02 C 1587

insurance coverage under this section would not be provided. For purposes of this

section, a “defeating contingency” is defined as a condition which would prevent

the beneficiary from acquiring a vested and non-contingent interest in the funds in

the deposit account upon the owner’s death.
Accordingly, the FDIC moved for summary judgment on the ground that its denial of
separate insurance coverage was proper under 12 C.F.R. § 330.10(f) and 12 U.S.C. §
1821(a)(1)(B),(C). Plaintiffs have filed a cross motion for summary judgment alleging
that the FDIC incorrectly applied 12 C.F.R. § 330.10(f) concerning revocable trust
accounts in determining that the Joeann V. Hanna Revocable Trust contained a defeating
contingency thereby eliminating it from consideration for insurance coverage as separate
from Joeann Hanna’s other individual accounts which had already exhausted the
$100,000 dollar limit pursuant to 12 U.S.C. § 1821(a)(1)(B) and 12 C-F.R. § 330.6(a).
Plaintiffs further allege that even if the FDIC properly applied its regulations in this case,
the regulations are unreasonable and inconsistent with 12 U.S.C. § 1811 et seq.

With respect to the accounts held in trust for Mr. Hanna’s mother, Julia, Plaintiffs
concede that the half of the funds that were contributed by Joeann Hanna are not insured
separately from Joeann Hanna’s individual accounts since Julia Hanna does not meet the
requirements for a qualified beneficiary of Joeann Hanna pursuant to 12 C.F.R. §
330.10(a). The remaining issue is whether the Joeann V. Hanna Revocable Trust
contains a defeating contingency that disqualifies it from separate insurance coverage as
provided for in 12 C.F.R. § 330.10, and if so, whether the FDIC regulations as applied are
inconsistent with, and an unreasonable use of, the interpretive power given to it by 12
U.S.C. § 1819%a).

The Self Declaration of Trust of Joeann V. Hanna states:



02 C 1587
will give deference to the agency’s interpretation if it is a reasonable construction.
Bankers Life, 142 F.3d at 983.

The FDIC was established by Congress pursuant to 12 U.S.C. § 1811 which states
in part that:

There is hereby established a Federal Deposit Insurance Corporation .. .
which shall insure, as hereinafter provided, the deposits of all banks and savings
associations which are entitled to the benefits of insurance under this chapter, and
which shall have the powers hereinafter granted.

Further, 12 U.S.C. § 1821(a)(1)(C) states in part that:

[T]he Corporation shall aggregate the amounts of all deposits in the
insured depository institution which are maintained by a depositor in the same
capacity and the same right for the benefit of the depositor or in the name of any
other person, other than any amount in a trust fund described in paragraph (1) or
(2) of § 18173)... -

Trust funds that are to be treated separately are further defined in 12 U.S.C. § 1817(i)(1)
which states that:

Trust funds held on deposit by an insured depository institution in a
fiduciary capacity as trustee pursuant to any irrevocable trust established pursuant
to any statute or written trust agreement shall be insured in an amount not to
exceed $100,000 for each trust estate.

The FDIC’s regulation, 12 C.F.R. § 330.10(f), was promulgated pursuant to the
statutory power granted to the FDIC to carry out the provisions of the statute to insure
deposits and to institute regulations that it deems necessary to carry out its duties.
Therefore, the regulation passes muster under the first prong of Chevron deference.
However, even under the second prong of Chevron, the regulation is a reasonable

interpretation of the power granted to the FDIC in the statute. Consequently, under either

prong of Chevron, 12 C.F.R. § 330.10(f) must be given deference by the court.


02 C 1587
decedent’s estate. 755 ILCS 5/18-10. Conversely, the Joeann V. Hanna Revocable Trust
lists “any legacies” as the type of claims allowed against the Trust. A claim under the
“any legacies” language is unlimited as to who may receive funds and how much that
claim may be worth, and certainly is not of the variety in the first classification of claims
described in 755 ILCS 5/18-10,18-13. Additionally, claims that are an expected part of
trusts are those which legally come prior to descent or bequest of a decedent’s property to
heirs or legatees. Therefore, the FDIC correctly identified this provision as being a
defeating contingency, which requires the Trust to be aggregated with Joeann Hanna’s
other individual accounts and insured up to a total of $100,000. 12 C.F.R. § 330.10(c).
To determine the existence of a defeating contingency, the FDIC need only look
to the Trust itself, and not at the will to which it refers. The FDIC’s regulation, 12 C.F.R.
330.10(£) states in part that: “If... the living trust includes a ‘defeating contingency’
relative to that beneficiary’s interest in the trust assets, then insurance coverage under this
section would not be provided.” As 12 C.F.R. § 330.5(a)(1) states in part:

If the FDIC, in its sole discretion, determines that the deposit account
records of the insured depository institution are clear and unambiguous, those
records shall be considered binding on the depositor, and the FDIC shall consider
no other records on the manner in which funds are owned. If the deposit account
records are ambiguous or unclear on the manner in which the funds are owned,
then the FDIC may, in its sole discretion, consider other evidence... .

