Opinion ID: 569328
Heading Depth: 1
Heading Rank: 2

Heading: appeal of fdic.

Text: 18
19 As receiver of North Central, FDIC is responsible for marshalling the bank's assets and distributing them ratably on all such claims as may have been proved to [the receiver's] satisfaction. 3 20 The distribution of assets of an insolvent national bank by the FDIC is a matter of federal law: 21 Under the relevant provisions of the National Bank Act (12 U.S.C. §§ 191-200) and the Federal Deposit Insurance Act (12 U.S.C. §§ 1811-32) Congress has established a complete system for the administration and liquidation of insolvent banks for the benefit of creditors with the receiver acting as the administrative agent of the Comptroller of the Currency. The Acts constitute a complete plan for the establishment and government of national banks.... 4 22 When the FDIC acts in its corporate capacity as receiver of a national bank, federal law applies. 5 23 Relying on First Empire Bank-New York v. FDIC; 6 FDIC v. Liberty National Bank and Trust Co.; 7 and Interfirst Bank-Abilene v. FDIC; 8 the district court in the case at bar held that Citizen's claims, pursuant to the standby letters of credit issued by North Central, were provable against FDIC, within the meaning of Section 194 of the National Bank Act. 24 The National Bank Act addresses the establishment, regulation, and liquidation of national banks, and provides in pertinent part the following: 25 [T]he Comptroller [receiver] shall make a ratable dividend of the money paid over to him ... on all such claims as may have been proved to his satisfaction or adjudicated in a court of competent jurisdiction.... 26 12 U.S.C. § 194. The National Bank Act itself does not otherwise set forth specifically the requirements of a provable claim. The lack of said specifics, was recognized early on by the Supreme Court in American Surety Co. v. Bethlehem National Bank, 314 U.S. 314, 316, 62 S.Ct. 226, 227-28, 86 L.Ed. 241 (1941), which held that Congress chose instead that  'just and equal distribution' of an insolvent bank's assets be achieved through the operation of familiar equitable doctrines fashioned by the courts. Id. 27 The First Empire decision is indistinguishable from the case at bar. The test of provability set forth in First Empire was adopted by the Tenth Circuit in Liberty National Bank, and this circuit in Interfirst Bank-Abilene. In First Empire, the court concluded that claimant's standby letter of credit claim was provable even though the default on the underlying note occurred subsequent to the issuer's insolvency, based on the following criteria: 28 1) it existed before the issuing bank's insolvency and did not depend on any new contractual obligation arising later; 9 29 2) liability on the claim was absolute and certain in amount when suit was filed against the receiver; 10 and 30 3) the claim was made in a timely manner. 31 572 F.2d at 1367-69. 32 The FDIC disputes neither the facts nor that Citizen's claim meets First Empire' § provability test. Rather, the FDIC's argument rests on a whole host of factually inapposite Supreme Court decisions discussed below in some detail, which focus on the concept of ratable distribution 11 as opposed to the nature of a provable claim. 33 In United States ex rel. White v. Knox, 111 U.S. 784, 4 S.Ct. 686, 28 L.Ed. 603 (1884), the question before the Court was whether a distribution should be calculated based on the amount of the claim on the date of insolvency or whether the creditor should be allowed to include the interest accrued post-insolvency. In White, the creditor had obtained a judgment against the receiver which included interest accrued post-insolvency. The Court concluded that it would not be ratable to allow one creditor to include interest and other creditors not to include interest, and therefore the creditor's ratable portion of a dividend was determined as of the date of insolvency. Nowhere in its decision in White, did the Court equate provability of claims with the absolute, fixed, due-and-owing language which applies to the concept of a ratable distribution. Provable claims were defined as claims which are shown ... to have their origin in something done before the insolvency. 111 U.S. at 787, 4 S.Ct. at 687. 34 In Scott v. Armstrong, 146 U.S. 499, 13 S.Ct. 148, 36 L.Ed. 1059 (1892), a set off case, the insolvent bank owed a promissory note which was not due on the date of insolvency. The issue before the Court was whether the holder of the note could set off funds it owed to the insolvent bank based on the promissory note which was not mature on the date of insolvency. The Court allowed the set off based on equitable principles, stating that the National Bank Act was not intended to alter existing rights, including the right of set off. 35 Both Merrill v. National Bank of Jacksonville, 173 U.S. 131, 19 S.Ct. 360, 43 L.Ed. 640 (1899), and American Surety Co. v. Bethlehem National Bank, 314 U.S. 314, 62 S.Ct. 226, 86 L.Ed. 241 (1941), dealt with the case of the secured creditor and ratable distribution of dividends. In Merrill, the issue before the Court was whether the value of the secured creditor's claim should be calculated on the date of insolvency, with or without credit for collateral or collections made post-insolvency. In other words, the issue before the Court was the basis for calculating the creditor's ratable portion of a dividend, and not whether the creditor's claim was provable pursuant to section 194 of the National Bank Act. 36 The American Surety case 12 is similar to Merrill, except that American Surety involved a surety who had collateral. The issue therein, which the Court answered in the negative, was whether the surety had to reduce the claim by collections occurring post-insolvency. 