Opinion ID: 576265
Heading Depth: 3
Heading Rank: 2

Heading: The National Banking Act

Text: 18 At issue here is whether the FDIC violated sections 91 and 194 of the National Banking Act (NBA), which impose on a national bank receiver the duty to make ratable dividends and avoid preferences, by structuring a purchase and assumption transaction in such a way that unaffiliated creditors received one hundred percent of their claims while affiliated creditors received only liquidation value. 6
19 The NBA allows the Comptroller, on becoming satisfied that a bank is in default, to appoint a receiver who 20 shall take possession of the books, records, and assets ..., collect all debts, dues, and claims belonging to it, and upon the order of a court ..., may sell all the real and personal property of such association, on such terms as the court shall direct. Such receiver shall pay over all money so made to the Treasurer of the United States, subject to order of the Comptroller,.... 12 U.S.C. § 192. Section 194 provides that: 21 From time to time, ..., the comptroller shall make a ratable dividend of the money so paid over to him by such receiver on all such claims as may have been proved to his satisfaction ... 12 U.S.C. § 194. 22 Section 91 continues the proscription against unequal distributions by invalidating preferences: 23 All transfers of the notes, bonds, bills of exchange, or other evidences of debt owing to any national banking association, or of deposits to its credit ... made after the commission of an act of insolvency, or in contemplation thereof, made with a view to prevent the application of its assets in the manner prescribed by this chapter, or with a view to the preference of one creditor to another, ... shall be utterly null and void. 12 U.S.C. § 91. 24 While these provisions of the NBA are not expressly made applicable to the FDIC, they must be read in light of the entire statutory scheme. Section 1821(c)(2)(A)(ii) of the Federal Deposit Insurance Act requires that the FDIC be appointed receiver whenever a receiver is appointed for the purpose of liquidation or winding up an insured national bank. 12 U.S.C. § 1821(c)(2)(A)(ii). Thus, whenever the FDIC acts as receiver and liquidates a failed national bank, it acts subject to the requirements in sections 91 and 194 of the NBA. 25 TAB contends that the FDIC's sale of TAB Fort Worth to an outside investor in a purchase and assumption generated proceeds that the FDIC was required to distribute equally to all TAB Fort Worth creditors. They further argue that the FDIC's paying the other TAB subsidiary banks only sixty-seven percent of their obligations while paying other creditors one hundred percent of their obligations is not a ratable dividend and in fact constitutes a preference of some creditors over others, thus violating both sections 91 and 194. 26 This interpretation of sections 91 and 194 misconstrues two aspects of the transaction at issue here. First, TAB misconceives what the requirement of ratability applies to: creditors need only be paid a pro rata share of their claims out of the assets of the failed bank. The statute requires the Comptroller to make a ratable dividend of the money so paid over to him by such receiver. 12 U.S.C. § 194 (emphasis added). The statute continues and clarifies that by money so paid over to him by such receiver is meant the proceeds of the assets of such association. Id. The statute does impose a requirement of ratable payments to creditors, but only to the extent of the assets of the failed bank. The parties stipulated that if the TAB banks had been liquidated, the proceeds generated would have been sufficient to pay creditors no more than sixty-seven cents on the dollar. Thus, the plaintiff TAB subsidiaries, in receiving sixty-seven percent of their claims, did receive a ratable distribution of the proceeds of the assets of TAB Fort Worth. 27 The plaintiff-appellees' interpretation also ignores the dual role that the FDIC played in the purchase and assumption of TAB Fort Worth. The FDIC acted not only as receiver of TAB Fort Worth, but also in its corporate capacity. The separateness of these dual identities of the FDIC has been well respected by federal courts. See Federal Deposit Ins. Corp. v. Condit, 861 F.2d 853, 856 (5th Cir.1988); Federal Deposit Ins. Corp. v. Hatmaker, 756 F.2d 34, 36 n. 2 (6th Cir.1985); Gunter, 674 F.2d at 873-74. The FDIC as receiver of TAB Fort Worth sold nearly all the assets of TAB Fort Worth to the Bridge Bank. The FDIC in its corporate capacity provided operating funds to the Bridge Bank, injected $900 million from the insurance fund so that nonaffiliated creditors could be paid 100% of their claims instead of only the 67% pro rata share to which they were entitled, and entered an indemnification agreement with the Bridge Bank. While the NBA does require that the FDIC as receiver distribute the proceeds of