This procedure allows the FDIC to make the quickest possible determination to facilitate
the public’s access to its savings and maintain the going concern value of the failed bank.
Villafane-Neriz v. FDIC, 75 F.3d 727, 732 (1st Cir. 1996). In this case, looking solely at

the Trust, there is no indication that the clause at issue pertaining to “any legacies” does

not operate as a defeating contingency to defeat the interest of the Trust beneficiaries.



02 C 1587
If the assets of my estate subject to probate (excluding tangible personal
property and any assets specifically bequeathed or devised by Will or any Codicil
thereto) are insufficient to pay any legacies set forth in my Will or any Codicil
thereto, the Trustee shall pay such legacies.
The effect of this clause is to prevent the beneficiaries of the Trust from having a vested
non-contingent interest in the funds and therefore disqualifies the Trust from being
insured separately pursuant to 12 C.F.R. § 330.10(f). Consequently, the funds in the
Joeann V. Hanna Revocable Trust must be treated as individually owned accounts of
Joeann Hanna, aggregated with any other individually owned accounts held by her, and
insured up to a total of $100,000. 12 C.F.R. §330.10(c).

To assist in applying the revocable trust regulations in the context of defeating
contingencies, the FDIC issued the Guidelines for Insurance Coverage of Revocable Trust
Accounts (Guidelines). 1994 WL 467226. In the Guidelines, the FDIC states that some
defeating contingencies “are viewed as such expected parts of trusts that they can appear
in a trust without being held to prevent the beneficiary from having a vested interest in
the trust, provided the beneficiary does have a vested interest.” These types of defeating
contingencies do not defeat the separate insurability of a beneficiary’s trust interest, and
include clauses such as a “condition that inheritance, estate and other death taxes, last
illness and funeral expenses, the decedent’s debts and administrative expenses relating to
the settlor’s estate must be paid from the trust.” The clause in the Joeann V. Hanna
Revocable Trust does not qualify as such an expected part of a trust that it will not be
viewed as preventing the beneficiary from obtaining a vested interest in the funds.
Looking to the Illinois Probate Act of 1975, the types of claims considered as an

“expected part of trusts” in the Guidelines are all considered in the same classification of

5



02 C 1587

the Trust left Joeann Hanna with a measure of control over the Trust assets, exercisable
by execution of a codicil or a new will, that is incompatible with the separate treatment of
the Trust for deposit insurance purposes pursuant to 12 C.F.R. § 330.10(f).

Plaintiffs contend that 12 C.F.R. § 330.10(f) is an unreasonable exercise of the
regulatory power granted to the FDIC by Congress pursuant to 12 U.S.C § 1819(a)(Tenth)
which states in part that the FDIC shall have power “[t]o prescribe by its Board of
Directors such rules and regulations as it may deem necessary fo carry out the provisions
of this chapter or of any other law which it has the responsibility of administering or
enforcing.” Courts have traditionally given full deference to a regulation that has been
issued under specific directive from Congress as in this case. Bankers Life and Casualty
Company v. United States, 142 F.3d 973 n. 4 (7th Cir. 1998). Further, the FDIC
regulations in this case are legislative regulations and not interpretive regulations as
distinguished by the Administrative Procedures Act. See 5 U.S.C. § 553(b)(3)(A) (1994).
Legislative regulations are rules of full legal effect that create new legal duties binding on
the parties and the courts and thus require full notice and comment procedures. Bankers
Life, 142 F.3d at 978. These regulations are entitled to deference. Chevron, U.S.A., Inc.
v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). Under Chevron
deference, the court applies a two step analysis to determine the level of deference to give
a regulation that was promulgated pursuant to a statute: (1) The court looks to the plain
meaning of the statutory text to determine if it either supports or opposes the agency’s

interpretation, and (2) if the statute is either ambiguous or silent on the issue, the court



Minute Order Fosm (06/97)

Xd United States District Court, Northern District of Illinois

Ni f Assigned Jud; ; itting Judge it if

Sierra | Geonge W. Lindberg | stn te tome

CASE NUMBER 02 C 1587 DATE 11/14/2002
CASE Kenneth Hanna, et al. vs. FDIC
TITLE

[ln the following box (a) indicate the party filing the motion, e.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
of the motion being presented.]

