, all of which went to Crocker to make

possible the advantage to the assumed creditors. This

lien would without doubt consume in full the remain-

ing assets, leaving the unassumed creditors without

any recovery whatsoever. Thus, even as to the re-

maining assets the assumed creditors would seem, in-

directly, to have got there first and to have cut the

remaining creditors out.

In our judgment it could not have been the con-

gressional intent, upon balance, to have the fiscal in-

tegrity of the deposit insurance fund (which can be

adequately protected by other more equitable means)

outweigh the policy of equitable and ratable payment

of creditors in this manner and to permit the FDIC,

25a

whenever it felt its action to be reasonable and to

serve to protect the deposit insurance fund against

loss, to prefer some creditors over others—paying

some in full while others received little or nothing.

This is not to say that every purchase and assump-

tion agreement must include every creditor in order

to be valid. If the purchase leaves sufficient assets in

the receivership to allow distribution to unassumed

creditors equal to that undertaken by the acquiring

bank as to the creditors it has accepted, distribution

still could be ratable. See White v. Know, 111 U.S.

784, 785 (1884). The FDIC may prefer to take this

chance. It must, however, stand ready to render the

distribution ratable—to supplement the remaining

assets should they fall short and to surrender its lien

when necessary.

We conclude that the responsibility lies on the

FDIC under § 194 to compensate appellants for its

failure as Receiver to make distributions ratably. Had

it insisted that these appellants be included in the

purchase and assumption agreement as creditors with

claims assumed by Crocker, as it should have done,

it would then have had to satisfy Crocker by adding

to the amount borrowed from the Corporation and

paid to Crocker the full amount of the claims. That

sum appellants are now entitled to receive from the

FDIC.

B. Interest

The question here is whether appellants should re-

cover interest upon their claims. The FDIC contends

that to allow recovery of interest would be to permit

26a

increase of the claims over their amounts at the time

of receivership. It relies on White v. Know, 111 U.S.

784 (1884). In that case a creditor recovered a judg-

ment against a national bank after the bank was de-

clared insolvent. The judgment included the amount

of his claim with interest added to the date of judg-

ment. The claimant sought a ratable distribution on

the full amount of the judgment including interest,

but the Comptroller refused to recognize interest add-

ed between the insolvency and the judgment and paid

a ratable dividend only on the amount of the claim

as of the date of insolvency. 111 U.S. at 785. The

Supreme Court agreed with the Comptroller, holding

that the claimant was only entitled to a ratable dis-

tribution based on the value of the claim on the date

of insolvency, “because the dividends to the other

creditors had been calculated in that way and he was

entitled to what had been distributed to others during

the pendency of his litigation.” 111 U.S. at 786.[*]

The purpose of the rule disallowing interest ac-

cruing after insolvency is to lend support to the con-

cept of ratable distribution: that ratable distribu-

tion should be made to the creditors on the basis of

what was due to them at the time of the insolvency.

However, a difference must be recognized between

the case where interest accruing after insolvency is

added to become a part of the claim itself and the

case where interest is awarded in addition to the

amount of the claim for failure of the receiver to

pay the claim when it became due or to include the

[* See pp. 29a-30a, infra.]

27a

claim in a distribution in which it was entitled

ratably to share.

Noting this distinction, the Court in Armstrong

v. American Exchange Nat’l Bank, 133 U.S. 433,

470 (1890) allowed interest on a claim from the

date on which the distribution to the claimant should

have been made. Similarly, in Ticonic, Nat’l Bank

v. Sprague, 303 U.S. 406 (1938), the Court held that:

“It is true that in the liquidation of national

banks, dividends from the general funds on un-

secured claims are made pro rata upon the

amount of each claim as of the date of the in-

solvency * * * It is in order to assure equality

among creditors as of the date of insolvency that

interest accruing thereafter is not considered.

But interest is proper where the ideal of equality

is served, and so a creditor whose claim has been

erroneously disallowed is entitled on its allow-

ance to interest on his dividends from the time a

ratable amount was paid other creditors.”

303 U.S. at 411 (emphasis supplied).

To be accorded the required equal treatment among

creditors, appellants were entitled to a ratable divi-

dend of 100 percent of the value of each letter of

credit on the date each letter matured. Because such

a ratable distribution was not made, appellants are

entitled to recover the interest accruing on each let-

ter from the date of its maturity, the dates on which

the distribution would have been made had all the

claims been ratably treated. Ticonic Nat’l Bank v.

Sprague, supra, 303 U.S. at 411.

28a =e

JUDGMENT a ia

On the cross appeal of the FDIC, the judgment of UNITED STATES COURT OF APPEALS

the district court holding appellants’ letters of credit FOR THE NINTH CIRCUIT

to be provable claims in face amount is affirmed. [Filed Apr. 10, 1978]

On the appeal of First Empire Bank and Societe

Generale, the judgment of the district court is re- No. 77-2090

versed and the case is remanded with rg First EMPIRE BANK—NEW YORK, etc., et al.,

that judgment be entered in favor of each appelian PLAINTIFFS-APPELLANTS

in the amount of the face value of each USNB letter

: of credit held by it, plus interest from the dates of v8.

maturity, less the amount of any USNB deposit held FEDERAL DEPOSIT INSURANCE CORPORATION, et al.,

by it. DEFENDANTS-APPELLEES

No. 77-2147

FEDERAL DEPOSIT INSURANCE CORPORATION, et al.,

COUNTERCLAIMANTS-CROSS-APPELLANTS

v8.