the assets of the failed bank ratably, there is no requirement imposed on the FDIC in its corporate capacity that distributions from the insurance fund must be paid ratably. See 12 U.S.C. § 1823(c) (giving the FDIC sole discretion to make contributions to an insured bank). Indeed, the only obligation in this respect imposed on the FDIC in its corporate capacity is to compensate insured depositors fully. Thus, the plaintiffs TAB banks and TAB have no claim to a pro rata share of the contribution from the insurance fund, nor can they force the FDIC to provide them with matching distributions from the insurance fund. 7 28 Plaintiffs-appellees urge, however, that the $900 million in direct assistance provided by the FDIC in its corporate capacity was consideration for the purchase and assumption transaction, and thus was (or was in large part) proceeds of TAB Fort Worth's assets that must be distributed ratably. We find this proposition to be factually inaccurate. As consideration for the assets not transferred to the Bridge Bank, FDIC Corporate provided FDIC Receiver with funds sufficient to pay those creditors of TAB Fort Worth whose liabilities were not assumed in the purchase and assumption a pro rata share of the assets of TAB Fort Worth. The $900 million FDIC Corporate paid to the assuming bank constituted simply direct assistance payments from the insurance fund for which the FDIC, Receiver or Corporate, received nothing in exchange. To treat these direct payments as some type of consideration or return for the assets of TAB Fort Worth is to ignore the fact that these payments were necessary because the transferred assets of TAB Fort Worth (and the other TAB subsidiary banks) were less than the assumed liabilities by $900 million. 8
29 Very little case law exists interpreting these provisions of the NBA. The Supreme Court first spoke in this area in White v. Knox, 111 U.S. 784, 4 S.Ct. 686, 28 L.Ed. 603 (1884). White involved the failure of Miners' National Bank in 1875. The Comptroller refused to allow White's claim, and White brought a mandamus action against the Comptroller. In 1883, White recovered a judgment against the bank in the amount of his claim plus interest from the date the claim had been denied. During the intervening eight years, the Comptroller had made dividends to other creditors amounting to sixty-five percent of their claims. The Comptroller then made a payment to White in the amount of sixty-five percent of his original claim, excluding interest. White sued, claiming he was entitled to sixty-five percent of his judgment, which included interest from the date his claim had been denied. The Supreme Court affirmed the action of the Comptroller. The Court explained the statutory proscription that dividends be paid ratably as requiring dividends to be made by some uniform rule and noted that [a]ll creditors are to be treated alike. White, 4 S.Ct. at 686-87. The Court held that it was the comptroller's duty in paying dividends, to take the value of the claim at that time as the basis of distribution. Id. at 687. White, with its emphasis on payments to creditors from the assets of the bank as of the date of insolvency, bolsters our conclusion that the FDIC did not violate its duty to distribute dividends ratably. The explanatory language that all creditors be treated alike does not, as plaintiffs-appellees assert, dictate the outcome in this case. 30 Since White, a string of federal cases have cemented the principle that the NBA mandates pro rata payment of claims as of the date of insolvency. See, e.g., Scott v. Armstrong, 146 U.S. 499, 13 S.Ct. 148, 151, 36 L.Ed. 1059 (1892); FDIC v. McKnight, 769 F.2d 658, 661 (10th Cir.1985), cert. denied sub nom. All Souls Episcopal Church v. Federal Deposit Ins. Corp., 475 U.S. 1010, 106 S.Ct. 1184, 89 L.Ed.2d 300 (1986); American Nat'l Bank v. FDIC, 710 F.2d 1528, 1540 (11th Cir.1983). Scott also affirms the principle that ratable payments are only required to be made to the extent of the assets of the failed bank: The requirement as to ratable dividends is to make them from what belongs to the bank, and that which at the time of the insolvency belongs of right to the debtor does not belong to the bank. Scott, 13 S.Ct. at 151. FDIC Receiver had a duty to make ratable dividends only from the amount that belonged to TAB Fort Worth at the date of insolvency; this amount was sufficient to pay each creditor only sixty-seven percent of its claim. The remaining portion of the $900 million that FDIC Corporate contributed to satisfy the unaffiliated creditors' claims at the time of insolvency belonged of right to FDIC Corporate, and thus did not belong to TAB Fort Worth. Neither the NBA nor the Federal Deposit Insurance Act imposed any duty on the FDIC to distribute this $900 million ratably. 