Opinion ID: 531859
Heading Depth: 2
Heading Rank: 1

Heading: Priority of FDIC as Insurer of Bank Deposits

Text: 18 The FDIC was created by Congress during the Depression in an effort to safeguard bank depositors from the dangers of bank failures. FDIC v. Philadelphia Gear Corp., 476 U.S. 426, 432-35, 106 S.Ct. 1931, 1935-37, 90 L.Ed.2d 428 (1986) (quoting 77 Cong.Rec. 3837, 3840 (1933)). The cornerstone of Congress's bank protection system was the deposit insurance program which insured depositors against potential loss from a bank failure up to a stated monetary amount. See 12 U.S.C. section 1821(a). 19 When a bank fails, the FDIC will generally be appointed as a receiver. 12 U.S.C. section 1821(c), (e) (1982). The FDIC will then proceed to determine the future course for the failed bank. The FDIC has two alternatives: (1) a deposit payoff or liquidation where the bank is closed and the FDIC pays the depositors up to the $100,000 per account limit out of the deposit insurance fund, see 12 U.S.C. section 1821(d) (1982); or (2) a purchase and assumption transaction where the FDIC arranges for the sale of the failed bank's assets and deposit liabilities to another solvent bank. See 12 U.S.C. section 1823(c)(2), (c)(4)(A) (1982). The failed bank reopens in the solvent bank's name, and depositors are benefited by uninterrupted banking service. See Gunter v. Hutcheson, 674 F.2d 862, 865 (11th Cir.1982). 20 Before engaging in a purchase and assumption transaction, the FDIC must determine that the deposit insurance fund would suffer a greater loss in liquidation than in the purchase and assumption transaction. See 12 U.S.C. section 1823(c)(4)(A) (1982). This is done by performing a cost test where the benefit of a purchase and assumption transaction is measured by the value of the bids which are made by solvent banks for the failed bank's assets and deposit liabilities. 4 21 A purchase and assumption transaction is considered more desirable than a liquidation for several reasons, including that a bank closing deteriorates public confidence in the banking system, that closing a bank disrupts the operation of other solvent banks, that a liquidation may force depositors to wait for months to recover the insured portion of their funds, and that uninsured portions may never be recovered. Gunter, 674 F.2d at 865. 22 If the purchase and assumption transaction is the course chosen by the FDIC, then FDIC will sell the assets and deposit liabilities of the failed bank to the assuming bank. The assuming bank has the option to return to the FDIC in its receiver capacity those assets which the assuming bank finds to be of limited value. Id. The FDIC in its corporate capacity then purchases the returned assets from the receiver FDIC, which transfers the purchase price of the returned assets to the assuming bank. Id. The corporate FDIC attempts to collect on the returned assets, and proceeds from these collections are applied to replenish the insurance fund. As this Court stated in Gunter, through a purchase and assumption transaction, 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. Id. at 865-66. 23 The FDIC takes the position that a necessary element of a purchase and assumption transaction is an absolute priority for the FDIC in suits against third parties. Such a priority, the FDIC argues, would best aid the FDIC in replenishing the permanent insurance fund. 5 The FDIC reasons that as minimizing the depletion of the insurance fund is an express goal of the FDIC's statutory framework, the FDIC could not carry out its alleged statutory mission unless it had the ability to assert priority over the shareholders who are seeking recovery from the same assets as the corporation and that the need for the priority rule is thus implicit in the statutory scheme of the FDIC. 24 We agree that preservation of the permanent insurance fund is vital to the continued health of the nation's banking system. The FDIC should take all feasible measures authorized in the Federal Deposit Insurance Act to maximize recovery to the fund. We cannot, however, approve of judicial expansion of the express powers and rights granted to the FDIC in the Act by Congress. As the Federal Deposit Insurance Act contains no indication of an intention to create an absolute priority rule in favor of the FDIC, we must reverse the district court's finding based on policy considerations in favor of such a rule for the FDIC. 6 25 The case law advanced by the FDIC does not support a contrary finding. 7 In FDIC v. American Bank Trust Shares, Inc., 412 F.Supp. 302 (D.S.C.1976), vacated and remanded, 558 F.2d 711 (4th Cir.1977), on remand, 460 F.Supp. 549 (D.S.C.1978), aff'd, 629 F.2d 951 (4th Cir.1980), the FDIC was appointed receiver of American Bank & Trust (AB & T) by a South Carolina state court. Id. at 305. The FDIC, in its corporate capacity, purchased from FDIC as receiver several assets of AB & T, including all claims and causes of action of the receivership. 26 The FDIC brought a declaratory action, seeking a ruling that it owned all causes of action for harm or wrong done to AB & T. Shareholders of AB & T represented by Carl Joe Taylor brought a derivative suit against several directors of AB & T, and the district court ordered that these shareholders become a part of the federal court case and that all connected state court proceedings be stayed. 