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

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Supreme Court, U.S,

i D

80-1638

No ‘AR SO 1981

IN THE

Supreme Court of the United ‘States

OCTOBER TERM, 1980

First Emprre Bank-New York (by its successor-in-interest

Manvuracturers & Travers Trust Co. of Buffalo, New

York, a New York banking corporation) and Societe

GENERALE, a French banking corporation,

Petitioners,

FreperaL Depostr INSuRANCE CORPORATION and FEDERAL

DEPOSIT INSURANCE CORPORATION aS RECEIVER OF UNITED

States NatrionaL Bank.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF

APPEALS FOR THE NINTH CIRCUIT

Gary J. GREENBERG

Strroock & Stroock & Lavan

61 Broadway

New York, New York 10006

Tel.: 212-425-5200

Don A. Provuproot, JR.

GraHaM & JAMES

707 Wilshire Blvd.

Los Angeles, California 90017

Tel. : 213-624-2500

Attorneys for Petitioners.

Rita E. Hauser,

Evwarp J. Eckert,

Rosert I. Mrxonz1,

DANIEL Kapian,

Of Cownsel.

Question Presented

When the Federal Deposit Insurance Corporation re-

solves a national bank insolvency by arranging a purchase

and assumption of the failed bank’s assets and liabilities

by a sound bank, as is usually the case, thus assuring all

assumed creditors full principal plus interest at contract

rates, does it violate the provisions of the National Bank

Act mandating equal treatment among creditors (12 U.S.C.

§§ 91 and 194) if it ultimately pays improperly excluded

creditors only the legal rate of interest?

TABLE OF CONTENTS

Question Presented « .. .6osce+s3a553

opinions TROleW o.oo ss ocd sunekenaneneeeeee

A eer ee

Statutory Provisions Involved ....................

TTT eee

Reasons For Granting The Petition ...............

Comedie on. ec ccccessecnnndnnaense eae

Appendix A—United States Court of Appeals—

Ninth Circuit Opionion dated 12/30/80 ........

Appendix B—February 15 and 23, 1979 Letter Deci-

sions of the United States District Court for the

Southern District of California ................

Appendix C—United States Court of Appeals—

Ninth Cirenit Opinion dated 4/6/78 ...........

Appendix D—Order and Second Amended Judgment

Gated S/19/T0 .. oc ivsicvtsaeadaakeenaeeee

TABLE OF CASES

Anderson v. General American Life Ins. Co., 141

F.2d S06 (Gth Cir. 1986) 2.45 cccc000s-ee eee

Armstrong v. American Exchange Nat. Bank, 133

U.S. 488 (1900) .....cccccsctcvcvgssecee ene

Blakey v. Brinson, 286 U.S. 254 (1932) ............

ii TABLE OF AUTHORITIES

PAGE

Board «f County Commissioners v. United States,

ee a Se EN) Wr awk eka kaa OW were kaha ees 17

Bunge Corporation v. American Commercial Barge

Iine Co., 630 F.2d 1236 (7th Cir. 1980) ...... 14

Cook County National Bank v. United States, 107

SF RE ECCS ek OES Ca CE eee 8

Curtiss-Wright Corporation v. General Electric Co.,

ee Ss hn ob as ios 501 eke D Owen ks 15

Douglass v. Thurston County, 86 F.2d 899 (9th Cir.

SE senses ee wirus Kxbg oes Wee eek ae eEk Se’ 7,12

Davis v. Elmira Savings Bank, 161 U.S. 275 (1896) 8

Dunnagan v. Best, 59 F.2d 795 (W.D. Tex. 1932) ... 7

Elliott v. First Inland Nat. Bank, 32 F. Supp. 839

ay as OE 7h va os ne cA asks pe bwe ee dks 7

Employee-Teamsters Joint Council v. Weatherall

Concrete, 468 F. Supp. 1167 (S.D. W. Va. 1979) 15

Federal Barge Lines, Inc. v. Republic Marine, Inc.,

ORG Fe Ore Ce Cate BOE oickecc sca inca co's 14

FDIC vy. Freudenfeld, 492 F. Supp. 763 (E.D. Wise.

BOE. ert ciks ane wees sce arnckhee waren koi ks 10

First National Bank v. Colby, 21 Wall. (88 U.S.) 609

SRE i ha Snake non fee EERE hae 8

Gerstle v. Gamble-Skogmo, Inc., 332 F. Supp. 644

(E.D. N.Y. 1971), modified, 478 F.2d 1281 (2d

CSE 5a a eee eee sheen khectrciavae ewes 15

Jennings v. U.S. Fidelity & Guaranty Co., 294 USS.

BE. La a Pe ROR he ee Ce 8

Mechanics Universal Joint Co. v. Culhane, 299 U.S.

Ge ROE. cana erc swe Wen eeC cher eae CEheb sb ctans 8

TABLE OF AUTHORITIES iv

PAGE

Merril v. National Bank, 172 U.S. 131 (1899) ...... 11,12

Missouri State Life Ins. Co. v. Keyes, 46 F. Supp.

Gee A Ee RE nace ch ceeccraccavenens 7

National Bank of the Commonwealth v. Mechanics’

Nat. Bank, 94 U.S. 437 (1877) ...........e000 6

Sabine Towing and Transportation Co. v. Zapata

Ugland Drilling, Inc. 553 F.2d 489 (5th Cir.),

cert. denied, 434 U.S. 855 (1977) .............. 14

Sea-Land Service, Inc. v. Eagle Terminal Tankers,

Inc., 443 F. Supp. 5382 (W.D. Wash. 1977) ..... 14

Stein v. Delano, 35 F. Supp. 260 (D. N.J. 1940), aff'd,

121 F.2d 975 (3rd Cir.), cert. denied, 314 U.S. 655

SE dae o Vous ers Poet denn kee ce ce bb Ree en 4,42

Texas & Pacific Ry. Co. v. Pottorff, 291 U.S. 245

Eade cee dda es Ciao shea Fe ene ehewh s 8

Third National Bank v. Impac Ltd., Inc., 432 U.S. 312

NN Gi aa a 2A VG a Gog Es tiees be date os On see 8

Ticonic National Bank v. Sprague, 303 U.S. 406

Sukh tae aE ETE OO wOd ew Naas ose sews 6, 9, 11

United States v. M/V Gopher State, 614 F.2d 1186

I NE re me gt a e's Sa tals aoe 8 Oe 14, 15

United States v. M/V Zoe Colocotroni, 602 F.2d 12

ee NE Clie reknnxcseawe seb ah ieee 15

Vanston Bondholders Protective Committee v. Green,

ge SE ee eee ee 11,12

STATUTES

Federal

Federal Deposit Insurance Act

Bee fo Rt ” en eee ee ee ee

TS UG, BAe COD. civ i scan cs cccwecsveasncte

Vv TABLE OF AUTHORITIES

PAGE

es Cl awry ssn eesncceseves 16

Ee sc viv ewsncesevecceccees 13

ER ceo s wane me cecnccecece 13

Judicial Code

eed nds wwe cent nesnccvoce 2

National Bank Act

ene 23.2377

12 U.S.C. $194 (B.S. $5236)........... 2, 3, 4, 6, 9,17

State

California Civil Code $3289 ...................08. 16

Oregon Compiled Laws Annotated § 66-101 (1940) .. 7

15 Vernon’s Texas Civil Statutes Annotated, Art.

Ce Rakes cee éuceciceces 7

OTHER AUTHORITIES

3A Collier on Bankruptcy (14th Ed. 1975)

Tee eS elewiacescececss 11

6/Part 2 Collier on Bankruptcy (14th Ed. 1978)

OS Ee ee 11

FDIC 1979 Annual Report ............ccccccccses 9, 10

Glenn on Liquidation (1935 Ed.) $488 ............ 11

Hanson, Effect of Insolvency Proceedings on Credi-

tor’s Right to Interest, 32 Mich. L. Rev. 1069

ECAC GCG LUG Wan ea SeaG ass cnvccnccecs 12

In THE

Supreme Court of the United States

OCTOBER TERM, 1980

,™

First Empre Bank-New York by its successor-in-

interest Manuracrurers & Travers Trust Co. of Buf-

falo, New York, a New York banking corporation) and

SociETE GENERALE, a French banking corporation,

Petitioners,

FreperaL Deposir Insurance CorporRATION and FEDERAL

Deposit INSURANCE CoRPORATION AS RECEIVER OF UNITED

States Nationa, Bank.

As.

—

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR

THE NINTH CIRCUIT

First Empire Bank-New York, by its successor-in-

interest Manufacturers & Traders Trust Co., and Societe

Generale petition for a writ of certiorari to review a judg-

ment and decision of the United States Court of Appeals

for the Ninth Circuit.

Opinions Below

The opinion of the Court of Appeals (App. A, infra

at Al-A7) is not yet reported. The district court’s de-

cision (App. B, infra at B1-B3) is not reported. A prior,

related opinion of the Court of Appeals (App. C, infra at

C1-C23) is reported at 572 F.2d 1361, cert. denied, 439

U.S. 919.

Jurisdiction

The judgment of the Court of Appeals was entered on

December 30, 1980. (App. A at Al) The jurisdiction

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

Statutory Provisions Involved

This case involves two provisions of the National Bank

Act (“NBA”):

1. 12 U.S.C. $91 (RS. § 5242) :

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

change, or other evidences of debt owing to any na-

tional 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 chapter, or with a view to the

preference of one creditor to another, except in pay-

ment of its circulating notes, shall be utterly null

and void;....

2. 12 U.S.C. § 194 (B.S. § 5236) :

From time to time,...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 adjudicated in a

court of competent jurisdiction, and, as the pro-

ceeds of the assets of such association are paid over

to him, shall make further dividends on all claims

previously proved or adjudicated; and the re-

mainder 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.’