31 Plaintiffs-appellees and the district court base their theory that the FDIC violated the ratability requirement of the NBA on First Empire Bank v. Federal Deposit Ins. Corp. and its progeny. See 572 F.2d 1361 (9th Cir.1978), cert. denied 439 U.S. 919, 99 S.Ct. 293, 58 L.Ed.2d 265 (1978); Woodbridge Plaza v. Bank of Irvine, 815 F.2d 538 (9th Cir.1987) (extending the principle of First Empire to state banks of which the FDIC is appointed receiver). First Empire arose on facts similar in many respects to those now before this Court. It involved the insolvency of United States National Bank of San Diego (USNB). The FDIC closed and was appointed receiver of USNB on October 18, 1973. The FDIC entered a purchase and assumption agreement with Crocker National Bank (Crocker) for most of the assets and liabilities of USNB. Certain assets and liabilities associated with USNB's controlling shareholder, however, were not assumed by Crocker. To make the purchase and assumption feasible, the FDIC in its corporate capacity lent the FDIC as receiver $128,780,000, which amount was among the assets transferred by the receiver to Crocker in the purchase and assumption agreement. The FDIC in its corporate capacity received and retained a first lien, superior to that of any unassumed creditor, in all the assets of the receivership estate not transferred to Crocker, to secure its $128,780,000 loan to the receivership. The creditors whose claims were not assumed sued the FDIC for payment in full. The district court held in favor of the FDIC, and the Ninth Circuit reversed. 32 In ruling in favor of those creditors, the Ninth Circuit held that sections 91 and 194 of the NBA apply to the FDIC when acting as receiver of a failed bank. It also found that in a purchase and assumption transaction the assumption of some liabilities in full, while the obligations of other creditors were not assumed at all, violated section 194 of the NBA. The court did note, however, that not every purchase and assumption agreement must include every creditor in order to be valid. If the purchase leaves sufficient assets in the receivership to allow distribution to unassumed creditors equal to that undertaken by the acquiring bank as to the creditors it has accepted, distribution still could be ratable. First Empire, 572 F.2d at 1371. 33 Although at first glance First Empire appears to be identical to the present case, it is in fact significantly different. The FDIC made no provision for any payment of the creditors' claims that were not assumed in First Empire; the unassumed creditors, unlike the plaintiff TAB banks here, did not receive a ratable dividend of the assets of the failed bank. The Ninth Circuit's decision in First Empire seems to be strongly influenced by this fact. The Court noted that: 34 In this case the extraordinary extent of the lack of equal treatment is emphasized by the fact that the unassumed creditors, left with only a claim against the undesirable assets of USNB remaining in the receivership, do not even have that questionable source of recovery unimpaired. They are subordinated to the lien of the Corporation [the FDIC] to secure its loan of money to the Receiver, all of which went to Crocker to make possible the advantage to the assumed creditors. This lien would without doubt consume in full the remaining assets, leaving the unassumed creditors without any recovery whatsoever. First Empire, 572 F.2d at 1371 (emphasis added). 9 35 Thus, the purchase and assumption agreement structured by the FDIC in First Empire would have denied the unassumed creditors what they would have received in a straight liquidation (and indeed would have denied them any payment). That is not the case here, and that is the crucial distinction. 36 In addition to First Empire, a trio of federal district courts in Texas have recently been confronted with interpreting sections 194 and 91 of the NBA. See MCorp v. Clarke, 755 F.Supp. 1402 (N.D.Tex.1991); Senior Unsecured Creditors' Committee v. FDIC, 749 F.Supp. 758 (N.D.Tex.1990); Texas Am. Bancshares, Inc. v. Clarke, 740 F.Supp. 1243 (N.D.Tex.1990) (appeal pending). In MCorp and Texas American (the district court's decision in the present case), the courts followed the lead of First Empire and found that the NBA prevents structuring a purchase and assumption transaction so that some creditors receive one hundred percent while others receive only liquidation value. In contrast, the district court in Senior Unsecured Creditors' Committee, after noting that this appeal was pending, declined to decide whether the First Empire interpretation of the NBA should be followed, but opined that: 37 the court sees considerable force in the FDIC's argument that the ratable distribution requirement of § 194 applies differently to purchase and assumption transactions, requiring only the ratable distribution of the value of the failed bank's assets as if it had been liquidated. Senior Unsecured Creditors' Comm., 749 F.Supp. at 775-76 (footnote omitted).
