Opposition Brief — Wood v. Federal Deposit Insurance

Supreme Court, U.S.

is FILED

(9) OCT 15 1906

No. 84-1952 JOSEPH F. SPANIOL, JR.

CLERK

SS

te Seem Cet of the Mato to

OCTOBER TERM, 1985

RICHARD M. Woop, PETITIONER

ea

FEDERAL DEPosiIT INSURANCE CORPORATION

ON PETITION FOR A WRIT OF CERTIORAR! TO

THE UNITED STATES COURT OF APPEALS FOR

THE SIXTH CIRCUIT

BRIEF FOR THE FEDER.AL DEPOSIT INSURANCE

CORPORATION IN OPPOSITION

CHARLES FRIED

Acting Solicitor General

Department of Justice

Washington, D.C. 20530

(202) 633-2217

JouHn C. Murpny, Jr.

General Counsel

LAWRENCE F. BATES

- Counsel

RALPH E. FRABLE

Senior Attorney

Federal Deposit Insurance Corporation

Washington, D.C. 20429

BEST AVAILABLE COPY

QUESTIONS PRESENTED

1. Whether the district court had subject matter jurisdic-

tion under 12 U.S.C. 1819 (Fourth) over this suit to which

the Federal Deposit Insurance Corporation (FDIC) is a

party in its corporate capacity.

2. Whether the FDIC, when it purchases assets from the

receiver of an insolvent bank pursuant to 12 U.S.C. 1823 in

order to facilitate a purchase and assumption transaction

with another insured bank, is shielded from a defense of

usury arising under state law that would not prevail against

a holder in due course.

(D)

TABLE OF CONTENTS

Page

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TABLE OF AUTHORITIES

Cases:

Bebee v. Grettenberger, 82 Mich. 416,

Ne ee ced d esc necceceese 10

Charter Executive Center, Ltd., In re,

ae 14, 15

Clearfield T. ust Co. v. United States,

EES 9

Cohn v. Receivables Finance Co..,

TET TEE EERE EL EERE TOTES 16

D’Oench, Duhme & Co. v. FDIC,

ee es chs 60% haces 8, 9, 11, 12, 16

Eiberger v. West, 247 Ga. 767,

ie Retake een bis see cuenee 16

F & T Contractors, Inc., In re,

ee ae ck 6 wah «becca ese 3,9

age eG 8

FDIC v. de Jesus Valez, 678 F.2d 371 ........ 8-9

FDIC v. Garbutt, 370 N.W.2d 387 ......... 16, 18

FDIC v. Glickman, 450 F.2d 416 ............. 18

(IIT)

IV

Page

Cases—Continued:

FDIC v. Godshall, 558 F.2d 220 ........... 8. 18

FDIC v. Hatmaker, 756 F.2d 34 .......seee0. 15

FDIC v. Leach, No. 82-1003 (6th Cir.

| rererrrrr Teer Tree er 10, 15, 16

FDIC v. Rood, No. 82-1245-CIV-TGC

pkee, SS. : Beer rer Tree ee 15

FDIC vy. Sumner Financial Corp.,

SE cacumhonweneeaken aeons 60-0608 8

FDIC v. Tito Castro Construction, Inc.,

548 F. Supp. 1224, aff'd, 741 F.2d 475 .... 14, 15

Gilman v. FDIC, 660 F.2d 688 .......... ye

Gunter v. Hutcheson, 674 F.2d 862,

cert. denied, 459 U.S. 826 ....... 3, 12, 14, 15, 18

Heubusch v. Boone, 213 Va. 414, 192

BG PERSO Pee eT ee TU ETT T ETS 16

Illinois v. Milwaukee, 406 U.S. 91 ..... hea 12

Milwaukee v. Illinois, 451 U.S. 304 ........... 12

Miro vy. Allied Finance Corp.,

ee a ve ees es awk week 16

Missouri Pac. Ry. v. Ault, 256 U.S. 554 ....... 14

Osinski v. Yowell, 135 Mich. App. 279,

ee LE Fk cet ha deh cak 04655866 K00 10

United States v. Kimbell Foods, Inc.,

ae Wis FE waka camiceds 7,9, 11, 12, 13, 14, 15

United States v. Standard Oil Co.,

5 Ee ary er ee 11

United States v. Yazell, 382 U.S. 341 ........ 9, 12

Page

Statutes:

Federal Deposit Insurance Act, 12 U.S.C. 181

2b OTTO re ean Sree re pe ere 12

eG ET Aseeenk es bance caebavacducks 4

Fe EE. Savacicesnckvusstnceanes 8,9

egie f ie | EE TeTeTT TTT Tree 8

12 U.S.C. 1821(a) ........... ROA MIE! Fes 2-3

gk fff | err rere err 2

Se We I 3305 Khd do date nccecuceeee 2

Ge Ga EE Kavi anesacccesewcunteuns 2

PRR Som: 0 ee 3,4

ES Shs DEIR nce ccacenctaccdducn 4

Ee Ses SED ae et bass ds eudeendeeen 2

Se Sen ME awn Vea cas dices bkbRekehas 2

BE Widen PEED BK 0006 ab.000e sénaaneen 16

Be Ss SE KEK As RaKA bead We ee kes beeueen 6, 9

Mich. Comp. Laws Ann. (1967) :

AEE cabaes hoe Gaipenveeveseuedeous 10

CD wiceke eres ctkes takiennwe 10

Mich. Comp. Laws Ann. (1978) :

8. SR ee ene re oy 6, 10-11, 17

8 ere ee Pr rrr rrr re rer ee 6

EE ks uh aah pee Midd eo bho Asan asaces 6, 9

ON a PACS E 4

VI

Miscellaneous:

H.R. Rep. 2564, 81st Cong., 2d Sess. (1950)

In the Supreme Court of the Hnited States

‘ OcTOBER TERM, 1985

No. 84-1952

RICHARD M. WOobD, PETITIONER

V.

FEDERAL DEPOSIT INSURANCE CORPORATION

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR

THE SIXTH CIRCUIT

BRIEF FOR THE FEDERAL DEPOSIT INSURANCE

CORPORATION IN OPPOSITION

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. 1-13) is

reported at 758 F.2d 156. The opinion of the district court

(Pet. App. 14-19) is reported at 578 F. Supp. 144.

JURISDICTION

The judgment of the court of appeals was entered on

March 26, 1985, and the petition for a writ of certiorari was

filed on June 12, 1985. The jurisdiction of this Court is

invoked under 28 U.S.C. 1254(1).

STATEMENT

This case arose out of the efforts of the Federal Deposit

Insurance Corporation (FDIC) to collect on a note, guaran-

teed by petitioner, that the FDIC acquired as the result of

the failure of a bank of which petitioner was a director and

major shareholder.

(1)

2

1. The FDIC is a federal agency charged with “ ‘bringing

to depositors sound, effective, and uninterrupted operation

of the banking system with resulting safety and liquidity of

bank deposits’ ”(Pet. App. 9, quoting H.R. Rep. 2564, 8 Ist

Cong., 2d Sess. 3 (1950)). To that end, the FDIC insures

bank deposits. One of the FDIC’s most critical functions

arises in connection with the failure of an FDIC-insured

bank. When such a bank is closed by its chartering author-

ity, the FDIC must act quickly to meet its statutorily man-

dated responsibility of protecting depositors and preserving

public confidence. One option is for the FDIC simply to pay

the depositors their insured amounts. See 12 U.S.C. 1821(f).

In that event, the failed bank’s receiver (usually the FDIC

itself, acting in a separate capacity) then liquidates the

assets of the bank and distributes the proceeds to the bank’s

creditors, including uninsured -depositors.' This option,

which is sometimes referred to as a “deposit payoff,” has

several disadvantages, not the least of which is that public

confidence in the banking system may be severely under-

mined because of the disruption of service. These conse-

quences undermine the FDIC's goal of assuring uninter-

rupted operations and liquidity of deposits. Pet. App. 9-10.’

In most cases, the FDIC is appointed as receiver of the failed bank by

the appropriate banking authority. The FDIC is required by statute to

accept such an appointment if tendered. 12 U.S.C. 1821(c) and (e). Asa

result, in almost all cases in which a bank fails, the FDIC acts in two

separate capacities: in its corporate capacity as insurer of deposits, and

as the receiver of the failed bank. 12 U.S.C. 1823(d) and (e). See Pet.

App. 2.

?Under the “deposit payoff” alternative, all banking services are

abruptly interrupted; time, demand, and savings deposits are frozen;

and all checks drawn on the closed bank’s accounts are returned unpaid.

Bank depositors are left without access to their funds on deposit during

the time it takes the FDIC to determine the amount of deposit insurance

owed to each depositor and to prepare for payment. Moreover, deposi-

tors who have deposits exceeding the $100,000 insurance coverage (12

3

The FDIC has an alternative method of addressing the

problems presented by a bank failure that avoids the disad-

vantages of a deposit payoff. This method is known as the

“purchase and assumption transaction.” Pursuant to the

authority conferred on it by Congress under 12 U.S.C.

