DOWNRIVER COMMUNITY FEDERAL CREDIT UNION, ET AL., PETITIONERS V.
PENN SQUARE BANK, THROUGH ITS RECEIVER, FEDERAL DEPOSIT INSURANCE
CORPORATION

   No. 89-697

   In The Supreme Court Of The United States

   October Term, 1989

   On Petition For A Writ Of Certiorari To The United States Court Of
Appeals For The Tenth Circuit

   Brief For The United States In Opposition

            TABLE OF CONTENTS
   Question Presented
   Opinions below
   Jurisdiction
   Statement
   Argument
   Conclusion

                            OPINIONS BELOW

   The opinion of the court of appeals (Pet. App. 1a-21a) is reported
at 879 F.2d 754.  The order and judgment of the district court (Pet.
App. 22a-45a) are unreported.

                             JURISDICTION

   The judgment of the court of appeals was entered on July 3, 1989.
A petition for rehearing was denied on September 5, 1989 (Pet. App.
49a-50a).  The petition for a writ of certiorari was filed on October
31, 1989.  The jurisdiction of this Court is invoked under 28 U.S.C.
1254(1).

                          QUESTION PRESENTED

   Whether the ratable distribution requirement of the National Bank
Act precludes the establishment of a constructive trust on behalf of
an individual creditor of a failed national bank in the absence of a
showing that the bank's fraud caused a particular harm to the creditor
not shared by substantially all other creditors and that granting
relief to the creditor would not disrupt the orderly administration of
the receivership estate.

                               STATEMENT

   1. Petitioner Downriver Community Federal Credit Union held about
$4 million in certificates of deposit from Penn Square Bank and
petitioner Wood Products Credit Union held about $500,000 in the
Bank's certificates of deposit on July 5, 1982, when the Bank was
declared insolvent by the Comptroller of the Currency and ordered
closed.  The Federal Deposit Insurance Corporation (FDIC) was
appointed receiver of the Bank.  After being paid $100,000 each, the
amount of their insured deposits, Downriver and Wood Products applied
for and were issued Penn Square Bank receiver certificates for the
amount of their uninsured deposits.  Each has received more than half
of its uninsured funds.  Pet. App. 3a-4a.

   Petitioners sued the FDIC as receiver for Penn Square Bank in the
United States District Court for the Western District of Oklahoma,
seeking to recover all of their uninsured funds.  They claimed that
Penn Square Bank held those funds in constructive trust for their
benefit because it had induced their deposits by issuing financial
statements that materially misstated the Bank's financial condition.
Pet. App. 3a-4a.  The cases were consolidated for trial.  In the
liability phase, Downriver tried its fraud claim to a jury and Wood
Products tried its claim to the court.  Both triers of fact returned
verdicts in favor of petitioners, finding that Penn Square Bank's
December 31, 1981, and March 31, 1982, financial statements contained
material misrepresentations;  that those representations were relied
upon by petitioners;  and that the Bank's management either knew that
the financial statements contained false or misleading information or
recklessly made those representations knowing that there were no
reasonable grounds for believing them to be true.  Id. at 4a.

   The district court then addressed the remedial question -- whether
a constructive trust could be imposed on the assets held by the
receiver for the benefit of petitioners.  The court first held that
Oklahoma law, rather than federal law, should be applied in deciding
whether to impose a constructive trust.  Pet. App. 34a.  It further
held that petitioners had satisfied the prerequisites for the
imposition of a constructive trust under Oklahoma law.  Specifically,
it found that Penn Square Bank had obtained their deposits by fraud;
that the deposits had augmented Penn Square Bank's assets;  and that
the deposits could be traced into assets held by the receiver.  Id. at
35a-36a.  The court also determined that the constructive trusts
vested under Oklahoma law at the time of the original deposits, and
then concluded that petitioners' funds were not subject to the ratable
distribution requirements of the National Bank Act.  The district
court acknowledged that 12 U.S.C. 194 "requires ratable distribution
among holders of receivers certificates," but the court thought that
ratable distribution was not required in the case of "property that
does not rightfully belong to the bank." Pet. App. 36a.

