National bank may exchange its interest in a DPC real estate, acquired through foreclosure on a loan in which the bank was a participant, for an equivalent interest in an LLC owned by the participating banks which would manage and dispose of the DPC property. Prior to making the exchange, the bank must receive written notice of supervisory non-objection from its Examiner-in-Charge.

O

Comptroller of the Currency

Administrator of National Banks

Washington, DC 20219

September 18, 2009 Interpretive Letter #1123

October 2009

12 USC 29

12 USC 24(7)

Re:

Exchange of interest in real property acquired DPC for interest in an entity which

would dispose of the real property

Dear [ ]:

This is in response to your request for a legal opinion addressing the proposal by [ Bank,

City and State ] (“Bank”), to exchange its participation interest in other

real estate owned (“OREO”) acquired in satisfaction of a debt previously contracted (“DPC”) for

an interest in a limited liability company which would manage, market, and sell the DPC real

property. For the reasons discussed and subject to the representations and conditions set forth

herein, we believe that the Bank’s proposal is permissible under 12 U.S.C. §§ 24(Seventh) and 29.

Proposal

In 2006, the Bank participated in a syndicated loan to two related residential real estate

developers, [ Borrower1 ] and [ Borrower2 ] (collectively, the

“Borrowers”).1 The Borrowers’ collateral for the loan consisted of eleven residential

developments, comprising in total approximately [ ] completed houses and [ ] residential lots,

located in [ State1 ] and [ State2 ]. The Borrowers filed for bankruptcy in 2008, and the syndicate

recently foreclosed upon four of the developments (“OREO Properties”). The banks are

evaluating their options with respect to the remaining collateral, although the Bank states that

foreclosure remains likely.

For the four current OREO Properties, rather than having each participating bank hold a

partial interest in each OREO Property, the lending banks propose to establish a limited liability

company (“LLC”) to hold, manage, and dispose of the properties

. The banks are

evaluating their options with respect to the remaining collateral, although the Bank states that

foreclosure remains likely.

For the four current OREO Properties, rather than having each participating bank hold a

partial interest in each OREO Property, the lending banks propose to establish a limited liability

company (“LLC”) to hold, manage, and dispose of the properties. Each of the banks would

1 There are five banks, including the Bank, in the lending group. One of the other banks in the

lending group is the syndication agent.

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exchange its participation interest in the OREO Properties for an equivalent interest in the LLC.2

Accordingly, the LLC would aggregate all the outstanding DPC interests in the OREO Properties

and, thus, would be able to convey complete ownership of the properties to a purchaser.

Moreover, the LLC structure would permit the lending banks to ensure the efficient day-to-day

operation and management of the OREO Properties, to be carried out by the LLC’s managing

member.3

The Bank represents that the LLC will hold, manage, and dispose of the OREO Properties

within the guidelines for national banks’ OREO activities.4 The Bank further represents that it

expects the OREO Properties to be sold (or the LLC itself sold) within five years of its initial

acquisition of the OREO Properties. Distributions of revenue and income from disposal of the

OREO Properties would be allocated, and costs relating to the complex would be borne, in

relation to the members’ ownership interests.

Discussion

Pursuant to 12 U.S.C

Bank further represents that it

expects the OREO Properties to be sold (or the LLC itself sold) within five years of its initial

acquisition of the OREO Properties. Distributions of revenue and income from disposal of the

OREO Properties would be allocated, and costs relating to the complex would be borne, in

relation to the members’ ownership interests.

Discussion

Pursuant to 12 U.S.C. § 29, a national bank may “purchase, hold and convey real estate …

such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its

dealings.”5 Once it has acquired property in satisfaction of a debt previously contracted, a

national bank must dispose of such property within the time frames specified by section 29.

Section 29 does not require immediate disposal, nor does it permit the bank to hold onto the DPC

property speculatively.6 Instead, as it does in other instances, section 29 recognizes that once a

national bank permissibly acquires real property, the bank may act in good faith with respect to

2 The Bank would acquire an [ ]% interest in the LLC.

3 The loan’s syndication agent, [ Bank2 ], would serve as the managing member of the

LLC, responsible for day-to-day operational decisions for the LLC, with major LLC decisions reserved to

the members. The LLC will employ one or more third parties to act as managing agents for the OREO

Properties. In the absence of the LLC, operational decisions affecting the operations and disposal of the

OREO Properties would be made according to the terms of the loan documents.

4 Section 1.4 of the LLC Agreement would provide that so long as any member of the LLC is

subject to regulation, supervision, or examination by any federal or state bank regulatory agency, the LLC

may not engage in any activity that is impermissible under any federal or state banking law, regulation, or

regulatory agency opinion applicable to such member

ing to the terms of the loan documents.