1823(ch2)(A), the FDIC, in its corporate capacity, may

purchase assets of a failed insured bank in order to facilitate

the purchase of certain other assets and the assumption of

all deposit liabilities of the failed bank by another insured

bank (referred to as the “assuming bank”). Generally, the

assuming bank reopens the doors of the failed bank on the

next business day, thereby preventing any loss or inconven-

ience to depositors and any interruption of vital banking

services. In addition, the failed bank’s receiver is able to

realize some benefit from a valuable asset of the bank that

otherwise would be lost: the premium paid by the assuming

bank for the “going concern” value of the bank.

The detailed mechanics of a purchase and assumption

transaction have been described by the court below (Pet.

App. 2) and other courts. See Gunter v. Hutcheson, 674

F.2d 862, 865-866 (11th Cir.), cert. denied, 459 U.S. 826

(1982); Inre F & T Contractors, Inc., 718 F.2d 171, 174 (6th

Cir. 1983). Briefly, a purchase and assumption transaction

requires the assuming bank to purchase only those assets of

the failed bank that are believed to be of the highest banking

quality. As a result, the amount of deposit liabilities that

bank assumes is greater than the value of the assets it

purchases. The receiver of the failed bank therefore agrees

to pay in cash to tie assuming bank an amount sufficient to

cause the assets it purchases to be equal in amount to the

U.S.C. 1821(a)) and other creditors must await the payment of divi-

dends from the receiver's liquidation of the bank’s assets. The liquida-

tion proceedings often take years, and creditors may never recover the

full amount of their claims. See Pet. App. 9-11.

a

4

liabilities it assumes, less a credit for the premium paid by

the assuming bank for the “going concern” value of the

failed bank. Payment of these funds by the receiver is made

possible by the FDIC, acting in its separate corporate

capacity. The FDIC purchases from the receiver all remain-

ing assets of the failed bank that were not acquired by the

assuming bank. As consideration, the FDIC pays cash from

its Permanent Insurance Fund (12 U.S.C. 1817) to the

receiver in an amount equal to the difference between the

value of the failed bank’s assets acquired by the assuming

bank and the amount of deposit liabilities it assumed, less

an amount equal to the premium paid by the assuming bank

for the “going concern” value of the failed bank. 12 U.S.C.

1823(c)(2)(A). To minimize the resulting loss to the Per-

manent Insurance Fund, the FDIC then attempts to collect

on the assets it has acquired from the receiver.

It is imperative that the FDIC consummate the purchase

and assumption transaction as quickly as possible in order

to provide protection for depositors, to lessen the potential

adverse impact of a bank failure on the community and the

public in general, and to capture the “going concern” value

of the bank as an asset. See generally Pet. App. 9-10.

However, in authorizing the implementation of these trans-

actions as the preferred method for minimizing the adverse

consequences of a bank failure, Congress at the same time

sought to assure protection for the FDIC’s Permanent

Insurance Fund. Accordingly, Congress provided that the

FDIC may facilitate a purchase and assumption transac-

tion only if the cost to the Fund would be less than that of a

liquidation and deposit payoff. 12 U.S.C. 1823(c)(4)(A). As

a practical matter, this determination, sometimes referred

to as the “cost test,” must be made immediately upon a

bank’s failure if the FDIC is to consider the purchase and

assumption transaction alternative at all. Pet. App. 9-10.

5

2.a. Petitioner was a major shareholder in the Commun-

ity Bank of Washtenaw in Ypsilanti, Michigan (Commun-

ity Bank) and served as one of its directors and as its

attorney. Petitioner had agreed to purchase the interest of

Peter Sone in acompany called Thought Publications, Inc

(TPI). The company owed Stone unpaid salary totalling

$12,000, but had insufficient funds to pay the debt. As part

of the purchase transaction, petitioner arranged for a loan

of $12,000 to be made by the Community Bank to Stone

and Carole Barnett (formerly Carole Stone). Petitioner

guaranteed the loan and assured the Stones that he would

be solely responsible for payment of the principal, out of the

profits of TPI. Pet. App. 2-3, 15; 10-20-83 Tr. 13, 18-19;

10-23-83 Tr. 23.

On May 15, 1982, Community Bank was declared insol-

vent, and the FDIC was appointed as its receiver. On the

same day, the FDIC, as receiver, solicited bids from other

insured banks in an attempt to effect a purchase and

assumption transaction. The highest acceptable bid was

submitted by Michigan National Bank of Ann Arbor,

which agreed to assume the deposit liabilities, to purchase

certain assets of Community Bank, and to reopen the

Community Bank’s offices under the name of the Ann

Arbor Bank. In order to facilitate the transaction, the

FDIC, in its corporate capacity, purchased from the

receiver the Community Bank assets that the Ann Arbor

Bank did not acquire. Pet. App. 2, 15.