FIRST EMPIRE BANK—NEW YORK, et al.,

COUNTERDEFENDANTS-CROSS-APPELLEES

ORDER

MERRILL, Circuit Judge:

The opinion herein, filed April 6, 1978, is hereby

corrected as follows:

The quotation, lines 2-5, page 22 [p. 26a, supra]

is to read:

“because the dividends to the other creditors had

been calculated in that way, and all he was en-

80a. Bla

titled to was a share in the proceeds of the assets APPENDIX B

ual to what had been distributed to others dur-

fae the pendency of his litigation.” UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

/s/ Charles M. Merrill

Circuit Judge Civil No. 74-468-N

[Filed Mar. 18, 1977]

FIRST EMPIRE BANK—NEW YORK, et aL,

PLAINTIFFS

FEDERAL DEPOSIT INSURANCE CORPORATION, et al.,

DEFENDANTS

FEDERAL DEPOSIT INSURANCE CORPORATION,

as Receiver of United States National Bank,

COUNTERCLAIMANT

First EMPIRE BANK—NEW YORK, et al.,

COUNTERDEFENDANTS

FINDINGS OF FACT AND

CONCLUSIONS OF LAW

This case came on for trial on November 30, 1976,

and the evidence concluded December 17, 1976, after

which post trial briefs were filed. Gary J. Greenberg

of Stroock, Stroock & Lavan appeared as counsel for

laintiff and counterclaim defendant FIRST EM-

IRE BANK—NEW YORK and its successor-in-

interest Manufacturers and Traders Trust Company

| |

| i

32a

of Buffalo, New York (“FEB”). Don A. Proudfoot,

Jr. of Graham & James appeared as counsel for

plaintiff and counterclaim defendant SOCIETE GEN-

ERALE (“Sogen’”). Charles A. Legge and Wilkes

R. Morgan of Bronson, Bronson & McKinnon, and

Richard R. Gore of Schall, Boudreau & Gore appeared

as counsel for defendants and counterclaimants FED-

ERAL DEPOSIT INSURANCE CORPORATION

(“FDIC”) and FEDERAL DEPOSIT INSURANCE

CORPORATION as receiver of United States Na-

tional Bank (“Receiver’’)..

After receiving evidence, both oral and documen-

tary, considering the briefs and other records on file

in this action, the admissions contained in the pretrial

order, and taking judicial notice of the pleadings and

records on file in the matter entitled In Re the Liqui-

dation of United States National Bank, action number

73-445-N, now pending before this Court, and the

Congressional hearings of the Senate Subcommittee on

Banking dated November 27, 1973, etc., the Court

makes the following Findings of Fact and Conclu-

sions of Law:

FINDINGS OF FACT

1. FEB was, upon the commencement of this ac-

tion, a New York banking corporation with its prin-

cipal place of business in New York City, and hav-

ing a branch in Paris, France. On January 1, 1976,

it was merged into the Manufacturers and Traders

Trust Company of Buffalo, New York (a New York

banking corporation), which prosecutes this action

as successor-in-interest to FEB. Sogen is a French

33a

banking corporation with its principal place of busi-

ness in Paris, France, having a branch in London,

England.

2. FDIC is an agency of the United States govern-

ment organized and existing under and by virtue of

an act of Congress Title 12 U.S.C. §§ 1811-1831.

3. Receiver was appointed to such position on Oc-

tober 18, 1973, when the Comptroller of the Currency

(“Comptroller”) declared United States National

Bank (of San Diego, California) (‘“USNB’’) insol-

vent (12 U.S.C. § 1821[c]).

4, Until October 18, 1973, USNB was a national

banking association with its principal place of busi-

ness in San Diego, California.

5. On October 18, 1973, at 3:00 p.m. (P.D.T.), the

Comptroller declared USNB to be insolvent and ap-

pointed FDIC the Receiver.

6. Shortly after 3:00 p.m., October 18, 1973, the

Receiver, through the FDIC board of directors (all

of whom were present in San Francisco), called for

bids upon a predrafted Purchase and Assumption

Agreement. By the terms of the agreement, the Re-

ceiver offered for sale almost all of the deposit lia-

bilities of USNB and most of its assets except loans

to Westgate-California Corporation, British Columbia

Investment Company, and related companies and in-

dividuals connected to USNB’s President, C. Arn-

holt Smith (the “Designated Group”); and, to make

up the difference between the liabilities transferred

and the assets sold, the Receiver offered to supply a

34a

balancing amount of cash, which it borrowed from

FDIC.