37 Essentially, the FDIC argues that no reference whatsoever should be made to post-insolvency events, and that a claim must be absolutely fixed, due, and owing as of the date of insolvency to be provable, and therefore entitled to participate in the ratable distribution of funds with regard to insolvent national banks. Its argument is premised on the basic misconception that guidelines set forth in decisions of the Supreme Court pertaining to ratable distribution apply with equal force to the determination of whether a claim is provable within the meaning of section 194. Though related concepts, whether a claim is provable under section 194, and whether a distribution is ratable represent two entirely different inquiries. 38 Appellant's militant stand against reference to post-insolvency occurrences in determining the provability of claims, when carried to its logical conclusion, would in certain instances result in the secured creditor receiving more than his ratable share (e.g. the secured creditor who collects dividends based on the entire amount of the debt, and also recovers from the sale of collateral). Appellant's position would further dictate a result at odds with this court's decision in Pinckney v. Wylie, 86 F.2d 541 (5th Cir.1936). 39 In Pinckney, the noteholder (Wylie) asserted a claim against the insolvent national bank (Belton National Bank) which had guaranteed payment of the note. The note was secured by trust deeds on land, having the effect of mortgages, and a retained vendor's lien. Belton National Bank purchased the land from the original purchasers and makers of the notes, in liquidation of their indebtedness to the Bank, assuming the purchase money debt in the amount of $7,000. The Bank then sold the land to an individual who later renewed two of the notes, which the Bank guaranteed. The Bank then became insolvent. 40 The principal issue in Pinckney was ratable distribution, i.e., whether the Bank's liability would be based on the entire indebtedness or the amount after crediting the debt with proceeds from the sale of collateral. This court, of necessity, had to recognize the provability of the noteholder's claim against the Bank based upon its obligation as surety/guarantor. 41 Pinckney stands for the proposition that an obligation under a guaranty is provable. The obligation under a letter of credit considered herein is perhaps more absolute than that under a guaranty, considered in Pinckney. 42
43 At this point, some discussion appears to be in order regarding the nature of the standby letter of credit. The standby letter of credit is a hybrid financing mechanism, borrowing features from both the guaranty and commercial letter of credit. Like a guaranty agreement, the standby letter of credit may be drawn upon only in the event of the default of a debtor whose loan is collateralized by the letter of credit. However, the standby letter of credit, like the commercial letter of credit evidences, a principal, as opposed to ancillary, obligation--that is, the issuer's liability attaches pursuant to the issuer's own terms, without regard to performance of the underlying contract. In other words, the issuer of a standby letter of credit has a duty to pay which arises upon presentation of the complying documents. The principal difference between the traditional letter of credit and these newer standby letters of credit is that, whereas in the classical setting the letter of credit contemplates payment upon performance, the standby credit ... contemplates payment upon failure to perform. 13 44 The term standby letter of credit is defined at 12 C.F.R. § 32.2(e) (emphasis added) as follows: 45 A 'standby letter of credit' is any letter of credit, or similar arrangement, however named or described, which represents an obligation to the beneficiary on the part of the issuer (1) to repay money borrowed by or advanced to or for the account party, or (2) to make payment on account of any indebtedness undertaken by the account party, or (3) to make payment on account of any default by the account party in the performance of an obligation. 46 The plain definition of this financing mechanism belies appellant's contention that the parties do not expect that the standby letter of credit will ever be utilized. The Code of Federal Regulations further provides at section 32.2(a) and (d) that, for the purposes of calculation of the amount of loans and extensions of credit to any one borrower, both standby letters of credit and guaranties are considered loans or extensions of credit, i.e., as any direct or indirect advance of funds. 12 C.F.R. § 32.2(d). Thus, the lending limit regulations treat a standby letter of credit not as contingent liability, but as a loan--that is, as though the credit had been extended as of the date of commitment. 47
48 The salient fact here is that Citizens' rights and claim against North Central originated from the standby letters of credit issued by North Central long before its insolvency was declared. In Merrill, 19 S.Ct. at 366, the Supreme Court merely required payment of dividends ratably, that is to say, proportionately according to some uniform rule. The Court explained that the business of the Bank must stop when insolvency is declared and the only claims that can be recognized are those shown  'to have their origin in something done before the insolvency.'  Id. The Court recognized that, in the case of the secured creditor who recovers from the sale of collateral, dividend payments from the estate being administered should cease at the time his claim has been fully satisfied with collateral proceeds and dividend payments. That certain post-insolvency events may cause dividend payments to cease does not render the secured creditor's claim uncertain, not fixed, or not absolute as of the date of insolvency. 49 In American Surety Co., the Supreme Court recognized an equitable right and allowed a claimant to prove a claim it did not have on the date of insolvency. The Court allowed the surety company to rely on the equitable rule of subrogation in order to assert the amount of the depositor's claim against the bank. Unquestionably, ratable distribution requires that dividends be declared proportionately upon the amount of claims as they stand on the date of insolvency. 