The note executed by Stone and Barnett was among the

assets purchased by the FDIC. Community Bank, repre-

sented by petitioner, previously had filed suit in state court

against Stone and Barnett to collect the balance of the

principal and accrued interest on the note, which was

allegedly in default. Pet. App. 14. On November 6, 1982, the

FDIC, as holder of the note and of petitioner’s guaranty,

was substituted in its corporate capacity for Community

6

Bank as the plaintiff in the suit. Petitioner was then added

as adefendant. The FDIC subsequently removed the action

to the United States District Court for the Eastern District

of Michigan pursuant to 12 U.S.C. 1819 Fourth and 28

U.S.C. 1345. As a defense to the amended complaint, peti-

tioner, Stone and Barnett asserted that the loan was usur-

ious under Michigan law because it bore an interest rate of

15.21%. Michigan law provides in general that a loan made

by a bank to an individual at an interest rate of more than

7% is usurious unless the individual furnishes a sworn

statement that the loan is for a business purpose. Mich.

Comp. Laws. Ann. $$ 438.31, 438.61 (1978). Michigan law

further provides that as a penalty, a lender who enters into a

note that does not comply with the usury law is barred from

recovering any interest on the note and is liable to the

borrower for attorney fees and court costs. Id. § 438.32.

However, Michigan law provides that a holder in due

course is entitled to collect on the note as if usury had not

been alleged and proved. Id. § 438.5; See Pei. App. 26-28.

The case was tried to a jury, which found that all defend-

ants were liable on the note, bit that the note was not made

for a business purpose (Pet. App. 22-25). Petitioner and the

other defendants then moved to collect attorney fees and

court costs from the FDIC under the Michigan usury law,

in addition to the disallowance of interest, and the FDIC

moved for judgment notwithstanding the verdict on the

usury issue (id. at 15). The district court granted the FDIC’s

motion, permitting the FDIC to collect the interest on the

note as well as the principal. The court held that whea the

FDIC acquires a note in a purchase and assumption trans-

action, it enjoys a status equivalent to that of a holder in due

course if it does not have actual knowledge that the note was

given at a usurious rate. Applying that rule to the facts of

this case, the court found that the FDIC did not have

7

actual knowledge that the note was given at a usurious rate,

and it concluded that the FDIC therefore was not subject to

the usury defense raised by the defendants. The district

court accordingly also denied the motion of petitioner and

the other defendants to recover attorney fees and costs from

the FDIC. Pet. App. 14-i9.-

b. Although petitioner did not contest his liability for the

principal amount, he appealed the district court's rejection

of the usury defense and its resulting allowance of interest.?

The court of appeals affirmed (Pet. App. 1-13). Following

the analysis set forth by this Court in United States v.

Kimbell Foods, Inc., 440 U.S. 715 (1979), the court of

appeals held that when the FDIC, acting in its corporate

capacity and in the course of a purchase and assumption

transaction, acquires a note in good faith, for value, and

without actual knowledge of any defense against the note,

federal common law shields the FDIC from a usury defense

that would not prevail against a holder in due course (Pet.

App. 1-12). The court of appeais also held, as it previously

has done in Gilman v. FDIC, 660 F.2d 688 (6th Cir. 1981),

that the FDIC is not under a duty, in either of its capacities,

actually to examine the records of a failed bank before it

agrees to execute a purchase and assumption transaction,

and that it therefore cannot be charged with knowledge of a

defense merely because that information could be obtained

by searching through a failed bank’s files (Pet. App. 12-13).

ARGUMENT

The decision of the court of appeals is correct and does

not conflict with any decision of this Court or of another

court of appeals. Review by this Court therefore is not

warranted.

3Stone and Barnett did not appeal the award of interest.

8

1. Petitioner first contends (Pet. 9-13) that the federal

courts have no “subject matter jurisdiction” in this case. It

does not appear, however, that petitioner intends this objec-

tion to be taken literally, because petitioner states (Pet. 1 1)

that he does not question the right of the FDIC under 12

U.S.C. 1819 to remove the case to federal district court for

determination. Petitioner is clearly correct in this conces-

sion.

Section 1819 Fourth provides in relevant part:

All suits of a civil nature at common law or in equity to

which the Corporation shall be a party shall be deemed

to arise under the laws of the United States, and the

United States district courts shall have original juris-

diction thereof, without regard to the amount in con-

troversy; * * * except that any such suit to which the

Corporation is a party in its capacity as receiver of a

State bank and which involves only the rights or obli-

gations of depositors, creditors, stockholders, and

such State bank under State law shall not be deemed to

arise under the laws of the United States.