7. At approximately 4:30 p.m. on October 18, 1973,

the Receiver accepted the bid of Crocker National

Bank (“Crocker”) of $89.5 million, which was the

highest of the bids submitted.

8. The essential provisions of the Purchase and

Assumption transaction were as follows:

(a) The assuming bank (Crocker) purchased

certain of the assets of USNB from the Receiver

and assumed a substantial portion of the deposits

and other liabilities of USNB, with the assets

and liabilities related to the Designated Group

being excluded from the transfer.

(b) Since the amount of the liabilities assumed

by Crocker exceeded the value of the assets pur-

chased by it, the difference (less the $89.5 mil-

lion paid by Crocker for the value of USNB’s

banking business as a going concern) was made

up by the Receiver in cash. The Receiver ob-

tained the necessary cash, $130 million, by bor-

rowing from FDIC, the loan being secured by

USNB’s assets retained by the Receiver. Re-

ceiver borrowed ar additional $30 million from

FDIC on the security of the retained assets of

USNB in order to pay the Federal Reserve Bank

in San Francisco the sum of $30 million to sat-

isfy USNB’s obligation to that institution.

ital in order to support its expanded branch

structure and almost one billion dollars of new

35a

deposits, FDIC made a $50 million capital loan

to Crocker, evidenced by a capital note payable

to FDIC in five years in the amount of $50

million secured by USNB’s assets retained by

the Receiver.

(d) Pursuant to written agreements executed

on October 18, 1973, between FDIC and the Re-

ceiver, the cash advances made by FDIC to the

Receiver were secured by liens granted to FDIC

on all of the assets in the receivership (i.e., all

unpurchased assets).

(e) FDIC entered into an indemnity agree-

ment with Crocker to protect it against unas-

sumed USNB liabilities and certain other types

of loss which could result to Crocker from the

transaction, but not extending to losses which

might arise on the purchased loan portfolio.

9. Upon being advised of the acceptance of the

bid and the signing of the required documents, at-

torneys for the Receiver petitioned the United States

District Court for the Southern District of Califor-

nia, in San Diego (Judge Leland Nielsen), for the

requisite court approval of the proposed sale of

USNB’s assets (12 U.S.C. § 192). The Court heard

sworn testimony and thereafter granted the required

approval at approximately 6:15 p.m. On Friday

morning, October 19, 1973, all of the former offices

of USNB, except its Nassau, Bahamas office, reopened

at their usual business hour as Crocker branches.

10. At the time of its closing, USNB showed on

its books an amount in excess of $100 million on ac-

36a

count of certain letters of credit it had issued. Some

of these were commercial letters of credit secured by

title documents of goods. Such letters of credit were

required, under the Purchase and Assumption Agree-

ment, to be assumed by Crocker. Approximately $90

million in letters of credit, representing over seventy

transactions involving thirty-nine holders, appeared

on the bank’s records to have been issued in connec-

tion with transactions involving as account parties

one or another Smith-related enterprise or affiliated

person included in the Designated Group. These so-

called “standby” letters of credit not secured by title

documents of goods were not assumed by Crocker pur-

suant to the Purchase and Assumption Agreement

but were retained by the Receiver in the USNB re-

ceivership. However, other such “standby” letters of

credit in which the account parties were not members

of the Designated Group were assumed by Crocker

under the Purchase and Assumption Agreement.

11. On August 14, 1971, plaintiff FEB trans-

ferred $2 million to USNB for the account of West-

ward Realty Co. ([““] Westward”) and received USNB

letter of credit No. 70-328 in the face amount of $2

million. Together with letter of credit No. 70-328,

FEB also received note No. 74 of Westward due

August 12, 1972, in the face amount of $2 million

in favor of USNB, which note was endorsed in blank

by USNB. This credit was renewed on August 24,

1972, and FEB received USNB letter of credit No.

70-515 in the face amount of $2 million plus interest.

Together with letter of credit No. 70-515, FEB also

ea ee Oe PO Ee Sra

37a

received note No. 93 of Westward due August 14,

1974, in the face amount of $2 million in favor of

USNB, which note was endorsed in blank by USNB.

Neither USNB letter of credit No. 70-515 nor the

USNB endorsement of the Westward note was trans-

ferred to Crocker for assumption on October 18, 1973,

but they were retained in the receivership.

12. On March 7, 1973, plaintiff FEB transferred

$2 million to USNB for the account of Los Altos

Management Co. (“Los Altos”) and received USNB

letter of credit No. 70-612 in the face amount of $2

million plus interest. Together with the USNB letter

of credit, FEB received the promissory note of Los

Altos in its favor due March 7, 1974, in the face

amount of $2 million plus 814% interest per annum.

An FEB corporate borrowing resolution form accom-

panied the letter of credit and note. USNB letter of

credit No. 70-612 was not transferred to Crocker for

assumption on October 18, 1973, but was retained in

the receivership.

