Opinion ID: 576265
Heading Depth: 2
Heading Rank: 1

Heading: Background: Purchase and Assumption Transactions

Text: 10 This controversy arises in a context presenting an all too familiar scenario: the insolvency and subsequent closing by the FDIC of a large federally insured bank. Congress created the FDIC during another era of banking crisis to promote stability and maintain confidence in the national banking system. To this end, the FDIC as insurer of bank deposits pays depositors to the extent of insurance coverage when an insured bank fails. See 12 U.S.C. § 1821. In fulfilling this duty to pay depositors, the FDIC has two primary alternatives: liquidation or a purchase and assumption. 4 11 A liquidation involves closing the insolvent bank, selling its assets, paying depositors their insured amounts, and covering any shortfall with insurance funds. Liquidations may have substantial disadvantages: [a]ccounts are frozen, checks are returned unpaid, and a significant disruption of the intricate financial machinery results. Gunter v. Hutcheson, 674 F.2d 862, 865 (11th Cir.1982), cert. denied 459 U.S. 826, 103 S.Ct. 60, 74 L.Ed.2d 63 (1982). The probability that uninsured deposits or liabilities will be paid in any substantial part is slight, and the cost to the FDIC of simply covering insured funds is great. See FDIC v. Merchants Nat'l Bank, 725 F.2d 634, 636-37 (11th Cir.), cert. denied 469 U.S. 829, 105 S.Ct. 114, 83 L.Ed.2d 57 (1984). Additionally, closed banks erode confidence in the nation's banking system. Id. 12 In contrast, a purchase and assumption transaction has sometimes been found to be a dramatically effective and cost-efficient way to protect depositors, the banking system, and the resources of the insurance fund. Federal Deposit Ins. Corp. v. Bank of Boulder, 865 F.2d 1134, 1136 (10th Cir.1988). As in a liquidation, the FDIC is appointed receiver of the failed bank. However, instead of closing the institution, FDIC Receiver sells most of the assets and liabilities of the failed bank to a bridge bank. 5 The bridge bank opens the next day with no interruption of banking services or loss to depositors. 13 If the liabilities assumed by the bridge bank exceed the assets acquired, the FDIC (in its corporate capacity) pays the bridge bank the difference in a cash payment. The cash is obtained from the FDIC's insurance fund, and in exchange the FDIC (in its corporate capacity) acquires the untransferred, unassumed assets of the failed bank. In addition to providing the cash needed to entice a purchaser to buy the failed bank, the FDIC (in its corporate capacity) also provides the bridge bank with cash for operating expenses. 14 With one exception, the FDIC has almost complete discretion to undertake a purchase and assumption of the failed institution instead of a liquidation. The FDIC must determine that the purchase and assumption will be less costly than liquidating the bank. See 12 U.S.C. § 1823(c)(4)(A). 15 An appropriate purchase and assumption transaction is a symbiotic relationship for all involved: The FDIC minimizes its loss, the purchasing bank receives a new investment and expansion opportunity at low risk, and the depositors of the failed bank are protected from the vagaries of the closing and liquidation procedure. Gunter, 674 F.2d at 866. 16 In a case of first impression in this Circuit, this Court is now called upon to determine whether structuring a purchase and assumption agreement in such a way that creditors closely affiliated with the insolvent bank receive only the liquidation value of their claims while unaffiliated creditors receive one hundred percent violates the provisions of the National Banking Act.