Statement

This case arises out of the second largest bank failure

in American history—the 1973 collapse of United States

National Bank of San Diego, California (“USNB”). On

October 18, 1973, the FDIC, as Receiver of USNB (“Re-

ceiver”), implemented a purchase and assumption trans-

action with Crocker National Bank (“Crocker”). The only

excluded creditors (other than C. Arnholt Smith, the

bank’s principal stockholder, and his associates) were

banks holding some $91 million of USNB standby letters

of credit. Petitioners belonged to the excluded class; they

held five USNB letters of credit with a face value of $11.5

million. They commenced this lawsuit in December 1973,

contending that respondents’ treatment of their claims

against the USNB receivership was unlawful under 12

U.S.C. §$§91 and 194 and seeking the same payment that

had been received by all other non-Smith related USNB

?The Federal Deposit Insurance Act provides that whenever

the Comptroller of the Currency appoints a receiver of a national

bank ‘‘he shall appoint’’ the Federal Deposit Insurance Corpora-

tion (‘‘FDIC’’), 12 U.S.C, § 1821(c), and, ‘‘[{n]otwithstanding

any other provision of law,’’ the FDIC as receiver is authorized

to pay directly to ‘‘depositors and other creditors the net amounts

available for distribution to them.’’ 12 U.S.C. § 1821(d). Thus it

is not necessary for the FDIC as receiver to pay money over to the

Comptroller. Under present law, the FDIC as receiver pays

dividends directly to the creditors of an insolvent bank ‘‘in con-

formity with the provisions of law relating to the liquidation of

closed national banks,’’ id., to wit, § 194.

creditors, namely, full principal plus contract rates of in-

terest until the date of payment.’

The United States District Court for the Southern Dis-

trict of California held that petitioners’ claims were prov-

able, but it upheld the respondents’ refusal to pay them.

A unanimous Ninth Circuit Court of Appeals affirmed the

district court’s determination that petitioners held prov-

able claims, but the court held that respondents had vio-

lated the ratable dividend rule of 12 U.S.C. $194 when

the Receiver distributed the proceeds of the assets of

USNB in such a way as to provide a 100% payment to

some creditors and no payment to others. (572 F.2d at

1370-71; App. C at C18-C21). The court also decided that

petitioners, to be accorded the required equal treatment

among creditors, were entitled to be paid not only prin-

cipal but also pre-judgment interest. (Jd. at 1372; App.

C at C21-C23)

After this Court denied certiorari, 439 U.S. 919, peti-

tioners moved in the district court for the entry of judg-

ment in the sum of approximately $13.2 milion. The

amount sought was based on a calculation that applied

the contract rates of interest stated in each letter of credit

to the principal due thereon from the date that all other

creditors were paid through the date of payment to peti-

tioners.2 The FDIC filed objections, contending that the

2The Purchase and Assumption Agreement specifically com-

mitted Crocker and the FDIC to paying all assumed creditors full

contract interest. Paragraph 2.3 thereof provides as follows: ‘‘ All

liabilities assumed under this agreement by Assuming Bank are

assumed as of the Bank Closing [October 18, 1973], and Assuming

Bank agrees that interest and accruals on the related obligations

shall thereafter be acerued and paid by Assuming Bank in ac-

cordance with the terms of such obligations.’’ Plaintiffs’ Trial

Exhibit No. 1.

* The computation applied the rate of interest stipulated in each

letter of credit, calculated using the agreed-upon 360-day account-

ing year, and maintained the spread between the interest (if any)

due the Receiver on compensating deposits held by petitioners as

set-offs and the rate earned by petitioners on the letters of credit.

total payment should amount to $12 million. It ealeu-

lated the amount due via a method that eschewed con-

tractual rates of return and relied instead on the Cali-

fornia legal rate.®

The district court issued rulings (App. B at B1-B3)

which upheld the FDIC’s method of calculation. (See also

App. D at D3-D4) Petitioners appealed to the Ninth Cir-

cuit. By a 2-1 vote, that court affirmed the district court’s

judgment, holding that “it is recognized that interest upon

a claim erroneously disallowed by the receiver should be

calculated at the applicable legal rate’? (App. A at A4),

i.e., the statutory rate at which judgments earn interest in

the forum in which the federal court sits.

The dissent identified the “central problem” presented

by the case as “the task of determining what is needed

to put disfavored creditors on an equal footing with

favored creditors.’’ (Jd. at A6) It pointed out that

application of the legal rate “disadvantaged” petitioners

because the “favored creditors were timely paid and were

able to reinvest at market rates higher than the legal rate.

The disfavored parties were denied the opportunity for

investment at market rate.’’ (Jd. at A6-A7) Rather than

the legal rate, the dissent concluded that a ‘‘rate of return

*On December 11, 1978, the FDIC paid petitioners the amount

it conceded was due them. That payment was made pursuant to

a stipulation and order which provides that the FDIC will only be

liable to pay petitioners interest at the rate of 7% on all sums

above the amount previously paid which a court may subsequently

determine should have been paid to petitioners.

*The FDIC deducted the set-offs as of the date of USNB’s

closing, thus eliminating the agreed-upon interest spread. While

it computed interest on the reduced principal at the contract rates,

using the 360-day accounting year, until the date each letter of

credit matured, it thereafter applied a 365-day year and the

California legal rate of 7%.

approximately the market rate should have been used to

achieve equality.’’ (Jd. at A7)°*

Reasons For Granting The Petition

1. The NBA is silent both as to the availablity of pre-

judgment interest and the rate to be used in calculating

such interest. See National Bank of the Commonwealth v.

Mechanics’ Nat. Bank, 94 U.S. 437, 439 (1877). The Court

has determined, however, that excluded creditors of in-

solvent national banks are entitled to receive pre-judgment

interest for the period between payment of dividends to all

other creditors and the date they receive their payments.

Armstrong v. American Exchange Nat. Bank, 133 U.S. 433

(1890); Ticonic National Bank v. Sprague, 303 U.S. 406

(1938). It is now confronted with the question of what

rate of interest should be applied during that period.

While petitioners argued for application of the contract

rates and the dissent in the court below advocated use of

a market rat& the Ninth Circuit majority approved the

district court’s reliance upon the legal rate.

* Five other lawsuits have been commenced against the FDIC

contesting the treatment accorded holders of USNB standby letters

of credit. Those cases are pending in the United States District

Court for the Southern District of California. The FDIC com-

puted the payments made to those piaintiffs on the same basis as

used in this case. The resolution of this case will determine

whether the FDIC also owes those plaintiffs additional sums. It

is estimated that the other cases involve interest claims totalling

$3 million.

_ "In Armstrong the Court ruled that an award of pre-judgment

interest to a claimant who was improperly denied a ratable

dividend was ‘‘necessary to put the plaintiff on an equality with

the other creditors.’’ 133 U.S. at 470. Later, in Ticonic National

Bank, the Court noted that the question of interest should be deter-

mined by reference to the ‘‘ideal of equality’’ of treatment em-

bodied in 12 U.S.C. § 194. 303 U.S. at 411.

The circuit court majority decided this important ques-

tion of federal law by reference to three Depression-era

cases which opted for the legal rate of interest. (App. A

at A4) In so doing, the court ignored the fact that the

cases it relied upon (Douglass v. Thurston County, 86 F.2d

899 (9th Cir. 1936); Anderson v. General American Life

Ins. Co., 141 F.2d 898 (6th Cir. 1944); and Elliott v. First

Inland Nat. Bank, 32 F.Supp. 839 (D. Ore. 1940)) are the

product of a very different time in the banking and

economic history of the nation. Those cases arose out of

the multitude of bank failures that occurred during the

Depression. They are the progeny of a time when, because

of severely depressed economic conditions, legal rates of

interest exceeded commercial rates. Accordingly, in two

of the three cases cited by the Ninth Circuit majority, the

effect of applying the legal rate of interest was to give the

excluded creditors a greater return than they would have

received by application of the contract rates. (In the third

case, the two rates were equal.)* Moreover, the cases all

involved liquidations in which creditors received partial

dividends from the insolvent bank’s estate. Prior to this

* In the Anderson case the contract rate was only 3% (141 F.2d

at 909; see also the district court opinion, sub nom. Missouri State

Life Ins. Co. v. Keyes, 46 F.Supp. 181, 182 (W.D. Ky. 1933) ) but

the legal rate was 6% (141 F.2d at 909). Similarly, in Elliott, the

contract rate was 4% (32 F.Supp. at 839), but the legal rate was

6% (Oregon Co..piled Laws Annotated § 66-101 (1940)). In

Douglass, the contract rate was 6% (86 F.2d at 902) as was the

legal rate (id. at 910). One other case considers the same question,

Dunnagan v. Best, 59 F.2d 795 (W.D. Tex. 1932), and opts for

the legal rate. In that instance, the decision had the effect of

giving the excluded creditor less because the legal rate was 6%

(Vol. 15, Art. 5072, Vernon’s Texas Civil Statutes Annotated

(1925) ) while the contract rate was 8% (59 F.2d at 796). See

also Stein. v. Delano, 35 F.Supp. 260 (D.N.J. 1940), aff’d, 121 F.2d

975 (3d Cir.), cert. denied, 314 U.S. 655 (1941), which opted for

the legal rate in the face of arguments that a lesser amount would

suffice. 121 F.2d at 980. We discuss the Stein case infra at 12.

case, no court had had occasion to consider the question of

the appropriate rate of interest to be paid to excluded

creditors after the occurrence of an FDIC-assisted pur-

chase and assumption wherein all other creditors received

an immediate 100% dividend plus contract rates of interest.