13. On March 27, 1974, upon maturity of USNB

letter of credit No. 70-612, FEB, through its repre-

sentatives, presented to the Receiver and to Crocker

the documentation required by the said letter of

credit and demanded payment thereunder of $2,000,-

000 principal and $181,805.62 interest. The demands

for payment were rejected, and appropriate notices

of protest and certificates of dishonor were issued.

On August 14, 1974, upon maturity of USNB letter

of credit No. 70-515, FEB, through its representa-

tives, presented to the Receiver and to Crocker the

38a

documentation required by the said letter of credit

and demanded payment thereunder of $2,000,000

principal and $209,000 interest. The demands for

payment were rejected, and appropriate notices of

protest and certificates of dishonor were issued. In

addition, FEB has demanded payment from the Re-

ceiver pursuant to the USNB endorsement in blank

of the Westward note. The Receiver has declined to

honor the USNB endorsement and pay the Westward

note.

14. On April 10, 1973, plaintiff Sogen transferred

$3,000,000 to USNB for the account of Roberts

Farms, Inc. (“Roberts Farms”) and received USNB

letter of credit No. 70-620 in the face amount of

$3,000,000. Together with the USNB letter of credit,

Sogen received promissory note No. 39 of Roberts

Farms in the face amount of $3,000,000 plus interest

at 34% over market rate on a six-month rollover

payable at Sogen, London. USNB letter of credit

No. 70-620 was not transferred to Crocker for as-

sumption on October 18, 1973, but was retained in

the receivership.

15. On May 3, 1978, plaintiff Sogen transferred

$1,000,000 to USNB for the account of Westward

and received USNB letter of credit No. 70-639 in the

face amount of $1 million. Together with the USNB

letter of credit, Sogen received promissory note No.

109 of Westward in the face amount of $1 million

plus 914% interest per annum. USNB letter of

credit No. 70-639 was not transferred to Crocker for

ee kt oe = -

89a

assumption on October 18, 1973, but was retained

in the receivership.

16. On July 20, 1972, plaintiff Sogen transferred

$3,500,000 to USNB for the account of Tri-County

Ranches, Inc. (“Tri-County”) and received USNB

letter of credit No. 70-493 in face amount of $3,500,-

000. Together with USNB letter of credit No. 70-

493, Sogen received promissory note No. 81 of Tri-

County in the face amount of $3.5 million plus in-

terest payable at Sogen, London. This loan was re-

newed on July 20, 1978, and plaintiff Sogen received

USNB letter of credit No. 70-677. Together with

USNB letter of credit No. 70-677, Sogen received

promissory note No. 100 of Tri-County in the face

amount of $3.5 million plus 10-11/16% interest per

annum payable at Sogen, London. USNB letter of

credit No. 70-677 was not transferred to Crocker for

assumption on October 18, 1973, but was retained in

the receivership.

17. On May 8, 1974, following maturity of USNB

letter of credit No. 70-639, Sogen presented to the

Receiver and to Crocker the documentation required

by the said letter of credit and demanded payment

thereunder of principal in the amount of $1 million

and interest in the amount of $92,517.36. The de-

mands for payment were rejected. On July 25, 1974,

following maturity of USNB letter of credit No.

70-677, Sogen presented to the Receiver and to

Crocker the documentation required by the said let-

ter of credit and demanded payment thereunder of

principal in the amount of $3.5 million and interest

40a

in the amount of $381,335.98. The demands for pay-

ment were rejected. On April 30 and May 3, 1976,

following the maturity of USNB letter of credit No.

70-620, Sogen presented to the Receiver and to

Crocker the documentation required by the said letter

of credit and demanded payment thereunder of the

unpaid principal plus interest. The demands for pay-

ment were rejected.

18. Prior to its insolvency USNB maintained an

account at FEB and had deposited the sum of $200,-

000 with FEB. Subsequent to the insolvency of

USNB, FEB offset the funds then in the USNB

account, namely, $200,733.76, against its claims on

the USNB letters of credit and endorsement obliga-

tion. Although FDIC and the Receiver have de-

manded that FEB pay said funds to them, FEB has

refused to do so.

19. Prior to its insolvency, USNB had deposited

the sum of $2 million with Sogen. Subsequent to the

insolvency of USNB, Sogen offset said funds against

its claims on the USNB letters of credit. Although

FDIC and the Receiver have demanded that Sogen

pay said $2 million to them, Sogen has refused to do

SO.

20. On May 8, 1978, plaintiff Sogen transferred

$1 million to USNB for the account of Pacific Enter-

prises, Inc. (“Pacific Enterprises’’) and received

USNB letter of credit No. 70-640 in the face amount

of $1 million. Together with the USNB letter of

credit, Sogen received promissory note No. 107 of

Pacific Enterprises in the face amount of $1 million.

Said letter of credit was payable between May 3 and

4la

May 24, 1974. However, on or about October 10,

1973, USNB paid Sogen $1,036,111.10, represent-

ing principal and interest on the letter of credit.

Thereafter, Sogen returned to USNB letter of credit

No. 70-640 and Pacific Enterprises note No. 107, to-

gether with a letter of discharge from all liabilities.

