Opinion ID: 354160
Heading Depth: 2
Heading Rank: 2

Heading: Provability of Standby Letters of Credit

Text: 26 The Receiver contends, nevertheless, that standby letters of credit, whether ultra vires or not, are not provable in a national bank receivership, since, it asserts, claims against the receiver of a national bank are not provable if they were contingent on the date of the bank's insolvency. Although the case law is quite limited, where commentators have made such statements of the law, e. g., 9 C.J.S. Banks and Banking § 755, they are found to rest on cases involving a lessor of property leased to the bank who is asserting a claim against the receiver to recover liquidated damages for loss of future rent. 27 Kennedy v. Boston-Continental Nat'l Bank, 84 F.2d 592 (1st Cir. 1936), cert. dismissed, 300 U.S. 684, 57 S.Ct. 667, 81 L.Ed. 887 (1937), was such a case. There the lessor, following default by the national bank lessee, sought to exercise an option given him by the lease to obtain as liquidated damages the difference between the fair rental value of the property for the balance of the lease and the rental provided by the lease. The court held the claim not provable, relying on contract principles which reasoned that exercise of the option by the lessor created a new contract which came into being at the time of re-entry by the lessor. This court has followed Kennedy in a case also dealing with an exercise of option to obtain liquidated damages for loss of future rent, Argonaut Savings and Loan Ass'n v. FDIC, 392 F.2d 195, 197 (9th Cir.), cert. denied, 393 U.S. 839, 89 S.Ct. 116, 21 L.Ed.2d 110 (1968). Accord, FDIC v. Grella, 553 F.2d 258, 262 (2d Cir. 1977). 28 Although these cases use broad language, indicating that the bank's liability on any claim must have accrued and be unconditionally fixed at the date of insolvency, they are, by virtue of their dependence on the new contract principle, distinguishable from cases not dealing with lease options exercised after insolvency. The claims here are based on letters of credit that were in existence before insolvency and are not dependent on any new contractual obligations arising later. 29 We note that at the time Kennedy was decided claims for future rent in bankruptcy were handled in a manner different from that by which other contingent obligations were handled. Although contingent contract liabilities were provable in bankruptcy, the courts stopped short of extending the same liberality of view to claims based on leases. 3A Collier on Bankruptcy § 63.32(3) at 1927. This remnant of medieval theory is the basis for the statement in Kennedy that exercise of the right to re-entry amounted to creation of a new contract arising after insolvency. Id. at 1927-28. Shortly after the decision in Kennedy, the bankruptcy rules were liberalized to allow proof of a landlord's claim, although leases remained (and still remain) in a category apart from other contract claims, even in the present bankruptcy rules. See id. at § 63.31(1) at 1915-16, § 63.32(5) at 1931-32; 11 U.S.C. § 103(a)(9). 30 The dissenting judge in Kennedy noted that the allowance of the claim depends on whether the equity rule or bankruptcy rule of provability should be followed in a national bank's receivership. 84 F.2d at 598. His statement and the cases cited in the opinion indicate that the majority was relying on the now outdated bankruptcy rules in reaching its decision that the claims were not provable. 31 We conclude that the holdings of Kennedy and Argonaut should be limited to cases involving leases and loss of future rent and should not be extended to other contingent obligations. To follow those cases here would amount to extending into new areas a rule that now appears to be outmoded, based as it is on a bankruptcy rule that today has been repealed in favor of the contrary equity rule. 32 Although the authority against the provability of these letters is thus distinguishable, there is little positive authority to support a holding that they are provable in national bank receiverships. There is authority holding such claims provable in general equity receiverships and in bankruptcy, as we shall discuss, but the only case dealing with the question in the context of national bank receiverships is Pinckney v. Wylie, 86 F.2d 541 (5th Cir. 1936). There a claim based on a bank's obligation as a surety for another's debt was asserted against a receiver of a national bank. The principal issue was whether the claimant was entitled to a ratable distribution based on the full amount of the debt or on the amount of the debt after crediting the proceeds from the sale of the security for the loan. 86 F.2d at 542. In deciding the amount of the claim, the court necessarily recognized that a claim based on a bank's obligation as surety or guarantor is provable, although it did not discuss the issue. 33 The result in Pinckney is consistent with the bankruptcy rules and equitable receivership principles governing the provability of contingent claims. Claims based on surety or guarantee obligations of a bankrupt are clearly provable as contingent contract obligations, 11 U.S.C. § 103(a)(8). 3A Collier on Bankruptcy, § 63.19 at 1876. Even before the bankruptcy statute was amended to specifically state that contingent contract claims are provable, courts held suretyship and guarantee claims provable, stating (e)ven though not due until after the year allowed for proof of claims, if proved in time, such a claim may be liquidated as are other unmatured claims. Maynard v. Elliott, 283 U.S. 273, 279, 51 S.Ct. 390, 392, 75 L.Ed. 1028 (1931) (and see cases cited therein). 34 This bankruptcy rule of provability seems consistent with the principles governing equitable receiverships. Under equitable principles the court must consider: 35     on the one hand, the substantial right of all creditors to share in their debtor's property, and, on the other, the necessity for expeditious administration and, giving due consideration to both, must make rules which are practicable as well as equitable. 36 Penn. Steel Co. v. New York City Ry. Co., 198 F. 721, 738 (2d Cir. 1912). The court in Penn. Steel divided all claims into three classes: 37 (1) Claims which at the commencement of proceedings furnish a present cause of action; 38 (2) Claims which at that time are certain but which are not matured:(3) Claims which are contingent. 39 Id. at 738. The first two classes are clearly provable but the third class of contingent claims must be divided into two subclasses: 40 (1) Claims of which the worth or amount can be determined by recognized methods of computation at a time consistent with the expeditious settlement of the estates; 41 (2) Claims which are so uncertain that their worth cannot be so ascertained. 42 Id. at 739-40. The latter class cannot be proved, but the claims in the former class are provable. Id. 43 The court in Penn. Steel found no equitable reason why the time of appointment of the receiver should determine the provability of claims, and held that: 44 Claims which when presented within the time limited by the court for their presentation are certain or are capable of being made certain by recognized methods of computation, should be allowed. Claims which are not then certain should be disallowed because they afford no basis for making dividends. But there is no equitable reason why claims which are certain when presented and which are presented in time should have been certain at some arbitrary anterior period. 45 Id. at 741-42 (emphasis supplied). We agree with that statement. 46 The claims at issue here would be considered provable under these equitable principles because the liability on the standby letters of credit was absolute and certain in amount when this suit was filed against the Receiver. By that time, the principals had defaulted on the primary loan obligations. The claims against the Receiver were made in a timely manner, well before any distribution of the assets of the receivership, other than the distribution made through the purchase and assumption agreement. 47 Finally we note that the Receiver seems already to have acted upon the assumption that standby letters of credit are, in principle, provable. Some such instruments were actually assumed by Crocker with FDIC approval, and thus those creditors were assured payment in full. These were letters where Crocker was willing to accept the obligation of the account party to the creditor bank as an offsetting asset. Thus, it was not the taint of membership in the Designated Group that rendered the letters of appellants unacceptable to Crocker. It was the fact that the obligation was certain to accrue. It was in such cases that Crocker insisted upon the FDIC's guarantee. 48 We conclude that the claims of appellants were provable in face amount in the receivership. 49