At issue, therefore, is an unresolved question of federal

law which the Ninth Circuit disposed of by the application

of inapposite authority. This Court should review the

circuit court’s opinion in order to address the interest rate

question.

2. This Court has repeatedly emphasized that ‘‘one of

the objects of the national bank system is to secure, in

the event of insolvency, a just and equal distribution of

the assets of national banks among unsecured credi-

tors... .’’? Mechanics Universal Joint Co. v. Culhane,

299 U.S. 51, 55 (1936). Accord, Third National Bank v.

Impac Ltd., Inc., 432 U.S. 312, 323 (1977); Texas & Pacific

Ry. Co. v. Pottorff, 291 U.S. 245, 255 (1934); Blakey v.

Brinson, 286 U.S. 254, 263 (1932); First National Bank v.

Colby, 21 Wall. (88 U.S.) 609 (1875). The Court’s dedica-

tion to this principle is so strong that it has consistently

struck down federal and state statutes that purported to

create preferences for particular classes of creditors of

insolvent national banks. See Cook County National Bank

v. United States, 107 U.S. 445 (1883) ; Davis v. Elmira Sav-

ings Bank, 161 U.S. 275 (1896). See also Jennings v. U.S.

Fidelity & Guaranty Co., 294 U.S. 216 (1935).

While the Ninth Circuit’s first opinion recognized and

enforced the rule of equal treatment, its current holding

sanctions, as the dissent points out, disparate treatment.

The majority opinion unambiguously announces a rule of

federal law applicable to all national bank insolvencies re-

solved by FDIC-assisted purchase and assumption trans-

actions. Even though assumed creditors receive an im-

mediate 100% dividend plus contract rates of interest, the

circuit court holds that excluded creditors are entitled to

only a delayed dividend of 100% of their principal plus

‘‘the applicable legal rate’’ of interest. (App. A at A4;

emphasis supplied) On its face, therefore, the Ninth Cir-

cuit’s holding is in conflict with the ratable treatment

mandate of 12 U.S.C. §§91 and 194 and with the prior

decisions of this Curt which command strict adherence to

the ‘‘ideal of equa.ity’’ of treatment among all similarly

situated creditors of insolvent national banks. iconic

National Bank v. Sprague, 303 U.S. at 411. This conflict

raises an important question of federal law which warrants

a definitive ruling by this Court.

3. The question presented is likely to recur with some

frequency. During the past decade, 15 national banks

failed, the largest number of national bank failures in any

decade since World War II. Eleven of those cases (in-

cluding the five largest in the nation’s history) were re-

solved via the implementation of FDIC-assisted purchase

and assumption transactions.’ As noted in the FDIC’s

latest annual report, the purchase and assumption ap-

proach to resolving bank failures “has been used increas-

ingly in recent years.” FDIC 1979 Annual Report, p. 14.

Moreover, in virtually every large bank failure which the

FDIC has confronted, it has used the purchase and as-

sumption method.’®

* The statistics set out in this section were derived from the

FDIC Annual Reports for the years 1970-1979.

involving banks with deposits of $25 million or more, 22 were

handled via the purchase and assumptior route. See FDIC 1979

Annual Report, Table 124, p. 206.

The enormous increase in the size of national bank

failures," and the essentially exclusive use of the purchase

and assumption method is well illustrated by the following

comparisons: The total deposits involved in all national

bank failures prior to 1970 were $207.3 million, of which

$121.1 million were involved in a purchase and assump-

tion. In the 1970’s the total deposits held by failed na-

tional banks were $3.08 billion, and of that total, $3.03

billion were involved in a purchase and assumption. Thus,

98.3% of the deposits involved :n national bank insolven-

cies during the 1970’s were dealt with by purchase and

assumption transactions, representing 95% of the total

deposits of all failed nationa! banks since 1934 dealt with

via the purchase and assumption method.

Whenever during the last decade the FDIC, acting as

receiver of an insolvent national bank, entered into a

purchase and assumption transaction with a sound bank,

the assumed creditors received “full protection.” FDIC

1979 Annual Report, p. 15. In every relevant respect

those cases replicate ours, even as regards the presence

of excluded creditors. See FDIC v. Freudenfeld, 492

F.Supp. 763 (E.D. Wisc. 1980). Therefore, the question

11 During the period 1934 to 1979, 692 banks failed (includ-

inb both insured and non-insured institutions); they held

$6,081,926,000 in deposits. Of that amount, the 81 banks that

failed during the 1970’s held $5,210,599,000 in deposits or 85.7%

of the 46-year total. See FDIC 1979 Annual Report, Table 122,

p. 203. The 15 national banks that failed during the 1970’s held

a total of $3,077,800,000 in deposits, or 50.6% of the 1934-1979

total for all banks. Id.

12 In the Solicitor General’s August 1978 Petition for Certiorari

filed on behalf of the FDIC, seeking review of the Ninth Circuit’s

first decision, it was disclosed that in addition to the USNB in-

solvency, the ‘‘FDIC has excluded some standby letters of credit

from purchase and assumption transactions concerning 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 liabilities

from purchase and assumption transactions.’’ Petition for

Certiorari, No. 78-289, p. 10.

as to what rate of interest excluded creditors should re-

ceive is certain to recur as the lawsuits resulting from

the bank failures of the past decade reach the judgment

stage.”

4, The Ninth Circuit’s decision also warrants review be-

cause it conflicts with the well-established bankruptcy and

equity receivership rule that in 100% dividend cases in-

terest is available to all unsecured creditors at the contract

rates. 3A Collier on Bankruptcy (14th Ed. 1975) { 63.16,

pp. 1860-61. See also id. at pp. 1858-59; 6/Part 2 Collier

on Bankruptcy (14th Ed. 1978) 79.03, pp. 1576-77 1582,

1583; Glenn on Liquidation (1935 Ed.) § 488, p. 692. In-

terest at the contract rate is also available to a secured

creditor if the collateral is valuable enough to provide for

the payment of both principal and interest. Such is the

case even if general creditors receive less than a 100%

dividend and consequently are paid no interest. 3A Col-

lier » Bankruptcy, J 63.16, p. 1862.

Prior decisions of this Court have specifically estab-

lished that secured creditors of insolvent national banks

are entitled to collect contract rates of interest from the

proceeds of their collateral. See Vanston Bondholders

Protective Committee v. Green, 329 U.S. 156, 164-65

(1946); Ticonic National Bank v. Sprague, 303 U.S. at

411-413; Merrill vy. National Bank, 173 U.S. 131 (1899).

13 he interest rate question is also likely to recur for another

reason. As recognized by the Ninth Circuit in its first opinion,

the FDIC need not include every creditor in the package of liabili-

ties transferred to the assuming bank in a purchase and assump-

tion, provided it ‘‘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,’’ and/or

the FDIC stands ready ‘‘to supplement the remaining assets should

they fall short and to surrender its lien when necessary.’’ (572

F.2d at 1371; App. C at C20) It is reasonable to expect that

in the future, as in the past, the FDIC may well find it necessary

to exclude certain claimants from the group of initially assumed

creditors or otherwise to delay the payment of ratable dividends

to certain creditors (e.g., those whose claims are disputed).

Those decisions have also suggested, without so holding,

that unsecured creditors of insolvent national banks are

entitled to receive accrued contractual interest in 100%

dividend cases. In the Merrill opinion, Chief Justice

Fuller noted that “after the claims as allowed are paid in

full, interest accruing may then be paid before distribution

to stockholders.’’ 173 U.S. at 141. Accord, Douglass v.

Thurston County, 86 F.2d at 909-910. Cf. Vanston Bond-

holders Protective Committee v. Green, 329 U.S. at 165,

n.7. Moreover, in Stein v. Delano, supra, the Third Cir-

euit specifically held in a 100% dividend case thut national

bank depositors would receive interest from the proceeds

of the estate prior to payment of any funds to the stock-

holders. In reaching that conclusion, the court quotes

with approval a law review article which explains that

“

. when the surplus is sufficient to pay in full the

interest due to all the creditors, a difference in the

rates provided by their contracts is not productive of

any unjust inequality between them. The rights of

one are in no way affected by the amount received

by another. An amount equal to the principal is paid

to each. Even where the surplus will not pay all the

interest in full, no unjust inequality results from

dividing it on the basis of different contract rates.

The balance remaining due is proportioned to the

compensation that each should receive for the use of

his money. There is no injustice in computing the

proportion of compensation to be received by each

creditor on the basis of the rate of compensation for

which he contracted.”

121 F.2d at 978, quoting Hanson, Effect of Insolvency

Proceedings on Creditor’s Right to Interest, 32 Mich. LL.

Rev. 1069, 1082 (1934).*

4% The foregoing analysis pruvides a complete response to the

Ninth Circuit’s professed concern that awarding petitioners con-

tract interest ‘‘would result in a decidedly unratable distribution

as between disfavored creditors.’’ (App. A at A3-A4)

The district court refused to apply that rule in this case

because of ‘‘the fact that the FDIC is losing more than

$100 million in the process of liquidation.” (App. B at

B1-B2) The flaw in the district court’s reasoning is its

failure to recognize that the very fact of a bank failure

mandates a loss for FDIC (an agency created by Congress

during the Depression in order to transfer the losses re-

sulting from bank failures from bank creditors to a public

insurance fund). When the FDIC enters into a purchase

and assumption transaction it does so because a loss is

inevitable, and it is seeking to minimize the amount. It

purposely purchases bad assets or makes loans on the

security of such assets, giving far more to the assuming

bank or receiver than the true worth of the assets. See

072 F.2d at 1364; App. C at C3-C4. See also 12 U.S.C.

§§1823(d) and (e). Thus, the loss experienced by the

FDIC in any such case, including ours, is the inevitable

result of the bank failure at issue and the performance by

the Corporation of its statutory function—in our case it

was the inevitable result of the Corporation’s act of loan-

ing the Receiver far more than the retained assets of the

receivership were worth. To use that loss against peti-

tioners, to compare the FDIC in its capacity as a creditor

to petitioners’ situation is contrary to the statutory scheme

and ignores the essential distinction between a pre-in-

solvency creditor of USNB who lent funds prior to the

bank’s collapse and a post-insolvency creditor of the re-

ceivership estate who lent funds to the Receiver in lieu

of paying depositors the amount of their insured claims.