21. During the late spring or early summer of

1973, Sogen had acquired information that USNB’s

President, C. Arnholt Smith, had resigned.

22. Commencing in July 1978, Sogen had requested

that USNB provide it with detailed audited financial

Statements of the account parties under various

USNB letters of credit held by it, including the

Pacific Enterprises letter of credit.

23. None of the prerequisites for payment of the

Pacific Enterprises letter of credit set forth in para-

graphs 1 through 3 thereof had been met when USNB

prepaid the letter of credit.

24. Subsequent to the October 18, 1973 insolvency

of USNB, plaintiffs received from the Receiver proof

of claim forms which they were asked to complete

and file with the Receiver so that it could be deter-

mined whether they should be accorded the status

of claimants in the receivership. Proofs of claim were

submitted in December, 1973, and January, 1974, by

both plaintiffs on all five USNB letters of credit held

by them and by plaintiff FEB on the USNB en-

dorsement obligation.

25. During January to July, 1974, FDIC reviewed

the various proofs of claim submitted by the holders

of the $91 million in USNB letters of credit which

42a

had not been assumed by Crocker. FDIC had deter-

mined that those letters of credit which could be clas-

sified as reflecting direct, inter-bank loans to or de-

posits with USNB were within the class of USNB

liabilities which, under the Purchase and Assump-

tion Agreement, should have been assumed by

Crocker on October 18, 1973. On the other hand,

it concluded that those letters of credit which could

be classified as reflecting loans to the account parties

guaranteed by USNB standby letters of credit should

not be assumed by Crocker.

26. By letters dated June 19, 1974, FDIC, through

its Executive Secretary, informed the plaintiffs that

all of their letters of credit had been classified as

standby letters of credit rather than instr uments

reflective of direct, interbank transactions. By a

letter dated January 16, 1975, FDIC, through its

Executive Secretary, informed plaintiff FEB that

FDIC had determined that the liability of USNB

on its endorsement of Westward note No. 93 should

not be transferred to Crocker pursuant to the terms

and conditions of the Purchase and Assumption

Agreement.

27. Roberts Farms has thus far paid Sogen the

sum of $639,982.69 on its $3 million note.

98. Plaintiffs failed to file administrative claims

under the Federal Tort Claims Act prior to the com-

mencement of this action.

29. a) The transaction by which FEB trans-

ferred $2 million on August 14, 1972, and re-

ceived from USNB its letter of credit No. 70-515

ee ee an

43a

in the face amount of $2 million and other docu-

ments was a loan to Westward by FEB secured

by USNB. Letter of credit No. 70-515 was is-

sued by USNB to FEB to evidence a guarantee

by USNB of the loan made by FEB to West-

ward, and was not required to be assumed by

Crocker under the Purchase and Assumption

Agreement.

(b) The endorsement in blank by USNB of

Westward note No. 93, given to FEB in conjunc-

tion with USNB letter of credit No. 70-515, was

not a direct interbank liability of USNB to FEB

required to be assumed by Crocker under the

Purchase and Assumption Agreement.

ferred $2 million on March 7, 1973, and received

from USNB its letter of credit No. 70-612 in the

face amount of $2 million and other documents

was a loan to Los Altos by FEB secured by

USNB. Letter of credit No. 70-612 was issued

by USNB to FEB to evidence a guarantee by

USNB of the loan made by FEB to Los Altos,

and was not required to be assumed by Crocker

under the Purchase and Assumption Agreement.

(d) The transaction by which Sogen trans-

ferred $1 million on May 3, 1973, and received

from USNB its letter of credit No. 70-639 in the

face amount of $1 million and other documents

was a loan to Westward by Sogen secured by

USNB and not an inter-bank deposit or loan.

Letter of credit No. 70-639 was issued by USNB

a |

44a

to Sogen to evidence a guarantee by USNB of

the loan made by Sogen to Westward, and was

not required to be assumed by Crocker under the

Purchase and Assumption Agreement.

(e) The transaction by which Sogen trans-

ferred $3,500 000 on July 20, 1973, and received

from USNB its letter of credit No. 70-677 in the

face amount of $3,500,000 and other documents

was a loan to Tri-County by Sogen secured by

USNB and not an inter-bank deposit or loan.

Letter of credit No. 70-677 was issued by USNB

to Sogen to evidence a guarantee by USNB of

the loan made by Sogen to Tri-County, and was

not required to be assumed by Crocker under

the Purchase and Assumption Agreement.

(f) The transaction by which plaintiff Sogen

transferred $3 million on April 10, 1973, and

received from USNB its letter of credit No. 70-

620 in the face amount of $3 million and other

documents was a loan to Roberts Farms by

Sogen secured by USNB and not an inter-bank

deposit or loan. Letter of credit No. 70-620 was

issued by USNB to Sogen to evidence a guaran-

tee by USNB of the loan made by Sogen to

Roberts Farms, and was not required to be as-

sumed by Crocker under the Purchase and As-

sumption Agreement.

30. Plaintiffs offered no evidence of the value of

their letters of credit on October 18, 1973.