27 Another group of shareholders, led by Sidney Robinson Bagby, also brought a derivative suit against the directors of AB & T and/or American Bank Trust Shares (ABTS) in a federal court. These plaintiffs were also brought into the existing federal court suit with the FDIC. Sadie G. Schein, a holder of a subordinated capital note, brought suit on behalf of all subordinated capital noteholders of AB & T in state court, alleging fraud and deceit. Schein was also made a party in the federal action, FDIC v. American Bank Trust Shares, Inc. 28 The district court held that the FDIC owned all causes of action for harm done to ABTS, including claims against directors, officers and employees of the bank. Id. at 305-06. The court also ordered a stay on the non-derivative suits by Schein for fraud and deceit. The court found that [t]he subordinated capital notes, by their terms, were subordinate to the obligations of AB & T to its general creditor. Id. at 307. As the FDIC stood in the shoes of the general creditor, the FDIC therefore had a priority over the subordinate capital noteholders. 29 The district court stopped short, however, of creating an absolute priority for the FDIC, stating that: 30 The court is presently also of the view that FDIC is entitled to a priority over subordinated capital noteholders with respect to any recovery from directors and officers, and any policy insuring said persons. As a general rule, equity prefers the claims of innocent general creditors over the claims of shareholders or subordinated creditors deceived by officers of the corporation. However, before making a final determination on this point, the court at a proper time will give all parties an opportunity to be heard on the issue of priority of the disbursement of funds recovered by any party. 31 Id. at 307-08 (citations omitted). 32 On appeal, the Fourth Circuit vacated the district court's decision with directions for the district court to consider several issues raised by the defendants in a counterclaim concerning the method by which the FDIC acquired title to the bank's assets. FDIC v. ABTS, 558 F.2d 711, 713 (4th Cir.1977). The appellate court stated, however, that they did not disagree with the district court's conclusion that FDIC has demonstrated apparent title to the choses in action. Id. On remand, the district court decided the issues presented in the counterclaim, but did not make any further findings concerning its prior inclination of granting the FDIC a priority over recovery from directors and officers. 8 The decision in the series of ABTS cases therefore does not firmly establish that the FDIC is entitled to have this Court recognize a priority. 33 Nor does Palmer v. Metropolitan Bancorporation, Case No. 82-141-Civ-T-WC (M.D.Fla. May 23, 1983), appeal dismissed, 751 F.2d 392 (11th Cir.1984), offer much assistance to the FDIC. Although the district court in Palmer stated that the absolute priority rule requir[es] that the claims of general creditors be satisfied before an insolvent corporation's shareholders receive any distribution, Palmer, Order at 3 (citing In re Stirling Homex Corp., 579 F.2d 206, 211 (2d Cir.1978), cert. denied, 439 U.S. 1074, 99 S.Ct. 847, 59 L.Ed.2d 40 (1979)), this Court, upon review of the record, found that no ruling whatsoever has in fact been made concerning the priority of any claims asserted. Palmer v. Metropolitan Bancorporation, No. 83-3471, Order at 2 (11th Cir. Dec. 12, 1984) (unpublished). This Court concluded that the appeal was premature and dismissed the appeal. 9 Id. at 3. The Palmer decision is thus of no persuasive value on the issue of priorities. 34 One other district court case, Harris v. Stanley, Civil No. F 86-43 (N.D.Ind. Jan. 27, 1989), also addressed the priority issue. Harris involved allegations of federal and state securities fraud against several directors of Allen County Bank and two counts of racketeering against one bank director. Id., Order at 2. The plaintiff sought rescission of his stock purchase. Id. 35 One month after the plaintiff filed suit, Allen County Bank was declared insolvent and the FDIC was appointed as receiver. The FDIC conducted a purchase and assumption transaction with Indiana National Bank, which purchased several assets and deposit liabilities from the FDIC. The corporate FDIC agreed to purchase certain delinquent and classified loans not desired by Indiana National Bank. 36 The FDIC filed a motion to intervene and stay the proceedings in the plaintiff's case. Id. at 4. The district court granted the motion to intervene, and the FDIC filed a complaint against several defendants, alleging that the loss caused to the Allen Bank was caused by acts or omissions of the defendants. Id. at 4-5. 37 The FDIC again sought to stay the plaintiff's suit, alleging that the plaintiffs were improperly attempting to elevate their claims to the status of a priority creditor and that allowing the actions to proceed would contravene the statutory rules for banking. Id. at 6. The FDIC relied on Palmer and ABTS in support of its priority argument. Id. at 7-8. 