Though the issue was vigorously pressed in the Ninth

Circuit, the court chose to ignore it. It has nonetheless,

albeit sub silentio, ruled out application of a rule which

this and other courts had previously acknowledged as ap-

plicable in national bank insolvencies. The effect of that

holding will be widespread in our era of large national

bank failures resolved by FDIC-assisted purchase and as-

sumption transactions which afford all but disfavored

creditors a 100% dividend. See supra at 9-11.

5. An award of interest at the market rate, as advocated

by the dissenting judge in the court below, is an alternative

to contract rates. In this time of high interest, rapid

fluctuations in rates and high mobility of funds, use of the

market rate would satisfy the goals of ratable treatment

and full compensation.

The use of market rates in federal court awards of pre-

judgment interest is well established in admiralty, where,

as in this case, the goal is ‘‘fully compensating an injured

party for its losses.’’ Federal Barge Lines, Inc. v.

Republic Marine, Inc., 616 F.2d 372, 373 (8th Cir. 1980).

In several recent admiralty cases which have awarded

higher than statutory rates of interest, the courts have

relied upon money market conditions as a basis for doing

so. See, e.g., Bunge Corporation v. American Commercial

Barge Line Co., 630 F.2d 1236, 1243 (7th Cir. 1980);

Federal Barge Lines, Inc. v. Republic Marine, Inc., 616

F.2d at 373-74 (10% awarded); Sabine Towing and

Transportation Co. v. Zapata Ugland Drilling, Inc., 553

F.2d 489, 491 (5th Cir.), cert. denied, 434 U.S. 855 ( 1977)

(12% awarded based on cost of borrowing); Sea-Land

Service, Inc. v. Eagle Terminal Tankers, Inc., 443 F. Supp.

032, 5384 (W.D. Wash. 1977) (“An award of 6% interest is

not realistic in the money-market of today.... In addition,

the award of pre-judgment interest at a rate lower than

that prevailing on the money market may tend to dis-

courage the prompt disposition of litigation because of the

obvious benefit to the debtor.’’)

Indeed, in its role as plaintiff, the federal government

has urged the application of market rates in computing

interest awards. For example, in United States v. M/V

Gopher State, 614 F.2d 1186 (8th Cir. 1980), the govern-

ment appealed from the trial court’s award of 6% pre-

judgment interest based on the forum state’s statutory

rate. The court of appeals reversed and remanded for a

determination of interest ‘‘more in keeping with the in-

terest rates prevailing at the time repairs were com-

pleted... .’? 614 F.2d at 1190. The government likewise

made the same argument in United States v. M/V Zoe

Colocotroni, 602 F.2d 12, 14 (1st Cir. 1979), claiming that

the forum rate was ‘‘unrealistically low’’ at 6% and that

failure to award higher rates would amount to ‘‘a hand-

some reward for obstinacy.’’ The appellate court nonethe-

less affirmed use of the statutory rate as a guide, although

specifically noting that the trial court had discretion to

exceed that rate.’

The Court should give plenary consideration to the dis-

sent’s contention that the rule in national bank insolvencies

be the market rate of interest. Its use would result in

disadvantaged or delayed creditors receiving compensation

based upon the market rates both they and the favored

creditors could have earned during the period of delay.

This clearly serves the statutory goal of ratable treatment

among all creditors. As noted by the dissent, its use

would result in a desirable uniformity in nationel bank

insolvency cases. Moreover, it would eliminate any in-

centive for delay or reward for obstinacy.

6. The dissenting Ninth Circuit judge correctly points

out that the petitioners have been significantly disad-

vantaged by virtue of the result reached below. Whereas

the Ninth Circuit previously ruled that petitioners were

entitled to be accorded treatment ‘‘equal to that under-

taken by the acquiring bank’’ toward the assumed credi-

tors, so that petitioners would be restored to the same

position they would have been in had their claims been

15 This same theme is appearing in other federal law cases. For

example, non-statutory rates have recently been applied in suits

under ERISA (Employee-Teamsters Joint Council v. Weatherall

Concrete, 468 F. Supp. 1167, 1171 (S.D. W. Va. 1979) and the

securities laws (Gerstle v. Gamble-Skogmo, Inc., 332 F. Supp. 644,

648-49 (E.D.N.Y. 1971), modified, 478 F.2d 1281, 1307 (2d Cir.

1973). Cf. Curtiss-Wright Corporation v. General Electric Co.,

446 U.S. 1 (1980).

transferred to Crocker on October 18, 1973 (572 F.2d at

1371; App. C at C21), the result reached below falls more

than one million dollars short of that goal.

All of the creditors whose USNB obligations were as-

sumed by Crocker on October 18, 1973 (including creditors

holding standby letters of credit with non-Smith related

account parties) received 100% of principal and contract

interest..° They enjoyed the unfettered use of their

money upon maturity of their USNB obligations, and they

were able to reinvest those funds and to take full advant-

age of market conditions, earning high rates of return.

Petitioners, however, were deprived of the use of their

funds for several years and are now being limited to a

7% rate for the period of delay, even though their con-

tracts called for greater interest rates, and market condi-

tions were such that they could have earned a greater re-

turn on their money.

The ultimate irony is not, however, the Ninth Circuit’s

reimposition of the concept of disparate treatment, but is

the FDIC’s retention of an unconscionable windfall. The

FDIC had the use of petitioners’ $11.5 million from

October 18, 1973 through December 10, 1978. If the FDIC

is now required to pay only 7% interest, it will have

pocketed the difference between the rate it earned (see

12 U.S.C. § 1823(a)) and the 7% rate. To allow the FDIC

16 The assumed creditors also continued to enjoy the protection

of California Civil Code § 3289, which provides: ‘‘ Any legal rate

of interest stipulated by a contract remains chargeable after a

breach thereof, as before, until the contract is superseded by a

verdict or other new obligation.’’ As a consequence of the Pur-

chase and Assumption Agreement, all of USNB’s former creditors,

except petitioners and the similarly situated banks, became

creditors of Crocker and continued to enjoy the guaranty of § 3289.

If Crocker defaulted in the payment of any of the assumed obliga-

tions, § 3289 assured the receipt of full interest at the contract

rate. In order to place petitioners in the same position as the

assumed creditors, it is necessary that they too enjoy the benefit

of § 3289.

to thus benefit from its unlawful conduct makes no sense

whatever. That result is clearly contrary to the spirit of

12 U.S.C. §§ 91 and 194 and to equitable “considerations

of fairness” which always operate when questions of in-

terest are at issue. Board of County Commissioners v.

United States, 308 U.S. 343, 352 (1939).

Conclusion

Because of the significance of the federal law question

tendered, the conflict between the opinion below and prior

decisions of this Court and the courts of appeal, and the

substantial disadvantage visited upon petitioners by the

holding below, review is warranted. The legal issues are

timely, and they are clearly drawn so that this Court is

unlikely to be aided by further appellate litigation. <Ac-

cordingly, this petition for a writ of certiorari should be

granted.

March 27, 1981

Respectfully submitted,

Gary J. GREENBERG

Srroock & Stroock & Lavan

61 Broadway

New York, New York 10006

Tel.: 212-425-5200

Don A. Prouproot, JR.

GraHaM & JAMES

707 Wilshire Blvd.

Los Angeles, California 90017

Tel.: 213-624-2500

Attorneys for Petitioners.

Rita E. Hauser,

Epwarp J. Eckert,

Rosert I. Mm.onzi,

DanieL Kapian

Of Counsel.

Appendix A—United States Court of Appeals—

Ninth Circuit Opinion dated 12/30/80

C.A. No. 79-3166

D.A. No. 74-468-N

Filed

Dec 30 1980

Ricuarp H. Deane

Clerk, U.S. Court of Appeals

UNITED STATES COURT OF APPEALS

For tHe Ninta Crrcvir

First Empire Banx-New York (by its successor-in-interest

Manvuracturers & Travers Trust Co. of Buffalo, New

York, a New York banking corporation) and Socrete

GENERALE, a French banking corporation,

Plaintiff s-Appellants,

FeperaL Deposir Insurance Corporation and FEpERAL

Depostr InsuraANcE CorPorATION as RecEIveR oF UNITED

States Natrionau Bank.

Defendants-A ppellees.

APPEAL FROM THE Unirep States Disrraicr Court ror THE

SoutHerN Disrrict or CALIFORNIA

Letanp C. Nietsen, District Jupcr, Preswine

ARGUED AND Susmittep Apri 14, 1980

Before: Brown1ne, Merrity and Fiercuer, Circuit Judges

Merriz, Cireuit Judge:

In an earlier appeal this court dealt with problems

presented by the receivership of the United States National

Appendix A

Bank of San Diego (USNB) and with actions taken by

the Federal Deposit Insurance Corporation (FDIC), both

in its corporate capacity as insurer and as receiver of

USNB. First Empire Bank-New York v. Federal Deposit

Insurance Corp., 572 F.2d 1361 (9th Cir. 1978). FDIC

had entered into a purchase and assumption agreement

with Crocker National Bank. Under that contract, Crocker

had assumed certain obligations of USNB but had refused

to assume certain other obligations in the form of standby

letters of credit issued by the bank, unless FDIC, in its

corporate capacity, guaranteed the obligations of the ac-

count party as an offsetting asset. FDIC refused to do

this. We held that the purchase and assumption agree-

ment amounted to a distribution to those whose claims

were assumed by Crocker, and that since certain creditors

were excluded from the distribution it was not ratable

as required by the National Bank Act, 12 U.S.C. § 194.