31. In structuring the Purchase and Assumption

Agreement, FDIC’s decision to exclude plaintiffs’ let-

PRUNE eee A ee ee _— 3 a

45a

ters of credit from the liabilities transferred to

Crocker was reasonable, not arbitrary or capricious,

and founded on a rational basis.

32. The purchase and assumption transaction

among FDIC, the Receiver and Crocker was not a

dividend.

33. The laws of the United Kingdom and of the

State of New York as to the power of a bank to

set off a deposit held by it where its depositor/obligor

becomes insolvent are the same as the law of the

State of California and allow such setoff.

34. FEB and Sogen have produced no evidence

of what they would have received had their claims

been recognized by the receivership of USNB and

the assets and liabilities of USNB had been liquidated

rather than there having been a purchase and as-

sumption transaction.

35. The October 10, 1973 payment made through

USNB to plaintiff Sogen in connection with USNB

letter of credit No. 70-640 did not constitute a pref-

erential transfer of funds by USNB to Sogen.

CONCLUSIONS OF LAW

1. The claim of plaintiff FEB under USNB letter

of credit No. 70-515 is provable against the Receiver

in the face amount.

2. The claim of plaintiff FEB under USNB’s en-

dorsement of Westward note No. 93 is provable

against the Receiver in the face amount.

" 46a

8 The claim of plaintiff FEB under USNB letter

of credit No. 70-612 is provable against the Receiver

in the face amount.

4. The claim of plaintiff Sogen under USNB let-

ter of credit No. 70-639 is provable against the Re-

ceiver in the face amount.

5. The claim of plaintiff Sogen under USNB let-

ter of credit No. 70-677 is provable against the Re-

ceiver in the face amount.

6. The claim of plaintiff Sogen under USNB let-

ter of credit No. 70-620 is provable against the Re-

ceiver in the face amount, less payments received.

7. The claim of plaintiff FEB under USNB letter

of credit No. 70-515 was properly classified by FDIC

and the Receiver and was not required to be as-

sumed under the Purchase and Assumption Agree-

ment.

8. The claim of plaintiff FEB under USNB’s en-

dorsement of Westward note No. 93 was properly

classified by FDIC and the Receiver and was not

required to be assumed under the Purchase and As-

sumption Agreement.

9. The claim of plaintiff FEB under USNB letter

of credit No. 70-612 was properly classified by FDIC

and the Receiver and was not required to be assumed

under the Purchase and Assumption Agreement.

10. The claim of plaintiff Sogen under USNB let-

ter of credit No. 70-639 was properly classified by

FDIC and the Receiver and was not required to be

assumed under the Purchase and Assumption Agree-

ment.

47a

11. The claim of plaintiff Sogen under USNB

letter of credit No. 70-677 was properly classified by

FDIC and the Receiver and was not required to be

assumed under the Purchase and Assumption Agree-

ment.

12. The claim of plaintiff Sogen under USNB

letter of credit No. 70-620 was properly classified by

FDIC and the Receiver and was not required to be

assumed under the Purchase and Assumption Agree-

ment.

13. The purchase and assumption transaction

among FDIC, the Receiver and Crocker did not vio-

late 12 U.S.C. § 91.

14. The purchase and assumption transaction

among FDIC, the Receiver and Crocker did not vio-

late 12 U.S.C. § 194.

15. Other creditors of USNB did not receive an

unlawful preference over FEB and Sogen.

16. The transactions among FDIC, the Receiver

and Crocker on October 18, 1973, were authorized

by 12 U.S.C. § 1828(e).

17. The lien acquired by FDIC on the assets re-

tained by the Receiver was authorized by 12 U.S.C.

§ 1823 (e).

18. The plaintiffs’ causes of action were not re-

quired to be brought under the Federal Tort Claims

Act, and are therefore not barred in this action.

19. FDIC’s actions in negotiating and executing

the Purchase and Assumption Agreement among

FDIC, the Receiver and Crocker are judicially re-

48a

viewable, and were reasonable, not arbitrary and

capricious, and were founded on a rational basis.

20. FDIC’s action in investigating and classify-

ing plaintiffs’ claims in 1974 are judicially review-

able, and were reasonable, not arbitrary or capricious,

and were founded on a rational basis.

21. Plaintiffs’ causes of action were not required

to be brought under the Administrative Procedure

Act, 5 U.S.C. § 701 et seq., and are therefore not

barred in this action.

22. Plaintiffs are estopped to deny that their

transactions described in Findings of Fact Nos. 11,

12, 14, 15 and 16 were loans to the respective ac-

count parties which were guaranteed by USNB, and

were not loans or deposits with USNB, as those

transactions are indicated on their books and records

and the books and records of USNB before the in-

solvency of USNB on October 18, 1973.

23. Plaintiffs were entitled to setoff against their

claims the deposits of USNB held by them.

24. The October 10, 1973 payment made by USNB

to Sogen in connection with USNB letter of credit

No. 70-640 was not a preferential transfer in viola-

tion of 12 U.S.C. § 91.