   Although the district court imposed a constructive trust on the
assets held by the receiver to the extent of the principal amount of
the deposits and the interest accrued to the date Penn Square Bank was
declared insolvent, the court denied petitioners' claims for
post-insolvency, prejudgment interest.  It held that "the controllign
law on the issue of prejudgment interest is federal law because
federal law applies to any post-insolvency rights of (the)
plaintiffs." Pet. App. 38a (emphasis added).  The court concluded that
interest accruing on a claim after insolvency cannot be paid unless
the assets are sufficient to pay all claims in full, since to pay
interest on one claim while other claims remained unpaid in whole or
in part would violate Section 194's requirement that assets be
distributed ratably.  Pet. App. 39a.

   2. The court of appeals held that the district court erred by
imposing a constructive trust on any of petitioners' deposits.  Pet.
App. 1a-21a.

   a. The court of appeals first concluded that federal law governed.
It acknowledged that Congress has not enacted specific legislation
governing the preinsolvency relationship between a national bank and
its depositors, but noted that it has enacted specific legislation
governing the distribution of assets of a national bank after the
insolvent bank is closed.  That legislation requires a ratable
distribution of assets among all general creditors entitled to share
in the receivership estate -- Section 194 provides that "the
comptroller shall make a ratable dividend * * * on all such claims as
may have been proved to his satisfaction or adjudicated in a court of
competent jurisdiction." It also precludes payments by bank officers
that prefer some creditors to others -- 12 U.S.C. 91 provides that
"the preference of one creditor to another * * * shall be utterly null
and void." Pet. App. 8a-9a.

   In light of Congress's directions with respect to the distribution
of a failed bank's assets, the court of appeals held that "(a)s of the
moment that a national bank is declared insolvent and goes into the
hands of a receiver, federal law governs the distribution of the
bank's assets." Pet. App. 9a.  Thus, the court concluded, "(a)ll state
laws inconsistent with the 'system of equal distribution' established
by the National Bank Act are preempted" (ibid., quoting Jennings v.
United States Fidelity & Guar. Co., 294 U.S. 216, 226 (1935)), since
"(i)n no other way could there be unity of administration, and a
carrying out of the federal mandate of equality" (Pet. App. 9a,
quoting First Nat'l Bank v. Selden, 120 F. 212, 215 (7th Cir. 1903)).
The court further explained (Pet. App. 10a) that the National Bank Act
must be read in conjunction with the Federal Deposit Insurance Act,
which specifically provides that where the FDIC is acting as the
receiver of a federal bank all suits are "deemed to arise under the
laws of the United States" (12 U.S.C. 1819 Fourth).

   The court of appeals concluded that petitioners could not avoid the
application of federal law by claiming that their equitable right to
the funds arose prior to insolvency.  The court held that "(t)he
equitable fiction of trusts relating back to the date that the
plaintiffs deposited their funds in PSB * * * does not change the fact
that by purchasing a certificate of deposit in PSB, the plaintiffs
intended a debtor and creditor relationship," not one of beneficiary
and trustee.  Pet. App. 11a.

   However, the court noted that "(t)he relevant provisions of the
National Bank Act admittedly do not provide explicit guidance for the
disposition of all claims against the receiver's estate." Pet. App.
12a.  The court therefore went on to state that even though it had
decided that federal law governs the petitioners' claims, that did not
necessarily preclude the imposition of a constructive trust in
accordance with Oklahoma law:  "In fashioning the federal common law
in this area we may look for guidance to the law of the state having
the closest connection to the transaction at issue when to do so would
not conflict with the need for uniform rules governing bank
liquidations." Pet. App. 13a (quoting FDIC v. Palermo, 815 F.2d 1329,
1334 (10th Cir. 1987)).  But the court determined that the National
Bank Act's "unfriendliness to special interests requires a claimant
seeking a preference from pro rata distribution of assets to bear a
heavy burden of proof." Pet. App. 15a (citing Hibernia Nat'l Bank v.
FDIC, 733 F.2d 1403, 1408 (10th Cir. 1984)).  The court held that a
"national bank's fraudulent conduct may give rise to a constructive
trust only when the plaintiff can show that the bank's fraud caused a
particular harm that is not shared by substantially all other
depositors, and that granting relief to the plaintiff does not disrupt
the orderly administration of the receiver's estate." Pet. App. 15a.

   b. With respect to petitioners' claims, the court of appeals
determined that the fraudulent statements contained in Penn Square
Bank's financial statements were not directed specifically to the two
credit unions.  Pet. App. 19a.  It concluded that "(i)n the absence of
a false and fraudulent representation made specifically to the
plaintiff, with respect to the financial condition of the (bank), the
plaintiff has no equity superior to the rights of other depositors or
creditors of the (bank), who made deposits in said (bank) in reliance
upon the statements published by said (bank)." Pet. App. 20a (quoting
Beacon Mfg. Co. v. Hood, 204 N.C. 349, 351, 168 S.E. 523, 524 (1933)).