We remanded the case “with instructions that judgment

be entered in favor of each appellant in the amount of the

face value of each USNB letter of credit held by it, plus

interest from the dates of maturity, less the amount of any

USNB deposit held by it.” First Empire Bank-New York

v. Federal Deposit Insurance Corp., supra, 572 F.2d at

1372.

The district court has entered judgment for appellants

pursuant to our remand. On this appeal appellants chal-

lenge in three respects the manner in which sums due

them were computed by the district court.

1. Interest Rate .

The district court held that interest accruing after the

date on which the obligations matured should be calculated

at California’s legal rate of interest: 7% per annum.’

1The district court held that pre-maturity interest at the con-

tract rate properly formed a part of the creditors’ claims.

Appendix A

Appellants dispute this holding. They contend that in-

terest should be calculated at the contract rate so that

they can receive the full benefit of their bargain with

USNB. In support of this contention they point to the

emphasis we placed in our earlier opinion on the need

for equality of treatment between creditors if dividends

are to be “ratable.” They conclude that they are entitled

to the same treatment as those creditors who received the

benefit of their bargain when their claims were assumed,

and promptly paid, by Crocker.

We must reject appellants’ contention. The equality of

treatment we demanded in our earlier opinion pertained

to the sharing of the distribution of dividends by all hold-

ing claims against the closed bank.

In our earlier opinion we dealt with the question of

interest in response to FDIC’s contention that interest

should not form a part of the creditors’ claims. We noted

that while interest, after insolvency of the bank, cannot

be included in the claim against the bank, it is proper to

allow interest upon an erroneously disallowed claim from

the date a ratable amount was paid to other creditors.

We quoted from the Supreme Court in Ticonic National

Bank v. Sprague, 303 U.S. 406, 411 (1938):

“fA] ereditor whose claim has been erroneously dis-

allowed is entitled on its allowance to interest on his

dividends from the time a ratable amount was paid

other creditors.”

Accordingly, on our remand we directed that interest from

the date of maturity be paid, not because it was bargained

for, but in the nature of damages for failure to include

the creditor in distribution of a dividend.

However, the benefit-of-the-bargain rule, although appro-

priate in other circumstances, can have no application in

the event of the failure of a national bank. With differ-

ent contract rates applying to different claims, the benefit-

Appendix A

of-the-bargain rule would result in a decidedly unratable

distribution as between disfavored creditors.

Thus, in cases dealing with bank failures under the

National Bank Act, it is recognized that interest upon a

claim erroneously disallowed by the receiver should be

calculated at the applicable legal rate. Douglass v. Thurs-

ton County, 86 F.2d 899 (9th Cir. 1936); Anderson v. Gen-

eral American Life Insurance Co., 141 F.2d 898 (6th Cir.

1944). In the latter case the court stated at page 909:

“By unquestioned authority the appellee General

American Life Insurance Company is entitled to re-

cover from the appellant Receiver legal interest at

the rate of 6% per annum upon the 67% dividend

and upon the 10% dividend, respectively, on its estab-

lished claim of $503,541.66, from the dates when like

dividends were respectively paid to other creditors

up to the date when corresponding dividends shall be

paid to the appellee.”

And in Elliott v. First Inland National Bank of

Pendleton, Or., 32 F.Supp. 839 (D.Ore. 1940), the court

stated:

‘‘The authorities support the proposition contended

for by the Receiver—that interest on the time and

savings deposits should be computed to the date of

closing at the contract rate * * * thereafter the total

should bear interest at the same rate (the local statu-

tory rate on judgments) as the demand deposits.

Ratability in distribution is thus attained. The ques-

tion is solely one of interpretation of the National

Banking Code.”’

Id. We agree with the Oregon court.

We conclude that the district court correctly allowed

post-maturity interest at the legal rate rather than at the

contract rate.

Appendix A

2. Accounting Year

Appellants’ letters of credit specified that interest

should be computed not only at a specified rate but on the

basis of a 360-day accounting year. In calculating the pre-

maturity interest, the district court used this basis together

with the specified contract rate. However, the court di-

rected that post-maturity interest should be computed on

a 365-day accounting year. Appellants contend that post-

maturity interest as well as pre-maturity interest should

be computed on the 360-day basis. We cannot agree.

The use of the 360-day basis was an advantage to the

lender, secured by special provision of the letters of credit.

Absent such a provision, interest would ordinarily be com-

puted on the basis of the physical fact that a ‘‘vear,’’ for

the purposes of interest or otherwise, is an actual year of

365 days. Appellants’ contention here suffers from the

same weakness as did their contention respecting interest

rate. For the reasons already given, contractual provi-

sions in this case as to interest cannot control after bank

closure. The district court was not in error in holding

that post-maturity interest should be computed on the basis

of a 365-day accounting year.

3. Crediting of Offsets

Appellants held deposits of USNB which they were en-

titled to retain as offsets against the sums due them from

USNB. The district court held that in computing interest

upon the sums due to appellants, the USNB deposits should

be offset (and the claims against USNB reduced accord-

ingly) as of the date of bank closure, October 18, 1973.

Appellants contend that the offsets should be credited as

of the date appellants ultimately received payment follow-

ing our remand. We cannot agree. This would, in effect,

allow appellants interest for the period from bank closure

Appendix A

to payment of their claims on the very deposits of USNB

which they had ordinary use of throughout this time.

Where the debt of a closed bank is offset against that

bank’s deposit in another bank, only the balance of deposit

over setoff is considered an asset of the receivership.

Scott v. Armstrong, 146 U.S. 499, 510 (1892); Federal De-

posit Insurance Corp. v. Mademoiselle of California, 379

F.2d 660, 663 (9th Cir. 1967). The rights of the parties

become fixed as of the date of insolvency. Scott v. Arm-

strong, swpra, 146 U.S. at 510.

As of that date, then, appellants’ rights to the USNB

deposits became fixed, and the receiver took no part of

those deposits as assets. Accordingly, as of that date the

debt of USNB on its letters of credit was reduced by the

amount of its deposits.

We conclude that the district court correctly ruled that

the deposits should be offset as of October 18, 1973.

Judgment affirmed.

Filed

Dee 30 1980

Ricuarp H. Deans

Clerk, U.S. Court of Appeals

First Empire Bank-New York, Erc.,

Kir Au. v. Feperat Deposit INSURANCE

CorporaTIion, Erc., No. 79-3166

FietcHer, Circuit Judge, dissenting:

I respectfully dissent. The central problem presented

by this appeal is the task of determining what is needed

to put disfavored creditors on an equal footing with

favored creditors. The favored creditors were timely paid

and were able to reinvest at market rates higher than the

Appendix A

legal rate. The disfavored parties were denied the oppor-

tunity for investment at the market rate. The appellants

have been disadvantaged by the use of the legal rate. A

rate of return approximating the market rate should have

been used to achieve equality.

The majority argues that giving appellants the benefit

of their bargain would result in unratable distribution

among disfavored creditors, because different contract

rates apply to different claims. But a decision giving dis-

favored creditors the approximate market rate would not

be based on contract, but rather on the equitable prin-

ciple of according disfavored creditors equal treatment

with favored creditors. Thus, a decision for appellants

would not entail awarding the specific contract rates

specified in each instrument, but rather would involve de-

termining market rate during the period of wrongful with-

holding. The rate, once determined, would be applicable

to all wrongfully withheld funds.

I would remand for a determination of the rate of

return that would have been earned had the appellants’

funds not been wrongfully withheld and for award of

interest based thereon.

Appendix B—February 15 and 23, 1979 Letter Deci-

sions of the United States District Court for the

Southern District of California

UNITED STATE DISTRICT COURT

SouTHERN Distrior oF CALIFORNIA

San Diego, California 92189

February 15, 1979

Chambers of

LeLanp C. NIELSEN

Judge

Gary J. Greenberg, Esq.

Stroock & Stroock & Lavan

61 Broadway

New York, New York 10006

Don A. Proudfoot, Jr., Esq.

Graham & James

100 Oceangate, Ste. 515

Long Beach, CA 90802

Charles A. Legge, Esq.

Bronson, Bronson & McKinnon

Bank of America Center

555 California Street

San Francisco, CA 94104

Re: First Empire Bank-New York, et al. v. FDIC

Civil No. 74-468-N

Gentlemen:

I have reviewed this matter at length, and I am not

satisfied that the question of the interest rate after

maturity was decided by the Court of Appeals.

I am further of the opinion that this case should not be

treated as a solvent insolvency, having in mind the fact

Appendia B

that the FDIC is losing more than $100 million in the

process of liquidation.

Therefore, the judgment that I will sign should include

the following:

Interest at the legal rate after the respective dates

of maturity;

. The offsets as of the date of bank closing;

3. Add First Empire’s one day’s interest;

Costs are allowed to the banks; and

. 365-day year approved.

I assume that you gentlemen can now agree on the form

the judgment should take, and I ask you to forward it to

me for signature on March 1, 1979, so that the appeal

process can be started again.

Sincerely yours,

/s/ Leann C, NIELSEN

Leland C. Nielsen

Appendix B

UNITED STATE DISTRICT: COURT

SoutHeERN District or CALIFORNIA

San Diego, California 92189

February 23, 1979

Chambers of

LeLtanp C. NIELSEN

Judge

Don A. Proudfoot, Jr., Esq.