Dated: March 18, 1977.

/s/ Leland C. Nielsen

LELAND C. NIELSEN

United States District Judge

49a

APPENDIX C

1. 12 U.S.C. 91 provides:

$91. Transfers by bank and other acts in con-

templation of insolvency

All transfers of the notes, bonds, bills of ex-

change, or other evidences of debt owing to any

national banking association, or of deposits to its

credit; all assignments of mortgages, sureties on

real estate, or of judgments or decrees in its

favor; all deposits of money, bullion, or other

valuable thing for its use, or for the use of any

of its shareholders or creditors; and all payments

of money to either, made after the commission of

an act of insolvency, or in contemplation thereof,

made with a view to prevent the application of

its assets in the manner prescribed by this chap-

ter, or with a view to the preference of one credi-

tor to another, except in payment of its circulat-

ing notes, shall be utterly null and void; and no

attachment, injunction, or execution, shall be is-

sued against such association or its property

before final judgment in any suit, action, or pro-

ceeding, in any State, county, or municipal court.

(R.S. § 5242.)

2. 12 U.S.C. 194 provides:

§ 194. Dividends on adjusted claims; distribu-

tion of assets

From time to time, after full provision has

been first made for refunding to the United

States any deficiency in redeeming the notes of

such association, the comptroller shall make a

ratable dividend of the money so paid over to

50a

him by such receiver on all such claims as may

have been proved to his satisfaction or adjudi-

cated in a court of competent jurisdiction, and,

as the proceeds of the assets of such association

are paid over to him, shall make further divi-

dends on all claims previously proved or adjudi-

cated; and the remainder of the proceeds, if any,

shall be paid over to the shareholders of such

association, or their legal representatives, in

proportion to the stock by them respectively held.

(R.S. $5236.)

8. 12 U.S.C. 1821 provides:

§ 1821. Permanent Insurance Fund

(a) Composition; amount of deposit insured; in-

surance of public funds; aggregate amount

of public funds

(1) The Temporary Federal Deposit Insur-

ance Fund and the Fund for Mutuals heretofore

created pursuant to the provisions of section

12B of the Federal Reserve Act, as amended, are

consolidated into a Permanent Insurance Fund

for insuring deposits, and the assets therein shall

be held by the Corporation for the uses and pur-

poses of the Corporation: Provided, That the

obligations to and rights of the Corporation,

depositors, banks, and other persons arising out

of any event or transaction prior to September

21, 1950, shall remain unimpaired. On and after

August 28, 1935, the Corporation shall insure

the deposits of all insured banks as provided in

this chapter: Provided further, That the insur-

ance shall apply only to deposits of insured banks

which have been made available since March 10,

ae | ene eRe

‘Pom eee ten ads ae. RE fete dele >

5la

1933, for withdrawal in the usual course of the

banking business: Provided further, That if any

insured bank shall, without the consent of the

Corporation, release or modify restrictions on

or deferments of deposits which had not been

made available for withdrawal in the usual

course of the banking business on or before

August 23, 1935, such deposits shall not be in-

sured. Except as provided in paragraph (2),

the maximum amount of the insured deposit of

any depositor shall be $40,000.

* * * * *

(b) Liquidation as closing of bank

For the purposes of this chapter an insured

bank shall be deemed to have been closed on

account of inability to meet the demands of its

depositors in any case in which it has been

closed for the purpose of liquidation without ade-

quate provision being made for payment of its

depositors.

Notwithstanding any other provision of law,

whenever the Comptroller of the Currency shall

appoint a receiver other than a conservator of

any insured national bank or insured District

_ bank, or of any noninsured national bank or

District bank hereafter closed, he shall appoint

the Corporation receiver for such closed bank.

(d) Powers and duties of Corporation as re-

ceiver

Notwithstanding any other provision of law,

it shall be the duty of the Corporation as such

receiver to cause notice to be given, by advertise-

52a

ment in such newspapers as it may direct, to

all persons having claims against such closed

bank pursuant to section 193 of this title; to

realize upon the assets of such closed bank, hav-

ing due regard to the condition of credit in the

locality; to enforce the individual liability of

the stockholders and directors thereof; and to

wind up the affairs of such closed bank in con-

formity with the provisions of law relating to

the liquidation of closed national banks, except as

herein otherwise provided. The Corporation as

such receiver shall pay to itself for its own ac-

count such portion of the amounts realized from

such liquidation as it shall be entitled to receive

on account of its subrogation to the claims of

depositors, and it shall pay to depositors and

other creditors the net amounts available for

distribution to them. The Corporation as such

receiver, however, may, in its discretion, pay

dividends on proved claims at any time after the

expiration of the period of advertisement made

pursuant to section 193 of this title, and no

liability shall attach to the Corporation itself or

as such receiver by reason of any such payment

for failure to pay dividends to a claimant whose

claim is not proved at the time of any such pay-

ment. With respect to any such closed bank, the

Corporation as such receiver shall have all the

rights, powers, and privileges now possessed by

or hereafter granted by law to a receiver of a

national bank or District bank and notwith-

standing any other provision of law in the exer-

cise of such rights, powers, and privileges the

Corporation shall not be subject to the direction

or supervision of the Secretary of the Treasury

or the Comptroller of the Currency.