   The court rejected petitioners' suggestion that unequal treatment
of depositors could be avoided by permitting all depositors similarly
situated to the plaintiffs to sue as a class.  It determined that
Congress had not intended to deluge the FDIC with claims for
preferences on behalf of all the uninsured depositors who could show
that they relied upon misleading information that was available to all
depositors.  Rather, the court determined, "(a)ny remedy for
fraudulent representations that affects, or potentially affects, all
creditors belongs to the receiver, who asserts such claims for the
benefit of all creditors" and distributes the proceeds on a pro rata
basis.  Pet. App. 21a.

                               ARGUMENT

   The court of appeals correctly held that federal law rather than
state law governs petitioners' claims and that petitioners are
entitled to no preference under the facts of this case.  Since its
decision does not conflict with any decision of this Court or another
court of appeals, further review is not warranted.

   1. a. Although state law generally governs the relationship of a
bank with its customers, "(s)tate law governance of the preinsolvency
contracts of national banks is limited * * * by the paramount
authority of Congress to regulate national banks." Pet. App. 8a.

         National banks are instrumentalities of the federal
      government, created for a public purpose, and as such
      necessarily subject to the paramount authority of the United
      States.  It follows that an attempt by a state to define their
      duties or control the conduct of their affairs is absolutely
      void, wherever such attempted exercise of authority expressly
      conflicts with the laws of the United States, and either
      frustrates the purpose of the national legislation or impairs
      the efficiency of these agencies of the federal government to
      discharge the duties for the performance of which they are
      created.  These principles are axiomatic, and are sanctioned by
      the repeated adjudications of this court.

   Davis v. Elmira Sav. Bank, 161 U.S. 275, 283 (1896).  Relying on
these principles, the court of appeals correctly held that, following
a determination that a bank is insolvent, federal law preempts state
law since Congress has enacted legislation governing the distribution
of a failed bank's assets.  Pet. App. 9a (citing American Surety Co.
v. Bethlehem Nat'l Bank, 314 U.S. 314, 316-317 (1941), and First Nat'l
Bank v. Selden, 120 F. 212, 215 (7th Cir. 1903)).

   Petitioners contend that state law should apply here because, under
it, their pre-insolvency relationship with Penn Square Bank was that
of beneficiary and trustee.  But petitioners' intention in depositing
their funds in Penn Square Bank was to establish the relationship of
debtor and creditor.  See Bank of Marin v. England, 385 U.S. 99, 101
(1966) (absent a showing of specific intent to the contrary, the
relationship of a bank to its depositors is that of debtor and
creditor founded upon contract).  Petitioners seek to change their
relationship with Penn Square Bank post-closing to one of trustee and
beneficiary.  Despite the equitable fiction that a constructive trust
arises at the time of the fraud, the characterization of the
relationship of petitioners and the Bank is a post-insolvency matter
governed by federal law.

   b. Under federal law, no constructive trust is warranted under the
facts of this case.  As the court of appeals noted (Pet. App. 8a-9a),
Section 194 states that creditors are to receive a "ratable dividend."
Thus, as the court of appeals held (Pet. App. 15a), a creditor of an
insolvent bank seeking a preference must overcome a heavy presumption
to the contrary.  Petitioners -- who have merely shown that they
relied on misleading statements in Penn Square Bank's financial
reports -- have not carried their burden.  They have established no
particular harm to them not shared by other depositors.  Indeed, the
district court acknowledged that the Bank's "officers and directors
intended to defraud all potential investors, depositors and
creditors." Id. at 33a.