MOTION:

DOCKET ENTRY:

(1) i) Filed motion of [ use listing in “Motion” box above.]

(2) Oo Brief in support of motion due

(3) Qa Answer brief to motiondue___. Reply to answer brief due

(4) a Ruling/Hearingon__setfor__——_at

(5) Oo Status hearing[held/continued to] [set for/re-set for]on___setfor__——_att

(6) Oo Pretrial conference[held/continued to] [set for/re-set for]on__—_setfor__—sat__—

(7) a Trial[set for/re-set for]on____at

(8) Q {Bench/Jury trial] [Hearing] held/continued to__at

(9) a This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to] 1
OFRCP4(m) OLocal Rule 41.1 CFRCP41(a\(1) CO FRCP4i(a)(2).

ao) [Other docket entry] | Defendant’s motion to dismiss (8-1) is denied. Defendant’s motion for

summary judgment (8-2) is granted. Plaintiffs’ motion for summary judgement (15-1) is denied. Enter
memorandum opinion and order.

(11) @f (For further detail see order attached to the original minute order.]

No notices required, advised in open court.

No notices required. number of notices

Notices mailed by judge's staff. NOV 1 A 2002

Notified counsel by telephone. date docketed

Y_ | Docketing to mail notices.
VY | Mail AO 450 form. ynod LawLsia’s n docket ep il
Copy to judge/magistrate judge. ya
courtraom Hy38 HY NL AONZO date ied otice
SLB deputy’s
initials Ay
otha 7
central Clerk's Office mating deputy ntl



02 C 1587

Accordingly, plaintiffs’ motion for summary judgment is denied and defendant’s motion
for summary judgment is granted.

ORDERED: Defendant’s motion to dismiss [8-1] is denied. Defendant’s motion
for summary judgment [8-2] is granted. Plaintiffs’ motion for summary judgment [15-1]
is denied. Judgment in favor of defendant, the Federal Deposit Insurance Corporation,
and against plaintiffs, Kenneth and Joeann Hanna, will be set forth on a separate

document and entered in the civil docket. Fed. R. Civ. P. 58, 79(a).

ORGE/ W. LINDBERG
enior UfS. District Judge

DATED: WOV 1 3 2002



02 C 1587

Ifthe FDIC was obligated to look at the Will in this case, the clause would still be
deemed to be a defeating contingency due to the possibility of the execution of a later will
or codicil adding legacies that would deplete the Trust thereby depriving the Trust
beneficiaries of their interest in the funds. 755 ILCS 5/4-7. In this case the Will referred
to by the Joeann V. Hanna Revocable Trust contains three sections: (1) to pay last
illness, funeral expenses, legal obligations, estate and inheritance taxes; (2) to bequeath
all household furniture, cars, jewelry, and other articles of household or personal use to
Kenneth Hanna, or to her children; and (3) to pay the residue of Joeann’s estate to the
Joeann V. Hanna Revocable Trust. Even though the specifics of this Will would not have
defeated the interests of the beneficiaries to the Trust, a later will or codicil could add
legacies that would deplete the Trust. The plaintiffs argue, “There can be little argument
that should the final disposition of Joeann Hanna’s Revocable Trust have become
necessary prior to the liquidation of Superior Bank that her Will would have been
considered in the disposition.” However, the issue of the distribution of the Trust assets
upon Joeann Hanna’s death is distinct from the question of whether the Trust provision in
question constitutes a defeating contingency due to its potential to defeat the interest of
the Trust beneficiaries. Finally, plaintiffs argue “the language deemed a ‘defeating
contingency’ in the Trust has no impact on the Trust, and is merely superfluous language
of no consequence.” However, Joeann Hanna presumably included the language in the
Trust for a purpose. Even if she did not have any purpose in mind when she included the
contingency, the fact remains that she could execute a codicil or a new will that could

defeat the beneficiaries’ interest in the assets of the Trust. In effect, the contingency in


02 C 1587

9. On March 12, 2002, the FDIC issued a letter explaining its final determination
as to the insurance coverage ... .

Plaintiffs allege the following additional facts which are not in dispute:
11. Joeann Hanna executed a Will with her revocable Trust, which William Mohr
drafted and prepared, and had executed and witnessed, in full compliance with
the laws of Illinois... .

