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

Heading: Common Law Priority of FDIC as General Creditor

Text: 46 The FDIC argues that if it is not entitled to a priority under the statutory scheme of the Federal Deposit Insurance Act, this Court should consider fashioning a federal common law absolute priority rule. For the reasons stated below, we decline to create such a rule. 47 The absolute priority rule evolved out of the bankruptcy principle that a debtor receives distribution only after all creditors have been satisfied. The rule applies to equity contributions in corporations by requiring that the providers of the equity (the stockholders) not seek recovery of corporate assets until general creditors' claims have been satisfied. In re Perimeter Park Investment Associates, Ltd., 697 F.2d 945, 952 n. 8 (11th Cir.1983). Secured creditors get first priority according to their rank and the unsecured creditors follow. Id. All members of a higher priority class must be paid in full before lower priority classes can be paid. Id. 48 In the present case, however, the shareholders are not attempting to collect on assets of the failed bank. Rather, they are proceeding against solvent third-parties in non-derivative shareholder suits. Although no consensus has yet evolved as to the rights of shareholders in such a situation, the 1978 revision of the Bankruptcy Code (Amended 1984) arguably approves of the position that such shareholders may proceed in suits against third parties on an equal status with general creditors. See 11 U.S.C. section 510(b) (1987). 13 The express terms of section 510(b) of the 1978 Bankruptcy Code apply only to claims against the debtor or an affiliate of a debtor. While we hesitate to formulate a broad holding under the present factual setting which may prohibit future courts from making different interpretations of section 510(b) under different factual situations, it appears that Congress did not intend to prohibit shareholders from proceeding against third parties when it passed section 510(b). 49 The FDIC must therefore derive its priority from some other source besides the absolute priority over equity contributors. The FDIC suggests that this court may create a priority under the federal common law. For the reasons stated below, we decline to create such a rule in this case. 50 The FDIC urges this Court to utilize the framework of United States v. Kimbell Foods, Inc., 440 U.S. 715, 726-27, 99 S.Ct. 1448, 1457-58, 59 L.Ed.2d 711 (1979) to fashion a federal common law rule of priority. 14 As the Supreme Court stated in Kimbell Foods, before undertaking the task of formulating federal common law, a court must consider: (1) whether a federal program is such that it requires a uniform national rule; (2) whether application of state law would frustrate specific objectives of the federal program; and (3) whether application of a federal rule would disrupt commercial relationships predicated on state law. Id. at 728-29, 99 S.Ct. at 1458-59. The Court noted that its function in creating federal common law should be to effectuate congressional policy. Id. at 738, 99 S.Ct. at 1464. 51 The Court in Kimbell, examining the need for a federal common law rule concerning priority rules on contractual liens by the Small Business Administration (SBA) or security interests taken by the Farmers Home Administration (FHA), concluded that national uniformity of priority rules was unnecessary to protect the federal interests behind the SBA and FHA loan programs. Id. at 729-32, 99 S.Ct. at 1459-61. The Court made this finding in spite of the government's argument that applying state law to these lending programs would undermine its ability to recover funds disbursed and therefore would conflict with program objectives. 15 Id. at 733, 99 S.Ct. at 1461. 52 The problem with applying a federal common law rule in this case is that the Federal Deposit Insurance Act does not compel the FDIC to pursue claims to restore the deposit insurance fund against third parties who may have harmed a failed bank. In Gunter, where a federal common law rule was formulated, the specific goal served by adopting the rule was allowing the FDIC to conduct an accurate cost test before engaging in a purchase and assumption transaction. Gunter, 674 F.2d at 869-70. Because of the nature of the analysis performed preceding a purchase and assumption transaction and the near impossibility of assessing overnight the value of potential lawsuits against third parties, the same need cannot be found with regard to potential lawsuits against third parties. The FDIC's argument that its mission is to maximize the recovery to the fund does not change the paramount consideration which all courts addressing the issue have found--that the cost test preceding a purchase and assumption transaction is performed quickly and with high reliance on the books and records of the failing bank. Of course, it would be convenient to the FDIC to have an arsenal of priorities, presumptions and defenses to maximize recovery to the insurance fund, but this does not require that courts must grant all of these tools to the FDIC in its effort to maximize deposit insurance fund recovery. Any rule fashioned must have its base on the goal of effectuating congressional policy. We are not convinced that Congress considered collections against parties such as the bank-related defendants in this case as a necessary part of the recovery to the deposit insurance fund. Any such priority over third-party lawsuits will have to come from Congress, not this Court.