4 Section 1.4 of the LLC Agreement would provide that so long as any member of the LLC is

subject to regulation, supervision, or examination by any federal or state bank regulatory agency, the LLC

may not engage in any activity that is impermissible under any federal or state banking law, regulation, or

regulatory agency opinion applicable to such member. Further, the Bank represents that the LLC would be

subject to OCC supervision and examination.

5 12 U.S.C. § 29(Third). The authority of a bank to acquire DPC property is a necessary power for

banks that has been recognized since the earliest days of our country. Among other provisions relating to

the power to hold real property included in the charter of the First National Bank was the power to hold

property “conveyed to it in satisfaction of debts previously contracted in the course of its dealings.” 1 Stat.

191, 1st Cong., Chap. 10, 1st Sess. (Feb. 25, 1791). A similar provision was included in the charter of the

Second Bank of the United States. 3 Stat. 266, 14th Cong., Chap. 44, 1st Sess. (Apr. 10, 1816). The

authority of a bank to acquire DPC property was included among those powers granted in the National

Currency Act of 1863, 12 Stat. 665, 37th Cong., Chap. 58, 3rd Sess. (Feb. 25, 1863).

6 See Conditional Approval No. 895 (Mar. 31, 2009) (DPC authority only applies to facilitate loan

recovery); Interpretive Letter No. 518, reprinted in [1990-1991 Transfer Binder] Fed. Banking L. Rep.

(CCH) § 83,226 (Apr. 6, 1990) (same).

ire DPC property was included among those powers granted in the National

Currency Act of 1863, 12 Stat. 665, 37th Cong., Chap. 58, 3rd Sess. (Feb. 25, 1863).

6 See Conditional Approval No. 895 (Mar. 31, 2009) (DPC authority only applies to facilitate loan

recovery); Interpretive Letter No. 518, reprinted in [1990-1991 Transfer Binder] Fed. Banking L. Rep.

(CCH) § 83,226 (Apr. 6, 1990) (same).

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that property as would any other prudent owner, subject only to the requirement that the bank

dispose of the DPC property within five years plus one possible five-year extension.7

Through analogy to section 29, the courts have interpreted the incidental powers of

national banks granted in 12 U.S.C. § 24 (Seventh) to authorize the acquisition and holding of

personal property, such as stock, in satisfaction of debts previously contracted.8 Moreover, the

OCC has long recognized that a national bank, pursuant to sections 24(Seventh) and 29, may

exchange permissibly acquired DPC property for other types of real or personal property.9 In

Interpretive Letter No. 395, the OCC permitted a national bank to exchange DPC real property for

preferred stock in a publicly-traded real estate company. The letter reasoned that, because

national banks were permitted to exchange DPC real property for other real property and because

national banks could acquire stock or other personal property interests DPC, national banks

permissibly could swap OREO for an equity interest in the entity acquiring the OREO. The letter

approved the exchange on the condition that the bank’s board must determine that the exchange

would be in the best interests of the bank and its ability to recover its loan loss

her real property and because

national banks could acquire stock or other personal property interests DPC, national banks

permissibly could swap OREO for an equity interest in the entity acquiring the OREO. The letter

approved the exchange on the condition that the bank’s board must determine that the exchange

would be in the best interests of the bank and its ability to recover its loan loss.

Similarly, the OCC recently concluded that a national bank may exchange an interest in

DPC real property for an equity interest in an entity which would manage, market, and dispose of

the property, where doing so would improve the ability of the bank to recover, or otherwise limit,

its loan loss. In Interpretive Letter No. 1118, the national bank’s DPC real property interest

consisted of approximately one-quarter of a townhouse apartment complex. Other financial

institutions, also through foreclosure, had acquired interests in the remainder of the complex. The

institutions proposed to create a limited liability company to collect their DPC interests which, in

total, comprised the entire complex. By aggregating their interests, the institutions would enhance

their ability to dispose of the property and also recognize cost savings in managing and marketing

the complex, both of which would improve the bank’s ability to recover its loan loss.