12. This will has not been revoked or modified in any way....

Plaintiffs filed a complaint, alleging the FDIC incorrectly determined that various
cash accounts held by plaintiffs were uninsured under the Federal Deposit Insurance Act,
12 U.S.C. § 1811 et seq., and were unlawfully withheld by the FDIC either in its capacity
as the administrator of the federal deposit insurance program, or in its capacity as the
receiver duly appointed to liquidate Superior Federal Savings Bank, or both. Pursuant to
12 U.S.C. § 1821(a)(1)(B), the net amount due to any depositor at an insured depository
institution shall not exceed $100,000. To determine the amount due to each depositor, the
FDIC:

[S]hall aggregate the amounts of all the deposits in the insured depository
institution which are maintained by a depositor in the same capacity and the same
right for the benefit of the depositor either in the name of the depositor or in the
name of any other person, other than any amount in a trust fund,

12 U.S.C. § 1821(a)(1)(C). Trust fund amounts that are excluded from aggregation for
purposes of the $100,000 limit are those described in 12 U.S.C. § 1817(i)(1) that are held
in any irrevocable trust established by a statute or written agreement, and are insured
separately up to $100,000. The FDIC further clarified this requirement in 12 C.F.R. §

330.10(f) which states in part that:

If, however, for example, the living trust includes a “defeating
contingency” relative to that beneficiary’s interest in the trust assets, then



02 C 1587

Pursuant to Fed. R. Civ. P. 12(b)(6), a motion to dismiss is properly granted when
a complaint fails to state a claim upon which relief can be granted. Since the FDIC’s
alleged right to dismissal in this case is dependant upon matters outside the pleadings, it
is more properly considered a motion for summary judgment pursuant to Fed. R. Civ. P.
56. Accordingly, the motion to dismiss is being denied.

Summary Judgment is appropriate when “there is no genuine issue as to any
material fact and . . . the moving party is entitled to a judgment as a matter of law.” Fed.
R. Civ, P. 56(c).

The defendant alleges the following facts as set forth in its Statement of Material
Facts Not in Dispute:

2. The FDIC is an agency of the United States that insures deposits in financial
institutions and acts as receiver for failed institutions .. . .

3. The plaintiffs had 11 accounts at Superior Bank, FSB held by revocable trusts

4. Seven accounts, totaling $230,963.76, were held by Mr. and Mrs. Hanna as
Trustees for the Joeann V. Hanna Revocable Trust and governed by the Self-
Declaration of Trust of Joeann V. Hanna, dated January 18, 2000... .

5. Four accounts, totaling $55,992.43, were held by Mr. and Mrs. Hanna in trust
for Julia A. Hanna, the mother of Mr. Hanna....

6. Mr. and Mrs. Hanna each contributed 50% of the funds in the accounts held
by them in trust for Julia A. Hanna....

7. On July 27, 2001, the Office of Thrift Supervision closed Superior Bank, FSB
and appointed the FDIC as receiver... .

8. On January 2, 2002, the FDIC issued the Hannas a receivership certificate for
$158,959.98, the entire amount of the funds in the accounts initially
determined to be uninsured ....



IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION DOCKETED

NOV 14 2092
KENNETH and JOEANN HANNA,

)
)
)
Plaintiffs,  )
) No. 02 C 1587

-vs- )

) Senior Judge George W. Lindberg
FEDERAL DEPOSIT INSURANCE )
CORPORATION, a corporation of the )
United States of America, individually )
and as Receiver of Superior Savings Bank, )
FSB, a federal savings bank in liquidation, )
)
Defendant. )

MEMORANDUM OPINION AND ORDER

Plaintiffs, Kenneth and Joeann Hanna, filed a complaint against defendant
Federal Deposit Insurance Corporation (FDIC), alleging that certain deposit accounts
were incorrectly determined to be uninsured and unlawfully withheld by the FDIC under
the Federal Deposit Insurance Act. 12 U.S.C. § 1811 et seq. The FDIC has moved for
dismissal of the complaint or, in the alternative, for summary judgment, on the ground
that its decision to deem various cash accounts held by the plaintiffs to be uninsured was
pursuant to 12 C.F.R. § 330.10, which the FDIC was authorized to promulgate under the
regulatory power granted to it by 12 U.S.C. § 1819(a). Plaintiffs have filed a cross
motion for summary judgment alleging that the FDIC incorrectly applied 12 C.F.R. §

330.1 0(f) concerning revocable trust accounts and that even if the FDIC properly applied

|

its regulations to this case, the regulations are unreasonable and inconsistent with 12

U.S.C. § 1811 et seq.