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

Heading: The Insolvency of USNB

Text: 10 In August, 1973, the Comptroller advised the FDIC that USNB was in poor financial condition and might have to be closed. The FDIC was provided with examination reports of USNB and other financial information available through the Comptroller's office. After analyzing the financial information, and information regarding the control of USNB, the FDIC decided that it had two relevant alternatives under the Act: (1) it could simply wait until USNB was closed by the Comptroller, and then pay the insured depositors up to the then $20,000 statutory limit and liquidate the bank; or (2) it could attempt to find a bank to purchase USNB's assets and assume its liabilities. 11 The consequences of liquidation were awesome. All of USNB's sixty-two offices, located throughout five southern California counties, would have to be closed and the value of uninterrupted operation of the offices would be lost. All checks drawn on USNB accounts would have to be dishonored, causing harm not only to the account holders but also to those persons to whom the account holders had written checks. The accounts of over 300,000 depositors in USNB would have to be held in suspense for a time long enough to permit the FDIC to compile records, offset the deposits with the liabilities, 12 U.S.C. § 1813(m), and pay the insurance, 12 U.S.C. § 1821(f). Insured depositors would receive only a maximum of $20,000, and a large percentage of the deposits were over that amount. Depositors and creditors would then receive only distributions from the liquidation of USNB's assets over a lengthy period of years. USNB had approximately one billion, two hundred and fifty million dollars in book values of assets and liabilities. It had deposits of $930 million. It had a trust department with assets under management of approximately $156 million. It had 344,000 separate deposit accounts. Approximately $300 million of those deposits were not insured. Innumerable legitimate borrowers were relying on USNB as a continuing source of credit to finance their businesses. 12 Faced with these consequences, the Board of Directors of the FDIC decided to attempt to find another bank to participate in a purchase and assumption transaction on such terms as would reduce the risk of loss to the Corporation. 13 It was first necessary to formulate the transaction in such a manner as would prove attractive to interested banks, so that competitive bidding among such banks would minimize the losses of the FDIC. To this end representatives of qualified and interested banks were invited to join with the Corporation in a discussion designed to fix the conditions of a purchase and assumption agreement. It became immediately apparent that certain assets and liabilities of USNB were not readily acceptable to the banks. These were assets and liabilities connected with the bank's controlling shareholder, C. Arnholt Smith, and certain USNB shareholders and companies associated with him. The banking transactions of the members of this group, referred to by the FDIC as the Designated Group, were regarded as suspect. Many interested persons attributed USNB's failure in large part either to mismanagement by the Designated Group or to their misuse of official power for personal gain, and charges were then under investigation by the Securities and Exchange Commission and the Internal Revenue Service. The members of the Designated Group individually were substantially indebted to USNB and the bank had issued standby letters of credit on their behalf to other banks that had lent money to group members. The consensus of the banks consulted by the Corporation was that the financial status of the Designated Group members was such that their obligations to USNB were of questionable value as assets, and that the assumption of liability on the standby letters of credit presented an unacceptable banking risk. Accordingly, the banks rejected such obligations as purchasable assets unless the Corporation would guarantee their value; they refused to assume the letters of credit as obligations unless in each case they had from the Corporation a guarantee of the obligation of the account party to the creditor bank as an offsetting asset. 14 The Corporation, faced with this ultimatum, refused to guarantee the value of these obligations. 1 It did not question the legal enforceability of the letters against USNB. However, it did not regard this as the controlling consideration. Instead it focused on the desirability of permitting the account parties to have their debts to the creditor banks paid out of the Corporation's jealously guarded deposit insurance fund. It felt that by guaranteeing the letters of credit it would be using the deposit insurance fund to make good tainted transactions of the Designated Group. Consequently, the purchase and assumption agreement as ultimately formulated did not include as purchased assets the obligations of members of the Designated Group or, as assumed obligations, the standby letters of credit issued to creditors of the group members. The transaction thus formulated was offered to the banks for competitive bid. 15 On October 18, 1973, USNB was closed by the Comptroller and the FDIC was appointed Receiver. Crocker National Bank, bidding $89.5 million for the value of USNB as a going concern, emerged as the acquiring bank and the following morning all USNB facilities, except its Nassau, Bahamas office, opened as branches of Crocker National Bank. 16 To implement the purchase and assumption agreement the Corporation lent to the Receiver the sum of $128,780,000 representing the difference between the amount of obligations assumed by Crocker and the value of the assets purchased, less the premium paid. To secure this loan the Corporation took a lien, prior to the claims of the remaining creditors of the receivership, on the unpurchased assets remaining in the receivership. The sum so lent was passed to Crocker by the Receiver along with the purchased assets.