The linchpin of OCC precedent authorizing an exchange of OREO for an equity interest,

which would allow the bank to more effectively achieve recovery on the underlying debt than if

the bank simply continued to hold the OREO, is a good faith undertaking by the bank to improve

its ability to recover, or otherwise limit, its loan loss on DPC property. In other words, the

exchange cannot be made for the purpose of speculation or the expectation of profit. Just as a

7 See 12 C.F.R

ich would allow the bank to more effectively achieve recovery on the underlying debt than if

the bank simply continued to hold the OREO, is a good faith undertaking by the bank to improve

its ability to recover, or otherwise limit, its loan loss on DPC property. In other words, the

exchange cannot be made for the purpose of speculation or the expectation of profit. Just as a

7 See 12 C.F.R. § 34.82(a) (national bank must dispose of other real estate owned “at the earliest

time that prudent judgment dictates, but not later than the end of the holding period (or an extension

thereof) permitted by 12 U.S.C. § 29” (emphasis added)).

8 See First Nat’l Bank of Charlotte v. Nat’l Exch. Bank of Baltimore, 92 U.S. 122, 127 (1875) (“In

the honest exercise of the power to compromise a doubtful debt owing the bank, it can hardly be doubted

that stocks may be accepted in payment and satisfaction, . . . Such a transaction would not amount to a

dealing in stocks.”); Atherton v. Anderson, 86 F.2d 518, 525 (6th Cir. 1936), rev’d on other grounds, 302

U.S. 643 (1937); Morris v. Third Nat’l Bank, 142 F. 25, 31 (8th Cir. 1905) (“A national bank may lawfully

do many things in securing and collecting its loans, in the enforcement of its rights and the conservation of

its property previously acquired, which it is not authorized to engage in as a primary business.”).

9 E.g., Interpretive Letter No. 1118 (Jul. 2, 2009) (to be published); Interpretive Letter No. 395,

reprinted in [1988-1989 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 85,619 (August 24, 1987);

Interpretive Letter No. 349, reprinted in [1985-1987 Binder] Fed. Banking L. Rep. (CCH) ¶ 85,519

(September 12, 1985) (permitting an exchange of DPC for other real property). The proposition that a

national bank may exchange OREO for property of some other form goes back at least as far as 1936. See

Letter from G. Lyons (January 6, 1936) (unpublished) (permitting an exchange of DPC property for other

real property).

9, reprinted in [1985-1987 Binder] Fed. Banking L. Rep. (CCH) ¶ 85,519

(September 12, 1985) (permitting an exchange of DPC for other real property). The proposition that a

national bank may exchange OREO for property of some other form goes back at least as far as 1936. See

Letter from G. Lyons (January 6, 1936) (unpublished) (permitting an exchange of DPC property for other

real property).

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national bank has no authority to take DPC property for purely speculative purposes,10

transactions involving DPC property “must be compromises in good faith.”11 The determination

of such good faith necessarily will be specific to each DPC property and the associated exchange.

In the instant proposal, the Bank proposes to exchange its participation interest in the

OREO Properties for an interest in the LLC. Each of the other participating banks would

exchange its interest, too, and in doing so the Bank believes that it, and the other banks, would be

better able to recover the loan loss and dispose of the properties. Most significantly, the Bank

represents that it likely would be unable to dispose of its interest in OREO Properties apart from

an agreement by all of the lending banks to jointly sell their interests. The Bank believes that an

interest in the LLC would be more marketable, enabling the Bank to dispose of its interests prior

to the LLC’s ultimate disposition of the OREO Properties. By improving its ability to dispose of

the property, the Bank in turn improves its ability to recover its loan loss.12 Also, rather than

managing the OREO Properties according to the complex and burdensome terms of the loan

documents, aggregating the participation interests in the OREO Properties in the LLC permits the

lending banks to designate one institution, the LLC’s managing member, to address the day-to-

day responsibilities of holding, managing, and negotiating the disposal of the OREO Properties

ss.12 Also, rather than

managing the OREO Properties according to the complex and burdensome terms of the loan

documents, aggregating the participation interests in the OREO Properties in the LLC permits the

lending banks to designate one institution, the LLC’s managing member, to address the day-to-

day responsibilities of holding, managing, and negotiating the disposal of the OREO Properties.

The Bank represents that it would recognize substantial cost savings through these efficiencies.

Because the power to hold the LLC interest arises from the DPC authority in sections

24(Seventh) and 29, it necessarily follows that such power is subject to the limitations contained

in section 29 and 12 C.F.R. Part 34. As described above, section 29 specifically limits the holding

period for DPC property to five years, with the possible extension of up to five additional years

with approval from the OCC. The OCC has applied, by analogy, similar holding limitations and

divestiture requirements to personal property acquired DPC under section 24(Seventh).13 For

purposes of measuring compliance, the Bank’s holding period for its interest in the LLC must be

measured from the date legal title to the OREO Properties was initially acquired by the Bank.14

Conclusion

Accordingly, in consideration of the foregoing analysis, based upon the facts and

representations provided by the Bank and subject to the conditions below, we conclude that the

10 Atherton, supra, at 525.

11 First Nat’l Bank of Charlotte, supra at 128.

12 Section 29 does not prohibit a national bank from recovering more than the amount of its loan

loss upon the disposition of OREO property. Rather, the principles underlying the restrictions in section 29

are designed to prevent banks from engaging in impermissible real estate speculation in order to recover

more money. See id.; Union Nat’l Bank v. Matthews, 98 U.S. 621, 626 (1879)

at 128.