   The imposition of a constructive trust under the facts of this case
would undermine the ratable distribution rule since, if a depositor
could receive full repayment of uninsured funds simply by
demonstrating that he based his investment decision on a bank's
financial statements and that those statements proved to be
misleading, then most creditors of a failed national bank would have
claims for full repayment.  Many if not most institutions which fail
have at some point made material misstatements of their financial
condition, and most investors can be said to rely to some degree on
the publicly disseminated financial statements of banks in which they
invest.  As the court of appeals stated, permitting some creditors to
receive a preferential recovery by filing lawsuits (and thus depleting
the estate's assets) quickly, despite the fact that all creditors
similarly situated would have the same claim, would make "the equality
promised to them * * * a mere mockery." Pet. App. 21a (quoting
National Bank v. Colby, 88 U.S. (21 Wall.) 609, 614 (1875)).

   2. Contrary to petitioners' contentions (Pet. 9, 10, 16), there is
no conflict in the circuits on the question presented.  Petitioners
cite no decision, and we know of none, where a court of appeals
approved the imposition of a constructive trust in a case like this
one.

   In Reno Nat'l Bank v. Seaborn, 99 F.2d 482 (9th Cir. 1938), a
depositor had instructed the Bank to transfer the depositor's funds to
another institution and the Bank promised to do so but did not.  The
Bank then became insolvent, and the depositor sought to recover in
full.  The court of appeals concluded that there was no need for
federal uniformity with respect to the question at issue (id. at 483),
but went on to hold under state law that the depositor should not be
treated more favorably than other creditors.  The decision not to
provide a preference in Reno Nat'l Bank is not in conflict with the
decision not to provide a preference in this case.  Moreover, not only
is the result in Reno Nat'l Bank in accord with that of the decision
in this case, the court's decision to consult state law is not
necessarily in tension with the reasoning of the court below.  As it
explained, in applying federal common law, a court "may choose to
adopt state law." Pet. App. 11a-12a n.6.  Furthermore, the court below
suggested that the imposition of a constructive trust might be
appropriate where, as in Reno Nat'l Bank, a depositor suffered a
particular harm not shared by other creditors.  See Pet. App. 16a.

   That was the case in Fiman v. South Dakota, 29 F.2d 776 (8th Cir.
1928), cert. denied, 279 U.S. 841 (1929).  In Fiman, the State's rural
credit board had made uninsured deposits in violation of a state law
that restricted the amount that it could deposit in any particular
institution;  thus, its claim was based on a particular law that was
not applicable to other depositors.  The court of appeals concluded
that the State's deposits had "been distinguished and pointed out as
money belonging to the state." Id. at 783.  In this case, in contrast,
petitioners' deposits have not been distinguished from those of other
creditors, since petitioners, like other depositors, relied to their
detriment on Penn Square Bank's misleading financial statements, which
were available to all depositors.

   Nor is FDIC v. Braemoor Associates, 686 F.2d 550 (7th Cir. 1982),
cert. denied, 461 U.S. 927 (1983), in conflict with the decision here.
 In that case the FDIC was acting as the receiver of a state bank
rather than a federal bank (see Pet. App. 10a & n.5), and the court
decided to apply state law in "the absence of any ready-made federal
common law." 686 F.2d at 554.  There was an absence of federal law
because that case did not involve a depositor seeking to obtain an
exception from the National Bank Act's ratable distribution
requirement.  Rather, the FDIC was attempting to recover money that
the president of the failed bank had funneled from the bank to a real
estate venture in which he was a partner.

   Finally, there is no merit to petitioners' claim that the court's
decision conflicts with cases construing federal bankruptcy law.
Specifically, petitioners contend that the court of appeals'
determinations of what constitutes an asset of a debtor's estate and
whether property obtained by fraud may be retained for the benefit of
that estate are inconsistent with determinations of the same issues
under the Bankruptcy Act.  But the court's decision does not permit
the receivership estate to retain any funds fraudulently obtained.  It
merely provides that where all creditors are similarly harmed, the
assets of the estate should be ratably distributed among all
creditors.  That result is in accord with the federal bankruptcy laws
requiring ratable distribution of assets among creditors of the same
class.

                              CONCLUSION

   The petition for a writ of certiorari should be denied.

   Respectfully submitted.

   KENNETH W. STARR

      Solicitor General

   MARK I. ROSEN

      Deputy General Counsel

   ANN S. DUROSS

      Assistant General Counsel

   JOAN E. SMILEY

      Senior Counsel

   SHARON POWERS SIVERTSEN

      Counsel Federal Deposit Insurance Corporation

   JANUARY 1990