Opinion ID: 354160
Heading Depth: 1
Heading Rank: 2

Heading: cross appeal of fdic

Text: 17 The FDIC has cross appealed from the rejection of its counterclaim against appellants and from the holding that appellants' claims were provable against the receivership estate. We consider this issue first because if the FDIC prevails and the letters are held not to be provable, appellants are without standing to advance the contentions they make in their appeal. 18 When USNB closed, the Receiver made demands upon appellants for deposits of USNB held by the appellant banks. Appellants refused to meet the Receiver's demands and retained the deposits to offset them against the amounts owed to them by USNB on the standby letters of credit. The FDIC filed a counterclaim in this action for the return of the deposits. The district court, holding the letters of credit to be provable, allowed appellants to set off their obligations against the amounts due on the letters of credit and rejected the counterclaim. The Receiver contends that this was error. It seeks not only to avoid liability on the letters of credit but also to recover from appellants the sums owed to USNB on the offset claims.
19 Preliminarily a word should be said with respect to the nature of the standby letter of credit the commercial instrument upon which appellants' claims are based. 20 The Receiver has acknowledged that some letters of credit issued by USNB did create provable claims and included these letters in the obligations assumed by Crocker in the purchase and assumption agreement. These were primarily traditional or commercial letters of credit. 2 This type of instrument developed as a means of facilitating international trade between distant buyers and sellers not commercially acquainted with each other. 21 Stripped to its essentials, the transaction runs as follows: the buyer arranges for a bank whose credit the seller will accept to issue a letter of credit in which the bank agrees to pay drafts drawn on it by the seller if, but only if, such drafts are accompanied by specified documents, such as bills of lading or air freight receipts, representing title to the goods that are the subject matter of the transaction between buyer and seller. The bank undertakes this obligation for a specified period of time. 22 Verkuil, Bank Solvency and Guaranty Letters of Credit, 25 Stan.L.Rev. 716, 718 (1973) (hereinafter Verkuil). 23 This letter of credit creates an absolute, independent obligation and payment must be made upon presentation of the proper documents regardless of any dispute between the buyer and seller concerning their agreement, such as a dispute over the quality of the goods delivered. See, Battaile, Guaranty Letters of Credit: Problems and Possibilities, 16 Ariz.L.Rev. 823, 825 (1974) (hereinafter Battaile); Association de Azucareros de Guatemala v. United States Nat'l Bank of Oregon, 423 F.2d 638, 641 (9th Cir. 1970). 24 In recent years instruments operating as letters of credit (in that they operate to create an absolute obligation upon presentation of specified documents) and termed standby to distinguish them from the traditional letters of credit have been used as security devices in a variety of contexts outside the traditional area of the international sale of goods. They have been used to insure construction loans, as quasi-performance bonds, to support the issuance of commercial paper and to secure the performance of purely monetary obligations such as those involved in this case. See Battaile, supra at 822-26; Verkuil, supra at 717, 721-22. Standby letters are convenient and inexpensive and are being adapted to many uses at this time. See Verkuil, supra at 717. The principal difference between the traditional letter of credit and these newer standby letters is that whereas in the classical setting, the letter of credit contemplates payment upon performance, 'the standby credit,'    'contemplates payment upon failure to perform.'  Katskee, The Standby Letter of Credit Debate the Case for Congressional Resolution, 92 Banking L.J. 697, 699 (1975) (hereinafter Katskee). 25 This has created an awkward situation for national banks, since the standby letter of credit possesses more of the characteristics of a guarantee and national banks are not authorized to enter into guarantees. See Katskee, supra at 712-14; Harfield, The Standby Letter of Credit Debate, 94 Banking L.J. 293, 301-03 (1977). No contention is made here, however, that issuance of the letters of credit in question was ultra vires. The Receiver has not asserted that defense and the Comptroller appears to have chosen instead to recognize the widespread bank use and commercial usefulness of the instrument and to attempt, by regulation, to eliminate the abuses which the failure of USNB has demonstrated can result from unregulated and excessive use. FDIC Reply Brief at 5-6; see, e. g., 12 C.F.R. § 7.7016 (1977).