Graham & James

707 Wilshire Blvd., 35th Floor

Los Angeles, CA 90071

Gary J. Greenberg, Esq.

Stroock & Stroock & Lavan

61 Broadway

New York, New York 10006

Charles A. Legge, Esq.

Bronson, Bronson & McKinnon

Bank of America Center

595 California Street

San Francisco, CA 94104

Re: First Empire Bank-New York, et al. v. FDIC

Ciwil No. 74-468-N; Your File: SCGS 400

Gentlemen:

This will acknowledeg receipt of Mr. Proudfoot’s letter

of February 22, 1979 concerning the set-off problem in the

above case.

I am sorry that I left this matter open, as it was my

intention to rule, and I now do so rule, that the set-off

should be against the obligation with the earliest maturity

date, whatever that obligation may be.

Sincerely yours,

/s/ Levanp C. NIELSEN

Leland C. Nielsen

Appendix C—United States Court of Appeals—

Ninth Circuit Opinion dated 4/6/78

sé

First Emprme Banx-New York (by its successor-in-in-

terest Manufacturers & Traders Trust Co. of Buffalo,

New York, a New York Banking Corporation), and

Societe Generale, a French Banking Corporation,

Plaintiffs-Appellants,

FreperaL Deposir Insurance Corporation and Federal

Deposit Insurance Corporation as Receiver of United

States National Bank,

Defendants-A ppellees.

FeperaL Depostr InsurANce Corporation and Federal

Deposit Insurance Corporation as Receiver of United

States National Bank,

Counterclaimants-Cross-Appellants,

First Emrrre Banx-New York and Societe Generale,

Counterdefendants-Cross-Appellees.

Nos. 77-2090 and 77-2147.

United States Court of Appeals,

Ninth Circuit.

April 6, 1978.

As Amended April 10, 1978.

Appeal from the United States District Court for the

Southern District of California.

Before Browninc and Merry, Circuit Judges and

Harper,* District Judge.

* Honorable Roy W. Harper, Senior United States District

Judge for the Eastern District of Missouri, sitting by designation.

C2 ;

Appendix C

Merrit, Circuit Judge:

This case arises out of the insolvency and receivership

of the United States National Bank of San Diego (USNB).

The Federal Deposit Insurance Corporation (FDIC), as

Receiver, entered into an agreemnt with Crocker National

Bank for purchase by Crocker of selected assets of USNB

and assumption by Crocker of certain of the bank’s obliga-

tions, including deposits. This suit was brought by credi-

tors of USNB whose claims had not been assumed by

Crocker. They contend that Crocker’s assumption, carry-

ing 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 appel-

lants to customers of USNB. The FDIC contends that

these claims were contingent, and were not debts of USNB

at the time of its insolvency or at the time it was placed

in receivership. 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 members of the

Appendia C

Federal Reserve System, 12 U.S.C. §§1811, 1813(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 demands of its

depositors, payment of the insured deposits in such

bank shall be made by the Corporation as soon as

possible * * * 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.”

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 whenever he ‘‘shall be-

come 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

Appendix C

closure and the drastic economic effect 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 agree-

ment. 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 acquir-

ing 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 obliga-

tions, the Corporation is authorized 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(e). The Corpora-

tion 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 depositors 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 re-

sorted to by a bank already failed and in receivership, 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 re-

Appendiz C

ports of USNB and other financial information available

through the Comptroller’s office. After analyzing the

financial information, and information regarding the con-

trol 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

insured 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 assume 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. All

checks drawn on USNB accounts would have to be dis-

honored, 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 maximum of $20,000, and a large

percentage of the deposits were over that amount. Deposi-

tors and creditors would then receive only distributions

from the liquidation of USNB’s assets over a lengthy

period of years. USNB had approximately one billion,

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. Approximately $300 million of those

deposits were not insured. Innumerable legitimate bor-

rowers were relying on USNB as a continuing source of

credit to finance their businesses.

Faced with these consequences, the Board of Directors

of the FDIC decided to attempt to find another bank to

Appendix C

participate in a purchase and assumption transaction on

such terms as would reduce the risk of loss to the Corpo-

ration.

It was first necessary to formulate the transaction 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 repre-

sentatives of qualified and interested banks were invited

to join with the Corporation is a discussion designed to

fix the conditions of a purchase and assumption agreement.

It became immediately 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 “Designated

Group,” were regarded as suspect. Many interested per-

sons attributed USNB’s failure in large part either to

mismanagement by the Designated Group or to their mis-

use of official power for personal gain, and charges were

then under investigation by the Securities and Exchange

Commission and the Internal Revenue Service. The mem-

bers of the Designated Group individually were substan-

tially indebted 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 banks

consulted by the Corporation was that the financial status

of the Designated Group members was such that their

obligations to USNB were of questionable value as assets,

and that the assumption of liability on the standby letters

of credit presented an unacceptable banking risk. Accord-

ingly, the banks rejected such obligations as purchasable

assets unless the Corporation would guarantee their value;

they refused to assume the letters of credit as obligations

unless in each case they had from the Corporation a guar-

Appendix C

antee of the obligation of the account party to the creditor

bank as an offsetting asset.

The Corporation, faced with this ultimatum, refused to

guarantee the value of these obligations.’ It did not ques-

tion the legal enforceability of the letters against USNB.

However, it did not regard this as the controlling con-

sideration. Instead it focused on the desirability of per-

mitting the account parties to have their debts to the

creditor banks paid out of the Corporation’s jealously

guarded deposit insurance fund. It felt that by guarantee-

ing the letters of credit it would be using the deposit in-

surance fund to make good “tainted” transactions of the

Designated Group. Consequently, the purchase and as-

sumption agreement as ultimately formulated did not in-

clude as purchased assets the obligations of members of

the Designated Group or, as assumed obligations, the

standby letters of credit issued to creditors of the group

members. The transaction thus formulated was offered to

the banks for competitive bid.

On October 18, 1973, USNB was closed by the Comp-

troller 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

* The Corporation is authorized to make such a guarantee under

12 U.S.C. § 1823(e), which provides that ‘‘the Corporation * * *

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.”’

Appendix C

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.

II. 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, appel-

lants 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 Receiver’s demands

and retained the deposits to offset them against the

amounts owed to them by USNB on the standby letters of

credit. 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 letters

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 in-

strument upon which appellants’ claims are based.

The Receiver has acknowledged that some letters of

credit issued by USNB did create provable claims and in-

eluded these letters in the obligations assumed by Crocker

in the purchase and assumption agreement. These were

Appendix C

primarily traditional or commercial letters of credit.? This

type of instrument developed 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 aecept—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 documents, such as bills of lading or air

freight receipts, representing title to the goods that

are the subject matter of the transaction between buyer

and seller. The bank undertakes this obligation 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, independent

obligation and payment must be made upon 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 Letters of Credit: Problems and Possi-

bilities, 16 Ariz.L.Rev. 823, 825 (1974) (hereinafter

“Battaile”); Association de Azgucareros de Guatemala v.

l'nited 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”

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

action against the Receiver in the USNB receivership that ulti-

mately 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 declaratory relief sought.

509 F.2d at 644-45.

C10

Appendix C

to distinguish them from the traditional letters of credit

have been used as security devices in a variety of con-

texts outside the traditional area of the international sale

of goods. They have been used to insure construction

loans as quasi-performance bonds, to support the issuance

of commercial paper and to secure the performance of

purely monetary obligations such as those involved in this

ease. See Battaile, supra 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, supra at 717. The principal difference between

the traditional letter of credit and these newer standby

letters is that “whereas in the classical setting, the letter

of credit contemplates 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 Bank-

ing L.J. 697, 699 (1975) (hereinafter “Katskee”).

This has created an awkward situation for national

banks, since the standby letter of credit possesses more

of the characteristics of a guarantee and national banks

are not authorized to enter into guarantees. 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 question 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 com-

mercial 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, e. g., 12

C.F.R. § 7.7016 (1977).

B. Provabiity of Standby Letters of Credit

The Receiver contends, nevertheless, that standby

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

Cll

Appendix C

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 Banking § 755, they are found to rest

on cases involving a lessor of property leased to the bank

who is asserting 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. 1936), cert. dismissed, 300 U.S. 684, 57 S.Ct. 667,

81 L.Ed. 887 (1937), was such a case. There the lessor,

following default by the national bank lessee, sought to ex-

ercise 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 contract 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

dealing with an exercise of the option to obtain liquidated

damages for loss of future rent, Argonaut Savings and

Loan Ass’n v. FDIC, 392 F.2d 195, 197 (9th Cir.), cert.

denied, 393 U.S. 839, 89 S.Ct. 116, 21 L.Ed.2d 110 (1968).

Accord, FDIC v. Grella, 553 F.2d 258, 262 (2d Cir. 1977).

Although these cases use broad language, indicating 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 in-

solvency and are not dependent on any new contractual

obligations arising later.

C12

Appendiz C

We conclude that the holdings of Kennedy and

for future rent in bankruptcy were handled in a manner

different from that by which other contingent obligations

were handled. Although contingent contract liabilities

were provable in bankruptcy, ‘‘the courts stopped short

of extending the same liberality 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 in-

solvency. 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 remained (and

still remain) in a category apart from other contract

claims, even in the present bankruptcy rules. See cd. at

§ 63.31[1] at 1915-16, §63.32[5] at 1931-32; 11 U.S.C.

§ 103(a) (9).