Under this provision, the federal courts lack jurisdiction

only when the FDIC is a party to a suit as receiver of a state

bank and the suit involves only the rights or obligations of

depositors, creditors, stockholders and the bank under state

law. FDIC v. Sumner Financial Corp., 602 F.2d 670, 677-

679 (Sth Cir. 1979); FDIC v. Godshall, 558 F.2d 220 (4th

Cir. 1977). But, where the FDIC, in its separate corporate

capacity, is asserting its own rights to realize on assets

— such as the note and guaranty at issue in this case —

Section 1819 expressly confers jurisdiction on the federal

district courts to entertain the suit. D’Oench, Duhme & Co.

v. FDIC, 315 U.S. 447, 455 (1942); FDIC v. Ashley, 585

F.2d 157 (6th Cir. 1978); FDIC v. Sumner Financial Corp.,

602 F.2d 670 (Sth Cir. 1979); FDIC v. de Jesus Valez, 678

9

F.2d 371 (ist Cir. 1982); In re F & T Contractors, Inc., 718

F.2d 171 (6th Cir. 1983).* The district court therefore clearly

had subject matter jurisdiction in this case.

2. Petitioner’s contention that the federal courts lack

subject matter jurisdiction apparently is intended to be but

another way of arguing that this case should be governed by

state rather than federal law and that petitioner therefore

should not be liable for interest on the note because it was

usurious under state law. See Pet. 10. It is clear, however,

that federal law governs this lawsuit. There can be no doubt

that the FDIC derives its authority from a specific Act of

Congress in the exercise of a “constitutional function or

power,” and that the overriding federal interests in the

FDIC’s exercise of its statutory responsibilities in adminis-

tering a nationwide federal program warrant the protection

of federal law. See United States v. Kimbell Foods, 440

U.S. 715, 726-727 (1979); United States v. Yazell, 382 U.S.

341, 354 (1966); Clearfield Trust Co. v. United States, 318

U.S. 363, 366-367 (1943). Indeed, as the court of appeals

recognized (Pet. App. 6), this Court already has specifically

held that federal law governs in a suit by the FDIC to

recover on a note. See D’Oench, Duhme, 315 U.S. at 456.

3. The remaining question, then, is what the content of

federal law should be in the circumstances of this case —

i.e., whether state law should be adopted as federal law, or

whether a separate federal rule should be fashioned. Under

Michigan law, a usurious note is not void, and the lender is

entitled to recover the principal; however, as a penalty for

entering into the agreement, the lender is barred from re-

covering interest, and attorney fees and costs may be

assessed against him. Mich. Comp. Laws. Ann. § 438.32

‘Federal jurisdiction is also available under 28 U.S.C. 1345, because

the FDIC is an agency of the United States that was expressly autho-

rized by Congress under 12 U.S.C. 1819 to bring this suit.

10

(1978). See FDIC v. Leach, No. &2-1003 (6th Cir. Sept. 11,

1985), slip op. 5 n.1; Osinski v. Yowell, 135 Mich. App.

279, 286-288, 354 N.W. 2d 318, 322 (1984); Bebee v. Gret-

tenberger, 82 Mich. App. 416, 422-423, 266 N.W. 2d 829,

832 (Ct. App. 1978). However, if the note passes to a person

who takes the note in good faith for valuable consideration

before it becomes due, and without actual notice that it was

given upon a usurious consideration, that person is entitled

to recover on the note to the same extent as if no usury

defense had been raised. Mich. Comp. Laws Ann. § 438.5

(1978). The latter provision in effect applies the doctrine of

holder in due course in the context of usur_. The court of

appeals assumed without deciding that the FDIC was not a

holder in due course as a matter of state law for purposes of

avoiding the state-law usury penalty (Pet. App. 4-5).° But

the court of appeals concluded that the usury penalty

should not be applied against the FDIC where it acted in

good faith and without actual knowledge that the note was

usurious. This conclusion was correct, particularly in the

circumstances of this case.

‘Petitioner asserts (Pet. 13) that both courts below ruled that the

FDIC is not a holder in due course under the Uniform Commercial

Code, as embodied in Mich. Comp. Laws Ann. $ 440.3302 (1967). It is

true that the district court so stated (albeit without specifying what

requirement of holder in due course status the FDIC does not satisfy

(see Pet. App. 17-18)), but the court of appeals exprevsly did not decide

that question (see Pet. App. 4-5).

Separate provisions of Michigan law concerning commercial paper

provide that a person does not become a holder in due course of an

instrument “by purchasing it as part of a bulk transaction not in the

regular course of business of the transferor.” Mich. Comp. Laws Ann.

$ 440.3302(3)(c) (1967); Pet. App. 29. Petitioner contends (Pet. 14-16)

that this limitation applies under Michigan’s usury laws as well and that

the FDIC could not be a holder in due course — and therefore could not

overcome petitioner’s defense of usury — because the FDIC acquired

the note at issue here as part of a bulk transaction following the failure

of the Community Bank. However, as the court of appeals observed

(Pet. App. 6), it does not appear that the “bulk transaction” limitation

applies to the provision for overcoming the usury defense under Mich.