26 The Receiver contends, nevertheless, that standby letters of credit, whether ultra vires or not, are not provable in a national bank receivership, since, it asserts, claims against the receiver of a national bank are not provable if they were contingent on the date of the bank's insolvency. Although the case law is quite limited, where commentators have made such statements of the law, e. g., 9 C.J.S. Banks and Banking § 755, they are found to rest on cases involving a lessor of property leased to the bank who is asserting a claim against the receiver to recover liquidated damages for loss of future rent. 27 Kennedy v. Boston-Continental Nat'l Bank, 84 F.2d 592 (1st Cir. 1936), cert. dismissed, 300 U.S. 684, 57 S.Ct. 667, 81 L.Ed. 887 (1937), was such a case. There the lessor, following default by the national bank lessee, sought to exercise an option given him by the lease to obtain as liquidated damages the difference between the fair rental value of the property for the balance of the lease and the rental provided by the lease. The court held the claim not provable, relying on contract principles which reasoned that exercise of the option by the lessor created a new contract which came into being at the time of re-entry by the lessor. This court has followed Kennedy in a case also dealing with an exercise of option to obtain liquidated damages for loss of future rent, Argonaut Savings and Loan Ass'n v. FDIC, 392 F.2d 195, 197 (9th Cir.), cert. denied, 393 U.S. 839, 89 S.Ct. 116, 21 L.Ed.2d 110 (1968). Accord, FDIC v. Grella, 553 F.2d 258, 262 (2d Cir. 1977). 28 Although these cases use broad language, indicating that the bank's liability on any claim must have accrued and be unconditionally fixed at the date of insolvency, they are, by virtue of their dependence on the new contract principle, distinguishable from cases not dealing with lease options exercised after insolvency. The claims here are based on letters of credit that were in existence before insolvency and are not dependent on any new contractual obligations arising later. 29 We note that at the time Kennedy was decided claims for future rent in bankruptcy were handled in a manner different from that by which other contingent obligations were handled. Although contingent contract liabilities were provable in bankruptcy, the courts stopped short of extending the same liberality of view to claims based on leases. 3A Collier on Bankruptcy § 63.32(3) at 1927. This remnant of medieval theory is the basis for the statement in Kennedy that exercise of the right to re-entry amounted to creation of a new contract arising after insolvency. Id. at 1927-28. Shortly after the decision in Kennedy, the bankruptcy rules were liberalized to allow proof of a landlord's claim, although leases remained (and still remain) in a category apart from other contract claims, even in the present bankruptcy rules. See id. at § 63.31(1) at 1915-16, § 63.32(5) at 1931-32; 11 U.S.C. § 103(a)(9). 30 The dissenting judge in Kennedy noted that the allowance of the claim depends on whether the equity rule or bankruptcy rule of provability should be followed in a national bank's receivership. 84 F.2d at 598. His statement and the cases cited in the opinion indicate that the majority was relying on the now outdated bankruptcy rules in reaching its decision that the claims were not provable. 31 We conclude that the holdings of Kennedy and Argonaut should be limited to cases involving leases and loss of future rent and should not be extended to other contingent obligations. To follow those cases here would amount to extending into new areas a rule that now appears to be outmoded, based as it is on a bankruptcy rule that today has been repealed in favor of the contrary equity rule. 32 Although the authority against the provability of these letters is thus distinguishable, there is little positive authority to support a holding that they are provable in national bank receiverships. There is authority holding such claims provable in general equity receiverships and in bankruptcy, as we shall discuss, but the only case dealing with the question in the context of national bank receiverships is Pinckney v. Wylie, 86 F.2d 541 (5th Cir. 1936). There a claim based on a bank's obligation as a surety for another's debt was asserted against a receiver of a national bank. The principal issue was whether the claimant was entitled to a ratable distribution based on the full amount of the debt or on the amount of the debt after crediting the proceeds from the sale of the security for the loan. 86 F.2d at 542. In deciding the amount of the claim, the court necessarily recognized that a claim based on a bank's obligation as surety or guarantor is provable, although it did not discuss the issue. 33 The result in Pinckney is consistent with the bankruptcy rules and equitable receivership principles governing the provability of contingent claims. Claims based on surety or guarantee obligations of a bankrupt are clearly provable as contingent contract obligations, 11 U.S.C. § 103(a)(8). 3A Collier on Bankruptcy, § 63.19 at 1876. Even before the bankruptcy statute was amended to specifically state that contingent contract claims are provable, courts held suretyship and guarantee claims provable, stating (e)ven though not due until after the year allowed for proof of claims, if proved in time, such a claim may be liquidated as are other unmatured claims. Maynard v. Elliott, 283 U.S. 273, 279, 51 S.Ct. 390, 392, 75 L.Ed. 1028 (1931) (and see cases cited therein). 34 This bankruptcy rule of provability seems consistent with the principles governing equitable receiverships. Under equitable principles the court must consider: 35     on the one hand, the substantial right of all creditors to share in their debtor's property, and, on the other, the necessity for expeditious administration and, giving due consideration to both, must make rules which are practicable as well as equitable. 36 Penn. Steel Co. v. New York City Ry. Co., 198 F. 721, 738 (2d Cir. 1912). The court in Penn. Steel divided all claims into three classes: 37 (1) Claims which at the commencement of proceedings furnish a present cause of action; 38 (2) Claims which at that time are certain but which are not matured:(3) Claims which are contingent. 39 Id. at 738. The first two classes are clearly provable but the third class of contingent claims must be divided into two subclasses: 40 (1) Claims of which the worth or amount can be determined by recognized methods of computation at a time consistent with the expeditious settlement of the estates; 41 (2) Claims which are so uncertain that their worth cannot be so ascertained. 42 Id. at 739-40. The latter class cannot be proved, but the claims in the former class are provable. Id. 43 The court in Penn. Steel found no equitable reason why the time of appointment of the receiver should determine the provability of claims, and held that: 44 Claims which when presented within the time limited by the court for their presentation are certain or are capable of being made certain by recognized methods of computation, should be allowed. Claims which are not then certain should be disallowed because they afford no basis for making dividends. But there 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. 45 Id. at 741-42 (emphasis supplied). We agree with that statement. 46 The claims at issue here would be considered provable under these equitable principles because the 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 the assets of the receivership, other than the distribution made through the purchase and assumption agreement. 47 Finally we note that the Receiver seems already to have acted upon the assumption that standby letters of credit are, in principle, provable. Some such instruments were actually assumed by Crocker with FDIC approval, and thus those creditors were assured payment in full. These were letters where Crocker was willing to accept the obligation of the account party to the creditor bank as an offsetting asset. Thus, it was not the taint of membership in the Designated Group that rendered the letters of appellants unacceptable to Crocker. It was the fact that the obligation was certain to accrue. It was in such cases that Crocker insisted upon the FDIC's guarantee. 48 We conclude that the claims of appellants were provable in face amount in the receivership. 49