38 Our holding is also buttressed by analogy to a line of bankruptcy cases involving payments to creditors of insolvent estates by third parties. 10 These cases establish that payment to a creditor of an insolvent estate by a source other than the estate does not create a preference, and any equal treatment required is based upon the creditors' share of the estate, not on benefits received from the collateral source. This proposition was established in two early Supreme Court cases. See National Bank of Newport v. National Herkimer Co. Bank, 225 U.S. 178, 32 S.Ct. 633, 56 L.Ed. 1042 (1912); Continental & Commercial Trust & Sav. Bank v. Chicago Title & Trust Co., 229 U.S. 435, 33 S.Ct. 829, 57 L.Ed. 1268 (1913). In National Herkimer, the Court noted that unless the creditor takes by virtue of a disposition by the insolvent debtor of his property for the creditor's benefit, so that the estate of the debtor is thereby diminished, the creditor cannot be charged with receiving a preference by transfer. 32 S.Ct. at 635. 39 Federal courts have expounded on this basic principle. In Virginia Nat'l Bank v. Woodson, the court noted that the test of whether a preference has occurred is not what the creditor receives but what the bankrupt's estate has lost because [i]t is the diminution of the bankrupt's estate, not the unequal payment to creditors, which is the evil sought to be remedied by the avoidance of a preferential transfer. 329 F.2d 836, 840 (4th Cir.1964). The Eighth Circuit has held, under this principle, that payments made to a debtor's creditors by an endorser, surety, guarantor, or payor in a business relationship with the debtor are not preferences because there is no transfer and resulting diminution of the debtor's estate. See Brown v. First Nat'l Bank of Little Rock, Ark., 748 F.2d 490 (8th Cir.1984); DeAngio v. DeAngio, 554 F.2d 863 (8th Cir.1977). 40 We find similar reasoning persuasive here. FDIC Receiver, on the insolvency of a bank, succeeds to the bank's estate and stands in the shoes of the debtor. See Downriver Comm. Fed. Credit Union v. Penn Square Bank, 879 F.2d 754 (10th Cir.1989) (noting that the FDIC takes control of an insolvent bank subject to the rights and equities existing prior to insolvency), cert. denied 493 U.S. 1070, 110 S.Ct. 1112, 107 L.Ed.2d 1019 (1990). Just as a payment to a creditor by an individual acting as surety or guarantor of a debtor does not constitute a preference, neither does payment to a creditor by the FDIC in its corporate capacity. 11 Therefore, FDIC Corporate's contributions of $900 million to TAB Fort Worth and other TAB subsidiary banks that enabled some creditors to receive 100% of their claims are not preferential transfers that the plaintiff TAB banks can avoid and claim as assets to be distributed by FDIC Receiver.
41 As a final consideration, we note that although the NBA does not provide explicit statutory guidance for the disposition of all claims against the receiver's estate, we are guided by Congress's purpose in enacting the NBA. Congress did not anticipate by specific rules all of the problems that arise in national bank liquidations, but instead chose achievement of a 'just and equal distribution' of an insolvent bank's assets through the operation of familiar equitable doctrines evolved by the courts. American Sur. Co. v. Bethlehem Nat'l Bank, 314 U.S. 314, 62 S.Ct. 226, 228, 86 L.Ed. 241 (1941). We are strengthened in our holding by noting that the equities favor the FDIC. The FDIC contributed approximately $900 million of its own funds--public monies--to cover the losses and fully compensate the unaffiliated creditors of TAB Fort Worth (and also of the other TAB subsidiary banks); the result is that each former TAB bank is open and operating today. A liquidation and the resulting disruption of the banking community and the general public was averted. Only the former shareholder of the TAB banks, and some of its wholly-owned subsidiaries, are now heard to complain, and they received everything they would have received had the TAB banks been liquidated. We think the FDIC's brief aptly summarizes the claims of plaintiffs-appellees as an ill-founded attempt by investors in the failed TAB System to secure a windfall judgment from the FDIC to make good the losses suffered by them from TAB's financial debacle. We decline to award such a windfall.C. FIRREA 42 The parties have also briefed extensively the issue of whether the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) controls the outcome of this case. One month after the Comptroller closed the TAB banks in July 1989, Congress enacted FIRREA. Among other things, FIRREA amended the Federal Deposit Insurance Act to provide that the maximum liability of the FDIC acting as receiver or in any other capacity to any person having a claim against the receiver or the failed bank shall be the amount the claimant would have received if the FDIC had liquidated the assets and liabilities of the bank. See 12 U.S.C. § 1821(i)(2). Without setting foot into the legal quagmire of whether FIRREA applies retroactively, we note simply that our holding here today is consistent with the result that would be reached on these facts under FIRREA; the FDIC is not compelled to pay a creditor more than the pro rata share it would have received if the FDIC had liquidated the bank.