11

In Kimbell Foods, the Court observed that whether to

adopt state law in a particular instance or to fashion a

separate federal rule is “dependent upon a variety of consid-

erations always relevant to the nature of the specific

governmental interests and to the effects upon them of

applying state law.” 440 U.S. at 728, quoting United States

v. Standard Oil Co., 332 U.S. 301, 310 (1947). The Court

identified three such considerations in Kimbell Foods:

whether there is a need for a nationally uniform body of

law, whether application of state law would frustrate spe-

cific objectives of the federal program, and the extent to

which application of a federal rule would disrupt commer-

cial relationships predicated on state law. 440 U.S. at 728-

729. These factors all counsel against application of the

state law usury penalty against the FDIC.

a. First, the very nature of the statutory program for

promoting stability and confidence in the Nation’s banking

system furnishes a compelling reason for a uniform federal

rule protecting the FDIC’s status as a holder of assets that it

acquired in good faith and without actual knowledge of a

defect under state law. The Court recognized this reality in

D’Oench, Duhme. There the Court held that a uniform

federal rule, rather than state-lawholder-in-due-course prin-

ciples, should be applied to protect the FDIC from undis-

closed side agreements that would otherwise defeat the

FDIC’s interest in notes it acquired from a failed bank. The

Court ruled that such arrangements are inconsistent with

the policy of the federal statute under which the FDIC

operates. 315 U.S. at 455, 459-462.

Comp Laws. Ann. § 438.5 (1978). That exception is not mentioned in

Section 438.5, even though that Section does list other conditions

commonly associated with holder in due course status. The omission

therefore appears to be deliberate.

12

The Court’s subsequent decisions have adhered to this

view of the protections that must be afforded the FDIC. In

Kimbell Foods, the Court, quoting its prior decision in

United States v. Yazell, 382 U.S. 341, 354 (1966), observed

that “federal programs that ‘by their nature are and must be

uniform in character throughout the Nation’ necessitate

formulation of controlling federal rules.” 440 U.S. at 728.

In Yazell, one of the examples the Court cited for the

proposition quoted in Kimbell Foods was the uniform fed-

eral rule fashioned for the protection of the FDIC in

D’Oench, Duhme. The Yazell Court observed that “(t]he

bank deposit insurance program is general and standard-

ized,” and “{iJn a!l relevant aspects, the terms are explicitly

dictated by federal law.” 382 U.S. at 354, citing the Federal

Deposit Insurance Act, 12 U.S.C. 1811 et seq. Similarly, in

Illinois v. Milwaukee, 406 U.S. 91 (1972), upon which the

Court also relied in Kimbell Foods (see 440 U.S. at 728), the

Court again cited D’Oench, Duhme as an example of a

situation in which the Court had fashioned federal common

law because “there [was] an overriding federal interest in the

need for a uniform rule of decision or where the controversy

touches basic interests of federalism” (406 U.S. at 105 n.6).°

The court of appeals properly adhered to this view here. See

also Gunter v. Hutcheson, 674 F.2d at 869-870.

b. Second, aside from the overriding need for uniformity

under the FDIC insurance program as a general matter,

application to the FDIC of penalties under the state law of

usury, even where the FDIC acquires assets in good faith

and without actual knowledge, “would frustrate specific

‘The Court’s subsequent decision in Milwaukee v. Illinios, 451 U.S.

304 (1981), did not question either the correctness of its decision in

Illinois v. Milwaukee under then-exsisting laws or, in particular, the

Court’s approval in the latter decision of D’Oench, Duhme as an

appropriate occasion for the fashioning of a federal common law rule.

See 451 U.S. at 314; id. at 336 (Blackmun, J., dissenting).

13

objectives of the federal program[]” (Kimbell Foods, 440

U.S. at 728). As we have explained above, one of the most

effective ways in which the FDIC can fulfill its statutory

responsibilities is to arrange a purchase and assumption

transaction, in lieu of the less favorable alternative of pay-

ing insured deposits and liquidating the failed bank’s assets.

However, the FDIC is authorized to enter into a purchase

and assumption transaction only when it determines the

transaction will cost less than the cost of a “deposit payoff.”