The dissenting judge in Kennedy noted that the al-

lowance of the claim ‘‘depends on whether the equity rule

or bankruptcy rule of provability should be followed’’ in

a national bank’s receivership. 84 F.2d at 598. His state-

ment and the cases cited in the opinion indicate that the

majority was relying on the now outdated bankruptcy rules

in reaching its decision 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 rule that now ap-

pears 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 au-

thority to support a holding that they are provable in

C13

Appendix C

national bank receiverships. There is authority holding

such claims provable in general equity receiverships and in

bankruptey, as we shall discuss, but the only case dealing

with the question in the context of national bank receiver-

ships is Pinckney v. Wylie, 86 F.2d 541 (5th Cir. 1936).

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 govern-

ing the provability of contingent claims. Claims based on

surety or guarantee obligations of a bankrupt are clearly

provable as contingent contract obligations, 11 U.S.C.

§ 103(a)(8). 3A Collier on Bankruptcy, § 63.19 at 1876.

Even before the bankruptcy statute was amended to specifi-

cally state that contingent contract claims are provable,

courts held suretyship and guarantee claims provable, stat-

ing ‘‘[e]ven 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.”? Maynard v.

Elliott, 283 U.S. 273, 279, 51 S.Ct. 390, 392, 75 L.Ed. 1028

(1931) (and see cases cited therein).

This bankruptcy rule of provability seems consistent

with the principles governing equitable receiverships.

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

C14

Appendix C

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, 738

(2d Cir. 1912). The court in Penn Steel divided all claims

into three classes: |

‘¢(1) Claims which at the commencement of pro-

ceedings 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 divided into

two subclasses:

“(1) Claims of which the worth or amount can be

determined by recognized methods of computation 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. /d.

The court in Penn. Steel found no equitable reason

why the time of appointment of the receiver should deter-

mine 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

C15

Appendix C

no equitable reason why claims which are certain when

presented 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 provable

under these equitable principles because the liability 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 defaulted 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 receivership, other than the distribution

made through the purchase and assumption agreement.

Finally we note that the Receiver seems already to have

acted upon the assumption that standby letters of credit

are, in principle, provable. Some such instruments were

actually assumed by Crocker with FDIC approval, and

thus those creditors were assured payment in full. These

were letters where Crocker was willing to accept the obli-

gation of the account party to the creditor bank as an off-

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

in the Designated Group that rendered the letters of appel-

lants 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.

Ill. APPEAL OF FIRST EMPIRE BANK AND

SOCIETE GENERALE

A. Ratable Distribution Under the NBA

Appellants contend that the purchase and assumption

agreement amounted to a preference of the creditors whose

C16

Appendix C

obligations were assumed, contrary to the provisions of

the National Banking Act (NBA), 12 U.S.C. $91, which

provides in part: “[A]ll payments of money * * * made

after the commission of an act of insolvency, or in con-

templation thereof, made with a view to prevent the ap-

plication of its assets in a manner prescribed by this chap-

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

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

Appellants further contend that the purchase and as-

sumption agreement amounted to a distribution to those

whose claims were assumed by Crocker, and that such dis-

tribution 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 satisfac-

tion or adjudicated in a court of competent jurisdic-

tion * * *.” (emphasis supplied).

Appellants contend that under the FDIA, $$ 91 and 194

of the NBA apply to the FDIC as Receiver. Section

1821(d) of the FDIA provides in part:

“Nothwithstanding 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 conform-

ity with the provisions of law relating to the liquida-

tion of closed national banks, except as herein other-

wise provided.” (emphasis supplied).

The Receiver contends that $91 does not apply to

banks in receivership, but only to preclosure transactions.

C17

Appendix C

It contends that § 194 does not apply to it® and that

§ 1821(d) exeuses 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 pro-

vided.” As provision to the contrary, the Receiver relies

on § 1823(e), which explicity authorizes the Corporation

to make loans implementing purchase and assumption

agreements and which provides in part:

“Whenever in the judgment of the Board of Direc-

tors such action will reduce the risk or avert a threat-

ened loss to the Corporation and * * * 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 Corporation may, wpon such terms and con-

ditions 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 * * * Any

insured national bank or District bank, or the Corpo-

ration as receiver thereof, is authorized to contract

° 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 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 purchase 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. Ha parte Moore, 6 F.2d 905, 909 (E.D.S.C.

1925) ; see Gockstetter v. Williams, 9 F.2d 354 (9th Cir. 1925).

C18

Appendix C

for such sales or loans and to pledge any assets of

the bank to secure such loans.’’ (emphasis supplied).

The FDIC contends that under this language, when

engaged as the Corporation or as Receiver, in accomplish-

ing a takeover by a purchase and assumption agreement,

it is authorized to act upon such terms and conditions

as it may determine without any restriction such as is

imposed by $91 or 194. It concedes 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 nation-

al banks have failed, due, without doubt, to the efficient

operations of the Comptroller and the FDIC. Court-made

law is, accordingly, sparse. However, we are unable to

accept the contentions of the FDIC.

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

the FDIC as the Receiver from complying with the pro-

visions of the NBA. The clause emphasized, upon which

the Receiver relies, refers to the FDIC in 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 agree-

ment as action that would “reduce the risk [of loss] or

avert a threatened loss to the Corporation.” The FDIC

points to the final sentence of the first paragraph of

§ 1823(e), set forth above, as indicating that the sub-

C19

Appendix C

section has the Receiver 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 Corporation

and includes in its enablement the FDIC as Receiver of

such banks. Thus the Receiver is taken note of only in

so far as to recognize that is can contract with the Cor-

poration. 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 provisions of the NBA

authorizing receivers to deal with receivership assets: 12

U.S.C. §§ 192, 194. See, Gockstetter v. Williams, 9 F.2d

304, 355-56 (9th Cir. 1925); Ha 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 formulating and execution of agree-

ments.

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 concession that it must act ‘‘rea-

sonably,’’ 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 un-

C20

Appendix C

assumed 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 un-

impaired. They are subordinated to the lien of the Cor-

poration 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 con-

sume in full the remaining asset, leaving the unassumed

creditors without any recovery whatsoever. ‘Thus, even

as to the remaining assets the assumed creditors would

seem, indirectly, 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 fiscal integrity of

the deposit insurance fund (which can be adequately pro-

tected by other more equitable means) outweigh the policy

of equitable and ratable payment of creditors in this

manner and to permit the FDIC, whenever it felt its action

to be reasonable and to serve to protect the deposit in-

surance 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 re-

ceivership 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. Knoz, 111 U.S. 784, 785, 4 S.Ct. 686, 28 L.Ed.

603 (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.

C21

Appendix C

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 as-

sumption 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 recover

interest upon their claims. The FDIC contends that to

allow recovery of interest would be to permit increase of

the claims over their amounts at the time of receivership.

It relies on White v. Kmoz, 111 U.S. 784, 4 S.Ct. 686, 28

L.Ed. 603 (1884). In that case a creditor recovered a

judgment against a national bank after the bank was

declared insolvent. The judgment included the amount of

his claim with interest added to the date of judgment. The

claimant sought a ratable distribution on the full amount

of the judgment including interest, but the Comptroller

refused to recognize interest added 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, 4 S.Ct. 686. The Supreme Court agreed with the

Comptroller, holding that the claimant was only entitled

to a ratable distribution 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 all

he was entitled to was a share in the proceeds of the assets

equal to what had been distributed to others during the

pendency of his litigation.’’ 111 U.S. at 786, 4 S.Ct. at 686.

C22

Appendiz C

The purpose of the rule disallowing interest accru-

ing after insolvency is to lend support to the concept of

ratable distribution: that ratable distribution 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 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, 10 S.Ct.

450, 33 L.Ed. 747 (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, 58 S.Ct. 612, 82 L.Ed. 926 (1938),

the Court held that:

“Tt is true that in the liquidation of national banks,

dividends from the general funds on unsecured claims

are made pro rata upon the amount of each claim as

of the date of the insolvency * * * It is in order to

assure equality among creditors as of the date of in-

solvency that interest accruing thereafter is not con-

sidered. But interest is proper where the ideal of

equality is served, and so a creditor whose claim has

been erroneously disallowed ts entitled on its allowance

to interest on his dividends from the time a ratable

amount was paid other creditors.’’

303 U.S. at 411, 58 S.Ct. at 614 (emphasis supplied).

To be accorded the required equal treatment among

creditors, appellants were entitled to a ratable dividend of

100 percent of the value of each letter of credit on the date

C23

Appendix C

each letter matured. Because such a ratable distribution

was not made, appellants are entitled to recover the in-

terest 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. Ticonic Nat’l Bank

v. Sprague, supra, 303 U.S. at 411, 58 S.Ct. 612.

JUDGMENT

On the cross appeal of the FDIC, the judgment of the

district court holding appellants’ letters of credit to be

provable claims in face amount is affirmed.

On the appeal of First Empire Bank and Societe

Generale, the judgment of the district court is reversed

and the case is remanded with instructions that judgment

be entered in favor of each appellant in the amount of the

face value of each USNB letter of credit held by it, plus

interest from the dates of maturity, less the amount of any

USNB deposit held by it.

Appendix D—Order and Second Amended Judgment

dated 3/19/79

FILED

ENTERED

LODGED

RECEIVED

MAR 19 1979

Clerk, U.S. District Court

SouTHERN District oF CALIFORNIA

By J. Hatch Deputy

UNITED STATES DISTRICT COURT

SouTHERN District or CALIFORNIA

No. 74-468-N

First EmprreE BANK—NeEw York, et al.,

Plaintiffs,

FrperaL Deposit INSURANCE CORPORATION, et al.,

Defendants.

FeperaL Deposit INSURANCE CorPoRATION, as Receiver of

United States National Bank,

Counterclaimant,

First Emprre BANK—NeEw York and Societe GENERALE,

Counterdefendants.