38 The court, quoting Palmer and ABTS, found that the FDIC was entitled to an absolute priority over the shareholder's claims. Id. at 8-9. The court stated that it makes sense to the court to allow the FDIC case to proceed first. In that way, the assets can be liquidated by the FDIC and a value can be placed upon plaintiff's stock. Without such a determination first, there would appear to be no way to place a definite value on John Harris' stock. Id. at 11. The opinion's reliance on authority which did not create a priority in favor of the FDIC diminishes the persuasive value of the district court's decision in Harris, and we decline to follow the decision as precedent. 39 The FDIC would have this Court take an expansive view of the powers necessary for the FDIC to conduct a purchase and assumption transaction. Specifically, the FDIC wants this Court to allow the FDIC to exercise all powers incidental to carrying out its express obligation to the fund, which would include granting an absolute priority over other claims. The FDIC has not directed this Court to any authority which would support this broad interpretation, and we have not independently discovered any rationale which would support the FDIC's position. 40 The FDIC also argues that an absolute priority is necessary for the FDIC to rely on the cost test in a purchase and assumption transaction. See, footnote 4. We are unconvinced by the argument of the FDIC. This Court's opinion in Gunter, 674 F.2d 862 (11th Cir.1982), is instructive in this regard. In Gunter, this Court concluded that section 2(e) of the Federal Deposit Insurance Act 10 did not protect the FDIC against a notemaker's defense of fraud, id. at 867, but went on to fashion a federal common law rule which protected the FDIC on notes acquired in a purchase and assumption transaction in good faith for value and without notice of claims or defenses of the notemaker. Id. at 872. The Court concluded by limiting the scope of the Gunter decision, stating: 41 [B]ecause this rule is based largely upon the need for quick decisions by the FDIC regarding the method to best handle a bank failure, the rule applies only when the FDIC acquires a note in the execution of a purchase and assumption transaction. In other, more normal, commercial contexts, we see no reason to relieve the FDIC from the ordinary operation of state law. Second, because another primary basis of the rule is the need for the FDIC to rely on the books and records of the failed bank in assessing its potential liability under a purchase and assumption vis-a-vis a liquidation, the protection from unknown fraud is available only to the extent the FDIC pays value for the note and thereby jeopardizes a portion of the insurance fund. 42 Gunter, 674 F.2d at 873. See also Langley v. FDIC, 484 U.S. 86, 91, 108 S.Ct. 396, 401, 98 L.Ed.2d 340 (1987) (The [purchase and assumption transaction], in particular, must be made 'with great speed, usually overnight, in order to preserve the going concern value of the failed bank and avoid an interruption in banking services.' ). The value of a potential lawsuit against solvent third parties cannot be assessed during the quick review of a failed bank's books which occurs during a purchase and assumption transaction. Without any doubt, the collections against solvent third parties would help the FDIC in restoring any loss to the permanent insurance fund, but such recovery can only be viewed at best as a contingency at the time of the purchase and assumption transactions. Denying the FDIC an absolute priority does not appear to make a cost test prior to a purchase and assumption transaction any less accurate. 43 The FDIC makes much criticism of the Gunter decision and states that the Supreme Court in Langley expressly disapproved Gunter 's conclusion and that the FDIC's statutory framework contained implicit purposes not literally articulated but which were required to adequately fulfill the statute's purpose. We disagree with the FDIC's manipulation of the Langley decision. While it is true that Langley defined agreement within section 1823(3) broader than the Eleventh Circuit had in Gunter, nothing in the Langley decision would suggest that this Court should take a broader view of the powers of the FDIC under the Federal Deposit Insurance Act. 44 The Court in Langley stated that the common meaning of agreement must be assigned to its usage in section 1823(e) if that section is to fulfill its intended purposes. Langley, 484 U.S. at 91, 108 S.Ct. at 401. The Court also found that two purposes, ready and reliable information to aid evaluations in the event of a sale of the bank's assets and mature consideration of unusual loan transactions, were implicit in the section's requirements. Id. at 91-92, 108 S.Ct. at 401-402. The Court was careful to note, however, that in interpreting the meaning of section 1823(e), it would not engraft an equitable exception upon the plain terms of the statute. Id. at 94, 108 S.Ct. at 402. 11 The court's deference to the legislation enacted by Congress is evident throughout the Langley decision, 12 and should serve as a guide for this Court in denying the FDIC's effort to create a priority which appears nowhere on the face of the Federal Deposit Insurance Act. We therefore find that the FDIC is not entitled to a priority over the shareholders by virtue of its status as the insurer of the failed Park Bank. 45