It would be impossible for the FDIC to estimate with reason-

able accuracy its potential loss from a purchase and

assumption transaction within the limited time available if

the FDIC were to be subject to potential state law claims of

usury of which it lacks knowledge. Moreover, a purchase

and assumption transaction must be consummated with

extraordinary speed if any “going concern” value of the

failed bank is to be retained and public confidence main-

tained; requiring the FDIC to conduct a detailed examina-

tion of the bank’s files and to consider the value of each of

its assets in light of the potential state law defenses and

penalties would substantially impair the FDIC’s ability to

act with the necessary dispatch. The result urged by peti-

tioner therefore would hinder the implementation of pur-

chase and assumption transactions, which afford an essen-

tial means of addressing the problems created by a failed

bank in a way that minimizes the disruptions of the banking

system and protects the resources of the insurance fund that

affords protection for depositors generally. See Pet. App.

7-11.

By the same token, the FDIC, unlike an ordinary assig-

nee who acquires an interest through a voluntary, arms-

length transaction, is not a “voluntary” creditor in any

meaningful sense of the term when it acquires assets pursu-

ant to a purchase and assumption transaction. In Kimbell

Foods, the term “voluntary creditor” was applied to federal

i

agencies that were involved in a lending transaction from its

inception, were able to tailor the transaction in light of

applicable state law, and were thus able to control the

factors that made collection of an obligation likely. See 440

U.S. at 732-733, 734-736. When the FDIC is faced with the

liquidation of the assets of a failed bank, it does not have

any of these opportunities. Moreover, the FDIC-administer-

ed insurance program is not a form of “social welfare legis-

lation” primarily designed for the benefit of particular pri-

vate persons (see Kimbell Foods, 440 U.S. at 735); it

benefits the banking system and the Nation as a whole by

assuring stability of institutions that are essential for the

conduct of commerce. .

We note as well that the effect of applying state law in full

force in these circumstances would be to prohibit the FDIC

from recovering any interest, not merely an amount in

excess of the ceiling under state law, and to expose the

FDIC to payment of attorney fees and costs as well. The

result would be to invoke against an agency of the United

States what state law itself designates as a “penalty” — a

consequence that ordinarily is barred absent express con-

gressional consent. FDIC v. Tito Castro Construction,

Inc., 548 F. Supp. 1224 (D. P.R. 1982), aff'd on other

grounds, 741 F.2d 475 (ist Cir. 1984); In re Charter Execu-

tive Center, Ltd., 34 Bankr. 131 (M.D. Fla. 1983). See

Missouri Pac. Ry. v. Ault, 256 U.S. 554 (1921).

c. Third, taking account of possible countervailing con-

siderations, the federal rule applied by the court of appeals

does not disrupt commercial relations predicated on state

law. It is doubtful that the potentiality of a bank failure

plays a role in the ord:aary commercial expectations of the

parties. Gunter v. Hutcheson, 674 F.2d at 872. Moreover,

under the court of appeals’ decision, the FDIC is simply

placed in the same position as a holder in due course who,

even under Michigan law, is not subject to the defense of

A OAR AOS (Aa Mw mas

scab nae caent

15

usury and the resulting penalty. As a result, petitioner’s

position is no worse than he would have been in had the

Community Bank trausferred the note to another banking

institution in the ordinary course of business. The prospect

that a note might be transferred to a holder in due course in

that manner is far more likely to have been within the

commercial expectations of the parties than is the potential

that the lending bank might fail at a time when the note

remained in its portfolio. For these reasons, the need to

avoid interference with the federal statutory policy of

promoting stability and confidence in the Nation’s banking

system far outweighs the remote possibility that commer-

cial expectations founded in the Michigan law of usury

_ might be affected by a federal rule protecting the FDIC

against state law usury claims in circumstances such as

these. Compare Kimbell Foods, 440 U.S. at 739-740.

d. Other federal courts likewise have held that a debtor

cannot invoke state usury penalties to reap a windfall forfei-

ture of a debt that came into the possession of the FDIC

through a purchase and assumption transaction. See FDIC

v. Tito Castro Construction Co., 548 F. Supp. 1224(D.P.R.

1982), aff'd on other grounds, 741 F.2d 475 (Ist Cir. 1984);

In re Charter Executive Center Ltd., 34 Bankr. 131, 135

(M.D. Fla. 1983); FDIC v. Rood, No. 82-1245-CIV-TGC

(M.D. Fla. Nov. 18, 1983). See also FDIC v. Leach, No.

82-1003 (6th Cir. Sept. 11, 1985), slip op. 5-8. Applying

similar principles, the FDIC also has been accorded protec-

tion against certain other state law defenses. See Gunter v.

Hutcheson, 674 F.2d at 873; Gilman v. FDIC, 660 F.2d

688, 695 (6th Cir. 1981); FDIC v. Hatmaker, 756 F.2d 34,

38 (6th Cir. 1985); FDIC v. Leach, slip op. 8-10. In view of

the consistent treatment of these issues by the lower federal

courts, there is no occasion for review by this Court.