53a

(e) Corporation as receiver of State banks

Whenever any insured State bank (except a

District bank) shall have been closed by action

of its board of directors or by the authority hav-

ing supervision of such bank, as the case may be,

on account of inability to meet the demands of

its depositors, the Corporation shall accept ap-

pointment as receiver thereof, if such appoint-

ment is tendered by the authority having super-

vision of such bank and is authorized or per-

mitted by State law. With respect to any such

insured State bank, the Corporation as such re-

ceiver shall possess all the rights, powers and

privileges granted by State law to a receiver of

a State bank.

(f) Payment of insured deposits

Whenever an insured bank shall have been

closed on account of inability to meet the de-

mands of its depositors, payment of the insured

leposits in such bank shall be made by the Cor-

poration as soon as possible, subject to the pro-

visions of subsection (g) of this section either

(1) by cash or (2) by making available to each

depositor a transferred deposit in a new bank in

the same community or in another insured bank

in an amount equal to the insured deposit of such

depositor: Provided, That the Corporation, in its

discretion, may require proof of claims to be

filed before paying the insured deposits, and

that in any case where the Corporation is not

satisfied as to the validity of a claim for an in-

sured deposit, it may require the final determina-

tion of a court of competent jurisdiction before

paying such claim.

54a

4, 12 U.S.C. 1823 provides:

§ 1823. Corporation monies

In order to reopen a closed insured bank or,

when the Corporation has determined that an

insured bank is in danger of closing, in order to

prevent such closing, the Corporation, in the

discretion of its Board of Directors, is authorized

to make loans to, or purchase the assets of, or

make deposits in, such insured bank, upon such

terms and conditions as the Board of Directors

may prescribe, when in the opinion of the Board

of Directors the continued operation of such bank

is essential to provide adequate banking service

in the community. Such loans and deposits may

be in subordination to the rights of depositors

and other creditors.

(d) Sale of assets to Corporation

Receivers or liquidators of insured banks

closed on account of inability to meet the de-

mands of their depositors shall be entitled to

offer the assets of such banks for sale to the

Corporation or as security for loans from the

Corporation, upon receiving permission from the

appropriate State authority in accordance with

express provisions of State law in the case of

insured State banks. The proceeds of every such

sale or loan shall be utilized for the same pur-

and in the same manner as other funds

realized from the liquidation of the assets of

such banks. In any case where prior to Septem-

ber 21, 1950, the Comptroller of the Currency

55a

has appointed a receiver of a closed national

bank other than the Corporation, he may, in

his discretion, pay dividends on proved claims at

any time after the expiration of the period of

advertisement made pursuant to section 193 of

this title, and no liability shall attach to the

Comptroller of the Currency or to the receiver

of any such national bank by reason of any such

payment for failure to pay dividends to a claim-

ant whose claim is not proved at the time of any

such payment. The Corporation, in its discre-

tion, may make loans on the security of or may

purchase and liquidate or sell any part of the

assets of an insured bank which is now or may

hereafter be closed on account of inability to

meet the demands of its depositors, but in any

ease in which the Corporation is acting as re-

ceiver of a closed insured bank, no such loan or

purchase shall be made without the approval of

a court of competent jurisdiction.

(e) Loans on assets as security

Whenever in the judgment of the Board of

Directors such action will reduce the risk or

avert a threatened loss to the Corporation and

will facilitate a merger or consolidation of an

insured bank with another insured bank, or will

facilitate the sale of the assets of an open or

closed insured bank to and assumption of its

liabilities by another insured bank, the Corpora-

tion may, upon such terms and conditions as it

may determine, make loans secured in whole or

in part by assets of an open or closed insured

bank, which loans may be in subordination to

the rights of depositors and other creditors, or

56a

the Corporation may purchase any such assets

or may guarantee any other insured bank

against loss by reason of its assuming the liabil-

ities and purchasing the assets of an open or

closed insured bank. Any insured national bank

or District. bank, or the Corporation as receiver

thereof, is authorized to contract for such sales

or loans and to pledge any assets of the bank to

secure such loans.

No agreement which tends to diminish or de-

feat the right, title or interest of the Corporation

in any asset acquired by it under this section,

either as security for a loan or by purchase,

shall be valid against the Corporation unless

such agreement (1) shall be in writing, (2) shall

have been executed by the bank and the person

or persons claiming an adverse interest there-

under, including the obligor, contemporaneously

with the acquisition of the asset by the bank,

(3) shall have been approved by the board of

directors of the bank or its loan committee,

which approval shall be reflected in the minutes

of said board or committee, and (4) shall have

been, continuously, from the time of its execu-

tion, an official record of the bank.

* * * * *

8. 8. covennment paintine orrice; 1976 271454 97

- a A ee ee

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.