4000 - Advisory Opinions
Where Municipal Waste Management Authority Pools Deposits Over $100,000 and Its Depository Institution Adequately Collateralizes Them, the FDIC or RTC as Receiver for that Institution Must Respect Such Pledge of Collateral
November 27, 1990
Carroll R. Shifflett, Associate General Counsel
Your letter of September 26, 1990, to Chairman Seidman has been referred to me for reply. In your letter you ask for guidance on how the FDIC and RTC would treat deposits of public funds pooled and collateralized by appropriate securities in the event the depository institution failed and the FDIC were appointed receiver. Your inquiry specifically concerns the treatment of deposits in excess of $100,000 of municipal waste management authorities that are pooled and collateralized by appropriate securities as prescribed by state law.
As you are aware, neither the FDIC nor the RTC issues binding advisory opinions as to positions they would adopt in hypothetical situations that may arise in future receiverships of insured institutions. The FDIC's and the RTC's actions in their capacity as receiver of a failed insured institution are determined on a case by case basis, in accordance with applicable laws and in light of the specific factual situation. I am willing, however, to provide my views as to what a court would hold in response to your inquiry.
According to your letter, the Department of Environmental Resources is considering adopting regulations that would allow municipal waste management authorities to pool deposits that the depository institution would secure with pledged assets of the institution. The Independent Regulatory Review Commission is concerned that these funds may not be adequately protected and that in the event the depository institution should fail, the FDIC or RTC as receiver would repudiate the contract underlying this deposit arrangement and the municipal waste management authorities would not receive the amount of the secured deposit. Although the Comments of the Independent Regulatory Review Commission, which you enclosed with your letter, do not address FIRREA, you mentioned certain provisions of FIRREA as the basis for your concern and, specifically, you mentioned the provision authorizing a receiver to repudiate contracts as well as the provision regarding the treatment of collateral pledged by institutions.
Provided that the deposit is adequately secured, that the collateral is held by a custodian pursuant to a proper security agreement and that the pledge of these assets to collateralize the deposits was properly prepared in the ordinary course of business, with no evidence of fraud or collusion, and for adequate consideration to the depository institution, it is my opinion that FDIC or RTC as receiver could not avoid such a pledge of collateral to the municipal waste management authorities.
As you noted in your letter, 12 U.S.C. §1821(e)(1) authorizes a receiver or conservator to disaffirm those contracts to which the depository institution is a party, the performance of which would be burdensome and the disaffirmance of which would promote the orderly administration of the institution's affairs. In addressing your concerns, 12 U.S.C. §§1821(d)(9), 1821(n)(4)(I) and 1823(e) must also be considered. These sections provide that an agreement is not enforceable against the FDIC or RTC unless, inter alia, the agreement was executed contemporaneously with the acquisition of the asset. In general, the FDIC or RTC as receiver or conservator of a depository institution cannot avoid a legally enforceable or perfected security interest in assets of a depository institution unless the security interest is taken with an interest to "hinder, delay or defraud the institution or the creditors of such institution." 12 U.S.C. §1821(e)(11).
In addition to the provisions in Title 12 mentioned above, the Commonwealth of Pennsylvania has set forth a standardized procedure for pledging assets to secure deposits of public funds required by other statutes or rules or regulations of public bodies. Under these guidelines, each depository must deliver the pledged assets to a custodian. The pledged assets must be the same as those applicable to United States Treasury tax and loan accounts under provisions of United States Treasury Circular No. 92, except that the valuation of obligations of the Commonwealth and public bodies of the Commonwealth shall be at the face value thereof.
I assume that the transactions contemplated would be undertaken in the ordinary course of business with no intent to hinder, delay or defraud the bank or its creditors. In considering the statutes referenced above, I believe that these security arrangements would be fully enforceable in the event the FDIC or RTC is appointed receiver or conservator. However, those public funds exceeding $100,000 would be protected only to the extent that they are adequately secured. If the funds are undersecured, the unsecured, uninsured portion could be in jeopardy and the depositor would receive a receivership certificate which would entitle the depositor to a distribution from the receivership for that portion.
The foregoing opinion only addresses the avoidability of the security interest in collateral pursuant to the cited sections and does not address the avoidability of a security interest in collateral under any other provisions of law or regulation.