# Petition — First Empire Bank-New York v. Federal Deposit Insurance > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385007_1550%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition - **Published:** January 1, 1981 - **Citation:** 452 U.S. 906 ## Text Supreme Court, U.S, i D 80-1638 No ‘AR SO 1981 oy IN THE Supreme Court of the United ‘States OCTOBER TERM, 1980 a> Ls 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, v. 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? ii 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, v. 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 3 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. 4 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. 4) 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%. 6 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. 7 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. 8 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- 9 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. © Of the 24 bank failures occurring between 1934 and 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. 10 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. 11 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). 12 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) 13 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. 14 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- 15 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). 16 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. 17 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. D2 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, D3 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; (c) Post Maturity interest should be computed based on 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 D4 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. Dd 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; (c) Sogen shall: Deliver USNB letter of credit No. 70- 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 D6 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 D7 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 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385007_1550%3A1. Public record. Not legal advice.