Appendix D

ORDER AND Seconp AMENDED JUDGMENT

The above-entitled cause came on for trial between

November 30 and December 17, 1976. Plaintiff and

counterclaim defendant First Empire Bank—New York

(“FEB”), by its successor-in-interest Manufacturers &

Traders Trust Co. of Buffalo, New York (“M & T’’), ap-

peared by Gary J. Greenberg, Esq., of Stroock & Stroock

& Lavan; plaintiff and counterclaim defendant Societe

Generale (“Socen”) appeared by Don A. Proudfoot, Jr.,

Esq., of Graham & James; defendants and counter-claim-

ants Federal Deposit Insurance Corporation (“FDIC”),

and Federal Deposit Insurance Corporation, as receiver of

United States National Bank (“Receiver”), appeared by

Charles A. Legge and Wilkes R. Morgan, Esqs., of Bron-

son, Bronson & McKinnon, and Richard R. Gore, Esq. of

Schall, Boudreau & Gore. On March 18, 1977, the Court

entered its Findings of Fact and Conclusions of Law,

together with a Judgment. On April 25, 1977, an Amended

Judgment was entered by the Court. Both plaintiffs and

defendants prosecuted appeals from the Amended Judg-

ment to the United States Court of Appeals for the

Ninth Cireuit. On April 6, 1978, that Court entered its

opinion and decision affirming in part and reversing in

part the Amended Judgment. FDIC filed a Petition for

a Writ of Certiorari with the United States Supreme

Court asking that Court to review, in part, the Ninth

Circuit’s determination. On October 16, 1978, the Supreme

Court denied the Petition. On October 24, 1978, the man-

date of the Ninth Circuit issued to this Court and was

duly spread upon the record on December 11, 1978.

On November 21, 1978, plaintiffs moved the Court for

entry of judgment. On December 7, 1978, defendants

filed objections to plaintiffs’ proposed judgment. Plain-

tiffs’ motion to enter judgment and FDIC’s objections

thereto came on for hearing before the Court on February

5, 1979. FEB and M & T appeared by Gary J. Greenberg,

Appendix D

Esqs., of Stroock & Stroock & Lavan, Sogen appeared

by Don A. Proudfoot, Jr., Esq., of Graham & James; and

FDIC and Receiver appeared by Charles A. Legge and

Wilkes R. Morgan, Esqs., of Bronson, Bronson &

McKinnon.

After considering the opinion and decision of the Ninth

Circuit Court of Appeals, the briefs and affidavits in sup-

pert of and in opposition to plaintiffs’ motion and defend-

ants’ objections, and the oral argument of counsel, and

upon due deliberation, the Court makes the following

Orders on Plaintiffs’ Motion and Defendants’ Objections:

(a) Plaintiffs are entitled to post-maturity interest on

each letter of credit at the California legal rate of seven

percent (7%) and not at the rates provided for in the

letters of credits and related agreements described below;

(b) Plaintiffs’ offsets of United States National Bank

(‘‘USNB’’) deposits held by them on the date of USNB’s

insolvency should be credited against the USNB letters

of credit held by plaintiffs bearing the earliest maturity

dates, with such offsets to be credited effective October 19,

1973;

a 365-day accounting year; and

(d) Plaintiffs are entitled to their taxable costs in this

Court.

Now THEREFORE, the Court enters Judgment as follows:

1. Judgment be and it hereby is entered in favor of

plaintiffs FEB, M & T and Sogen and against the Receiver

adjudicating that FEB, M & T and Sogen have proved

according to law that they are entitled to be recognized as

claimants of Receiver and to receive Receiver’s certificates

as follows:

(a) Claims re letters of credit Nos. 70-515 and

70-612 in favor of FEB and M & T in the face amount

Appendix D

thereof, plus interest at the contract rates to dates of

maturity, and legal interest thereafter, less offsets;

and

(b) Claims re letters of credit Nos. 70-639, 70-677

and 70-620 in favor of Sogen, in the face amount

thereof, plus interest at the contract rates to maturity

and legal interest thereafter, less payments received

and offsets.

2. Judgment be and it hereby is entered in favor of

FDIC and Receiver and against plaintiffs FEB and M & T

and Sogen on plaintiffs’ second amended complaint to the

extent plaintiffs sought declarations that their claims con-

stituted inter-bank loans or deposits which should have

been transferred to Crocker National Bank on October 18,

1973.

3. Judgment be and it is hereby entered in favor of

FEB, M & T and Sogen to the extent that the manner in

which the FDIC and the Receiver have acted with respect

to plaintiffs’ claims is unlawful, in that they have dis-

tinguished between plaintiffs’ claims and those of other

general creditors of USNB and have preferred other Gen-

eral Creditors over Plaintiffs in violation of the ratable

dividend requirement of 12 U.S.C. § 194.

4, The Clerk of the Court shall enter judgment in favor

of FEB and M & T against FDIC and the Receiver in the

amount of $5,529,165.78 and in favor of Sogen and against

FDIC and Receiver in the amount of $6,488,712.45.

5. Judgment be and it hereby is entered in favor of

FEB, M & T and Sogen and against the Receiver on its

counter-claims and each count thereof.

Appendix D

6. IT Is FURTHER ORDERED that:

(a) FEB and M & T shall: Deliver USNB letter of

credit No. 70-515 to the Receiver; transfer and assign to

the Receiver all of their right, title and interest in and

to a certain note of Westward Realty Co. (‘‘Westward’’),

No. 93 due August 14, 1974, in the face amount of

$2,000,000; deliver to the Receiver all documentation con-

cerning collections from the account party; and perform

any and all acts reasonably required by the Receiver in

connection with transferring and assigning FEB’s and

M & T’s claim in the bankruptcy proceedings of Westward

to the Receiver:

(b) FEB and M & T shall: Deliver USNB letter of

credit No. 70-612 to the Receiver, transfer and assign to

the Receiver all of its right, title and interest in and to

a certain note of the Los Altos Management Co., due

March 7, 1974, in the face amount of $2,000,000; deliver to

the Receiver all documentation concerning collections from

the account party; and perform any and all acts reason-

ably required by the Receiver in connection with trans-

ferring and assigning FEB’s and M & T’s claim in the

bankruptey proceedings of Los Altos Management Co. to

the Receiver;

639 to the Receiver; transfer and assign to the Receiver

all of its right, tithe and interest in and to a certain note

of Westward, No. 109, due May 3, 1974, in the face amount

of $1,000,000; deliver to the Receiver all documentation

concerning collections from the account party, security

presently or previously held for the indebtedness, and all

other documents concerning dealings with the account

party; and shall perform any and all acts reasonably re-

quired by the Receiver in connection with transferring

and assigning Sogen’s claim in the bankruptcy proceedings

of Westward to the Receiver;

(d) Sogen shall: Deliver USNB letter of credit No.

70-677 to the Receiver; transfer and assign to the Receiver

Appendix D

all of its right, title and interest in and to a certain note

of Tri-County Ranches, Inc., No. 100 due July 20, 1974,

in the face amount of $3,500,000; deliver to the Receiver

all documentation concerning collections from the account

party, security presently or previously held for the in-

debtedness, and all other documents concerning dealings

with the account party; and perform any and all acts

reasonably required by the Receiver in connection with

transferring and assigning Sogen’s claim in the bank-

ruptey proceedings of Tri-County Ranches, Ine., to the

Receiver ;

(e) Sogen shall: Deliver USNB letter of credit No.

70-620 to the Receiver; transfer and assign to the Receiver

all of its right, title and interest in and to a certain note

of Roberts Farms, Inc., No. 39, due April 21, 1976, in the

face amount of $3,000,000; deliver to the Receiver all docu-

mentation concerning collections from the account party,

security presently or previously held for the indebtedness,

and all other documents concerning dealings with the ac-

count party; and perform any and all acts reasonably

required by the Receiver in connection with transferring

and assigning Sogen’s claim in the bankruptcy proceed-

inzs of Roberts Farms, Inc., to the Receiver;

(f) Sogen shall perform any and all acts required by

the Receiver in connection with transferring and assigning

to the Receiver all of its right, title and interest in and

to that certain deed of trust dated May 1, 1973, between

Cuyamaca Land Company, Trustor, United States Hold-

ing Company, Trustee, and Westward Realty Co., Bene-

ficiary; and

(g) FEB, M & T and Sogen shall execute and deliver

to Receiver and FDIC all documents not set forth in sub-

paragraphs (a)—(f) above which Receiver or FDIC may

reasonably require for the purpose of enabling them to

Appendix D

pursue claims against others on the letter of credit trans-

actions which were the subject of this action.

7. Receiver paid $5,518,994.83 to FEB and M & T and

$6,439,396.18 to Sogen on December 11, 1978. Accordingly,

a balance of $10,170.95 is due to FEB and M & T and

$49,316.27 to Sogen, together with interest at the rate of

seven per cent per annum from December 11, 1978 to the

date of payment pursuant to the stipulation of the parties

and order filed on December 14, 1978. Satisfaction of

judgment may be entered upon payment of the additional

sums described in this paragraph and costs as inserted by

the clerk in paragraph 8 in accordance with Local Rule

15 of this Court.

8. Judgment be and it hereby is entered in favor of

plaintiffs FEB, M & T and Sogen and against FDIC in the

sum of $9,002.27 for costs of suit in this Court.

Dated: March 16, 1979.

LeLanp C. NIELSEN

United States District Court

Approved as to Form:

Strroock & Srroock & Lavan

GRAHAM & JAMES

By Epwarp J. Ecxerr

Eward J. Eckert, Esq.

Attorneys for FEB, M & T and Sogen

Bronson, Bronson & McKinnon

By Wiuixes R. Morcan

Wilkes R. Morgan

Attorneys for FDIC and Receiver

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