12 Section 29 does not prohibit a national bank from recovering more than the amount of its loan

loss upon the disposition of OREO property. Rather, the principles underlying the restrictions in section 29

are designed to prevent banks from engaging in impermissible real estate speculation in order to recover

more money. See id.; Union Nat’l Bank v. Matthews, 98 U.S. 621, 626 (1879). Therefore, as long as a

bank’s actions are made in good faith and not for speculative purposes, recovery of more than its loan loss

is permissible.

13 Conditional Approval No. 895, supra; Interpretive Letter No. 395, supra.

14 The Bank represents that, if any of the remaining seven residential developments serving as

collateral for the syndicated loan subsequently are foreclosed upon and placed into the LLC, the Bank will

nonetheless dispose of its LLC interest within the section 29 timeframe as measured from the date legal

title to the four OREO Properties was initially acquired by the Bank.

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Bank may exchange its DPC interest in the OREO Properties for an ownership interest in the

LLC.15 The authority to engage in this exchange is 12 U.S.C. §§ 24(Seventh) and 29, and is

subject to the following conditions:

(1) Prior to making the exchange, the Bank’s directors must determine that the exchange is in

the best interests of the Bank and would improve the ability of the Bank to recover, or

otherwise limit, its loan loss. The basis for such determination must be documented.

.15 The authority to engage in this exchange is 12 U.S.C. §§ 24(Seventh) and 29, and is

subject to the following conditions:

(1) Prior to making the exchange, the Bank’s directors must determine that the exchange is in

the best interests of the Bank and would improve the ability of the Bank to recover, or

otherwise limit, its loan loss. The basis for such determination must be documented.

(2) Prior to making the exchange, the Bank must notify its Examiner-in-Charge, in writing, of

the proposed exchange and must receive written notification of supervisory non-objection,

based on an evaluation of the adequacy of the Bank’s risk management and measurement

systems and controls to enable the Bank to exchange for, hold, and dispose of the LLC

interest in a safe and sound manner, and an evaluation of any other supervisory

considerations relevant to the exchange.

(3) The Bank may not further exchange the LLC interest for an interest in any other real or

personal property. Such property would be too far removed from the Bank’s original DPC

interest in the OREO Properties to be considered DPC property.

(4) The Bank must ensure that the LLC complies with the provisions of the OCC’s OREO

regulation, 12 C.F.R. Part 34, Subpart E, including obtaining a current appraisal on the

OREO Properties.

(5) Consistent with the limitations in 12 U.S.C. § 29 and 12 C.F.R. Part 34, the Bank must

dispose of its interest in the LLC no later than five years from the date it initially acquired

title to the OREO Properties, unless granted an extension by the OCC.

These conditions are conditions “imposed in writing by a Federal banking agency in

connection with any action on any application, notice, or other request” within the meaning of,

and enforceable under, 12 U.S.C. § 1818

ank must

dispose of its interest in the LLC no later than five years from the date it initially acquired

title to the OREO Properties, unless granted an extension by the OCC.

These conditions are conditions “imposed in writing by a Federal banking agency in

connection with any action on any application, notice, or other request” within the meaning of,

and enforceable under, 12 U.S.C. § 1818. Our conclusions herein are specifically based on the

Bank’s representations and written submissions describing the facts and circumstances of the

subject transactions, and any change in facts or circumstances could result in a different

conclusion.

This approval and the activities and communications by OCC employees in connection

with this approval, do not constitute a contract, express or implied, or any other obligation binding

upon the OCC, the United States, any agency or entity of the United States, or any officer or

employee of the United States, and do not affect the ability of the OCC to exercise its supervisory,

regulatory, and examination authorities under applicable law and regulations. The foregoing may

not be waived or modified by any employee or agent of the OCC or the United States.

15 Alternatively, the Bank at its discretion may follow the procedures in 12 C.F.R. § 5.36 to acquire

a non-controlling interest in the LLC.

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If you have any questions concerning this letter, please contact Steven V. Key, Special

Assistant to the Deputy Chief Counsels, at (202) 874-5200.

Sincerely,

signed

Julie L. Williams

First Senior Deputy Comptroller

and Chief Counsel