62 S.Ct. at 228. As to the provability of claims, the Court expressed no opinion. The Court explained that to be 'ratable,' the claims must be manifestly estimated as of the same point in time, and that date has been adjudged to be the date of insolvency. Id. The Court's further comments as to any limitation of the surety's participation are even more illustrative of its position that ratable distribution comport with intrinsic fairness, to wit: 50 On the other hand, if the surety's participation should be limited to the extent now urged by the receiver, the other creditors would profit solely because of fortuitous circumstances and without any relation to reasons of intrinsic fairness. 51 Id. at 228-29. 52 In the case at bar, Citizens' claim has its origin in the letters of credit issued by North Central prior to its insolvency. That liability thereunder was actually triggered by default on the Note which occurred shortly thereafter cannot be said to completely eradicate that contractual liability which originated from standby letters of credit pre-dating North Central's insolvency. 53 The Supreme Court in Merrill, explained its statements regarding ratable distribution as follows: 54 Whatever congress may be authorized to enact by reason of possessing the power to pass uniform laws on the subject of bankruptcies, it is very clear that it did not intend to impinge upon contracts existing between creditors and debtors, by anything prescribed in reference to the administration of the assets of insolvent national banks.... 55 The requirement of equality of distribution among creditors by the national banking act involves no invasion of prior contract rights of any such creditors, and ought not to be construed as having, or being intended to have, such a result. 56 19 S.Ct. at 366-37. 57 As it did in Liberty National Bank, the FDIC herein seeks too narrow an interpretation of ratable distribution of assets pursuant to section 194 of the National Bank Act. 806 F.2d at 965. Nothing in section 194, Merrill or American Surety Co., requires a holding under the instant facts that North Central's obligation to pay a fixed amount upon the occurrence of a specific event is obviated by its insolvency pre-dating the triggering event, i.e., default on the Note. The Tenth Circuit in Liberty National Bank, citing Merrill, observed that it is as much the purpose of the insolvency statutes to preserve the rights existing at the time of insolvency as to prevent new rights from arising thereafter. 14 806 F.2d at 965. 58 The existing Supreme Court case law does not address all types of claims and has not set forth any mechanistic provability test applicable to all types of negotiable instruments, including hybrids such as the standby letter of credit at issue in this case. Rather, the Court opened the door for the courts to apply equitable doctrines, apparently in harmony with the purpose of the National Bank Act scheme, that is, the liquidation of national banks for the benefit of creditors. 15 59 In Sisalcords Do Brazil, Ltd. v. Fiacao Brasileira De Sisal, S.A., 450 F.2d 419 (5th Cir.1971), as appellant represents, this court addressed the nature of letters of credit. We reviewed the dismissal of an action seeking to enforce a default judgment by means of attachment of an open letter of credit 16 issued by a Louisiana state bank. However, this Court's determination that the state bank did not have absolute liability under those letters of credit was predicated on Louisiana law of attachment and not the National Bank Act, to wit: Under Louisiana law the efficacy of an attachment is determined according to the facts existing at the date of issuance of the writ and, if defective, it is not cured by subsequent events. 450 F.2d at 422. Louisiana law of attachment does not allow resort to equitable doctrines. Therefore the court in Sisalcords concluded that the state bank's liability thereunder was not absolute. 60 The issue before the court in Sisalcords was whether the contractual obligation of the state bank under the letters of credit was a debt owing to the defendant by the garnishee within the meaning of the Louisiana law of attachment, 17 and therefore subject to attachment. Although the issue before this court in the present case is similar, the applicable law is the National Bank Act, which contemplates equitable doctrines fashioned by the courts. Other than providing us with some general definition and guidance as to the nature of letters of credit, Sisalcords is inapposite sub judice. 61 We can find no equitable reason in the present case why the time of appointment of the receiver should determine the provability of claims under the standby letters of credit. Liability on the standby letters of credit was absolute and certain in amount when this suit was filed against the receiver. By that time, the principals had defaulted on the primary loan obligations. The claims against the receiver were made in a timely manner, well before any distribution of assets of the receivership. We conclude that the claims of appellees under the standby letters of credit were provable in the face amount in the receivership.  '[T]here is no equitable reason why claims which are certain when presented and which are presented in time should have been certain at some arbitrary anterior period.'  18 62
63 The courts have consistently denied post-insolvency interest, as such an award would violate the rules of ratable distribution. The exceptions to this rule are where the assets of the receivership are sufficient to pay all provable claims in full, 19 or where the receiver is shown to be unreasonable or otherwise at fault denying the claim and/or administering the trust. 20 64 Citizens does not argue that it is entitled to interest, but rather that it may be entitled to interest based on the aforementioned exceptions to the rule. 65 The facts of this case do not allow for a determination that any award of post-insolvency interest was proper. If indeed the lower court intended to award such interest, it was in error. Unless and until there is a showing that the receivership has funds sufficient to pay all provable claims in full, or that the receiver was unreasonable in denying Citizens' claim, or was otherwise at fault in administering the trust, any award of post-insolvency interest is proscribed. 66