16

Moreover, the Court of Appeals of Michigan also has

recently held that the FDIC is not subject to the defense of

usury under Michigan law in a suit brought by the FDIC in

its corporate capacity. FDIC v. Garbutt, 370 N.W.2d 387,

391-392 (Mich. App. 1985). In so holding, the court relied

on D’Oen. h, Duhme and the district court decisions in the

instant case and FDIC v. Leach, supra, and it recognized

the “strong policy concerns implicated in a purchase and

assumption transaction” and the need “te “vxilitate the

congressional intent to protect the FDIC and the public

funds it administers” by according it a status similar to that

of a holder in due course. 370 N.W.2d at 392. Thus, the

Michigan Court of Appeals and the federal courts are in

agreement regarding the proper application of federal law

and Michigan law in this precise context.

e. The application of a federal rule to preclude petitioner

from invoking the penalty features of Michigan’s usury law

is particularly appropriate in this case. Petitioner was a

director and principal shareholder of Community Bank and

was instrumental in arranging the loan by Community

Bank as part of a broader transaction for his personal

benefit. It would be inequitable indeed if petitioner, at the

expense of the Permanent Insurance Fund, now were per-

mitted to avoid liability for the interest on the note he

arranged and guaranteed. Cf. 12 U.S.C. 1828@)(2). Com-

pare Eiberger v. West, 247 Ga. 767, 281 S.E. 2d 148 (1981);

Miro v. Allied Finance Corp., 650 S.W.2d 938 (Tex. Civ.

App. 1983); Cohn v. Receivables Finance Co., 260 N.E.2d

67 (Ill. App. 1970); Heubusch v. Boone, 213 Va. 414, 192

S.E.2d 783 (1972).

4. Finally, petitioner contends (Pet. 16-18, 21, 25) that

the federal rule adopted by the court of appeals should not

be applied in the circumstances of this case because the note

was unsurious on its face and the FDIC therefore had actual

17

knowledge of its usurious naivre. This fact-bound conten-

tion was correctly rejected by the court of appeals (Pet.

App. 12-13) and does not warrant review.

The note indicated that interest would accrue at an annual

rate of 15.21%. Such a note is not usurious on its face under

Michigan law. Whether such a note is or is not usurious

depends on whether the lender has secured a sworn state-

ment that indicates that the loan is for a business purpose.

An assignee who acquires a note with a 15.2! % interest rate

who is unaware of the fact that the required s:atement has

not been filed, and who is entitled to holder in due course

status under Michigan law, is not subject to a maker’s usury

defense. Mich. Comp. Laws Ann. § 438.5 (1978). Sucii a

note becomes usurious only upon consideration of factors

that are entirely independent of the note itself. The district

court below found no evidence that the FDIC had actual

knowledge of the fact that the note was usurious because of

either the absence of a business purpose or the absence of a

sworn statement concerning the business purpose (Pet.

App. 18).

Petitioner contends that the FDIC should be deemed to

have knowledge of everything in a failed bank’s records,

including the fact that a sworn statement concerning a

business purpose was not contained therein. The courts

have not placed such a burden on the FDIC, because to do

so would significantly impair its ability to perform the “cost

test” with the dispatch necessary to implement a purchase

and assumption transaction. See Pet. App. 12-13. As the

Sixth Circuit stated in Gilman v. FDIC, 660 F.2d at 695:

To hold the FDIC responsible retroactively for the

misdeeds of the predecessors of which it is ignorant

when it agrees to repurchase all returned assets would

hamper the FDIC’s ability and inclination to opt for a

Purchase and Assumption arrangement. The FDIC

would never be able to enter one with a clear assess-

ment of the amount of worthless paper and litigation it

18

might face. This dilemma would, in turn, frustrate the

public policies behind the scheme of nationel banking

insurance.

See also FDIC v. Garbutt, 370 N.W.2d at 392 (approving

Gilman analysis).’

CONCLUSION

The petition for a writ of certiorari should be denied.

Respectfully submitted.

CHARLES FRIED

Acting Solicitor General

JOHN C. MURPHY, JR.

General Counsel

LAWRENCE F. BATES

Covnsel

RALPH E. FRABLE

Senior Attorney

Federal Deposit Insurance Corporation

OCTOBER 1985

7Contrary to petitioner’s assertion (Pet. 24-27), the intra-FDIC

transfer of assets when it enters into a purchase and assumption transac-

tion satisfies the “good faith” criterion. See Gunter v. Hutcheson, 674

F.2d at 873-874. Other federal courts have recognized that the FDIC

may deal with itself in its dual capacities as receiver of a failed bank and

as corporate insurer of bank deposits. FDIC v. Godshall, 558 F.2d 220

(4th Cir. 1977); FDIC v. Glickman, 450 F.2d 416 (9th Cir. 1971).