Federal Deposit
Insurance Corporation

[Federal Register: December 18, 2001 (Volume 66, Number 243)]
[Proposed Rules]
[Page 65144-65146]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18de01-25]

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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 360

RIN 3064-AB92

Payment of Post-insolvency Interest in Receiverships With Surplus
Funds

AGENCY: Federal Deposit Insurance Corporation.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Federal Deposit Insurance Corporation is publishing for
notice and comment a proposed rule regarding the payment of post-
insolvency interest in insured depository institution receiverships
with surplus funds. The purpose of the rule is to establish a single
uniform interest rate, calculation method, and payment priority for
post-insolvency interest. The proposed rule provides that where funds
remain after the satisfaction of the principal amount of all creditor
claims, post-insolvency interest will be paid in the order of priority
set forth in section 11(d)(11)(A) of the Federal Deposit Insurance Act;
paid at the coupon equivalent yield of the average discount rate set on
the three-month Treasury bill at the last auction held by the United
States Treasury Department during the preceding calendar quarter;
adjusted each quarter after the receivership is established; and based
on a simple interest method of calculation.

DATES: Comments must be received by February 19, 2002.

ADDRESSES: Send written comments to Robert E. Feldman, Executive
Secretary, Attention: comments/OES, Federal Deposit Insurance
Corporation, 550 17th Street, NW., Washington, DC 20429. Comments may
be hand-delivered to the guard station located at the rear of the 17th
Street building on F Street on business days between 7 a.m. and 5 p.m.
Comments may also be faxed or emailed (FAX number (202) 898-3838;
Internet address: comments@FDIC.gov). Comments may be posted on the
FDIC internet site at http://www.fdic.gov/regulations/laws/Federal/
propose.html and may be inspected and photocopied at the FDIC Public
Information Center, Room 100, 801 17th Street, NW., Washington, DC
between 9 a.m. and 4:30 p.m. on business days.

FOR FURTHER INFORMATION CONTACT: Thomas Bolt, (202) 736-0168; or Rodney
Ray, (202) 898-3556.

SUPPLEMENTARY INFORMATION:

I. Background

For receiverships established after August 10, 1993, payment of
receivership claims is governed by section 11(d)(11)(A) of the Federal
Deposit Insurance Act, which section is also known as the national
depositor preference statute. Because the national depositor preference
statute does not specifically mention post-insolvency interest, and in
the absence of a regulation regarding its payment, the FDIC's practice
in receiverships subject to the national depositor preference statute
that have surplus funds has been to follow the common law rule. The
common law rule is that post-insolvency interest should be paid pro
rata to all creditors regardless of priority. The exception to this
approach is the case of an institution subject to a state law that
specifically provides for a different distribution priority. (Several
states' statutes provide that after the principal amounts of all claims
within the same class have been satisfied, interest is to be paid at
the same priority as the claim on which it accrues.) With respect to
the interest rate for post-insolvency interest, the FDIC, in
receiverships subject to the national depositor preference statute, has
used the federal judgment rate for federal or ``federalized''
institutions (state-chartered institutions where the FDIC has exercised
its self-appointment authority under section 11(c) of the FDI Act). For
state institutions, the FDIC used the applicable rate provided for by
state law. Consequently, different distribution priorities and interest
rates have been used depending on the type of institution involved and
the applicable law.
In December 2000, Congress granted the FDIC express rulemaking
authority regarding the payment of post-insolvency interest in
receiverships with surplus funds. The American Homeownership and
Economic Opportunity Act of 2000 added new subparagraph (C) to section
11(d)(10) of the FDI Act, which reads as follows:

(C) Rulemaking Authority of Corporation. The Corporation may
prescribe such rules, including definitions of terms, as it deems
appropriate to establish a single uniform

[[Page 65145]]

interest rate for or to make payment of post-insolvency interest to
creditors holding proven claims against the receivership estates of
insured Federal or State depository institutions following
satisfaction by the receiver of the principal amount of all creditor
claims.

By virtue of this rulemaking authority, the proposed rule regarding
post-insolvency interest would preempt any inconsistent state law by
providing a single uniform interest rate and priority of distribution
for post-insolvency interest in receiverships established after the
rule becomes effective. See City of New York v. FCC, 486 U.S. 57, 63
(1988) (regulation promulgated by federal agency acting within the
scope of its congressionally delegated authority may preempt state
law). The proposed rule will apply to receiverships established after
the effective date of the rule. Historically, relatively few
receiverships have generated sufficient recoveries to enable post-
insolvency interest to be paid. Consequently, the proposed rule will
probably apply to only a small number of receiverships in the future.

II. The Proposed Rule

New section 11(d)(10)(C) of the FDI Act provides that post-
insolvency interest will be paid after satisfaction of the principal
amount of all creditor claims. The proposed rule provides that after
the satisfaction of the principal amount of all creditor claims, post-
insolvency interest will be paid in the order of priority set forth in
section 11(d)(11)(A), the national depositor preference statute. This
differs from the FDIC's existing practice of following the common law
rule that post-insolvency interest should be paid pro rata to all
creditors regardless of priority, except in the case of an institution
subject to a state law that specifically provides for a different
distribution priority. Nevertheless, the approach in the proposed rule
appears to be more consistent with Congress's objective, as expressed
in the national depositor preference statute, that the deposit
liabilities be preferred over other liabilities in the liquidation of
an insured depository institution.\1\
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\1\ According to the legislative history, Congress enacted
depositor preference primarily to reduce the FDIC's cost of
resolving failed institutions by increasing its recoveries as
subrogee of insured deposit claims, thereby benefiting the deposit
insurance funds. ``Under depositor preference, the FDIC and RTC will
have a first claim on the assets of all failed banks and thrifts,
thereby increasing the savings to the Federal deposit insurance
funds.'' 139 Con. Rec. H6150 (daily ed. Aug. 5, 1993) (statement of
Rep. Gonzalez). Furthermore, Congress was aware that depositor
preference would result in diminished recoveries for general
creditors. See H.R. Rep. No. 111, 103d Cong., 1st Sess. 1993,
U.S.C.C.A.N. 378.
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The alternative approach would be to follow the common law rule and
pay post-insolvency interest on a pro rata basis to all creditors,
without regard to the priority of payment of the principal amount of a
creditor's claim under section 11(d)(11)(A). Depending on the amount of
assets available in a receivership to pay post-insolvency interest,
either approach could affect the recoveries of certain classes of
creditors.\2\
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\2\ The following discussion is provided to illustrate the
potential impact that selecting one distribution method over the
other could have on different classes of receivership creditors. The
FDIC believes, however, that the actual impact of either approach
will depend significantly on the particular facts and circumstances
surrounding future receiverships, therefore, the following
discussion is based on generalized observations of how receivership
distributions in future FDIC-administered receiverships might be
affected and is not an attempt to describe definitively how any
particular class of creditors will be affected by either approach.
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If post-insolvency interest was paid to receivership creditors
based on the priority accorded the principal amount of a creditor's
claim under section 11(d)(11)(A), creditors holding deposit claims
(including the FDIC's subrogated deposit claim against the
receivership) would receive all of their post-insolvency interest
payments, before the receivership creditors holding claims in the lower
priority classes received any post-insolvency interest payments. This
approach, therefore, would result in post-insolvency interest payments
being made to the depositors of the failed institution, but it may also
result in little or no post-insolvency interest payments being made to
creditors holding claims in the lower priority classes. Also, if
federal income tax claims have been allowed against the receivership
estate, this approach, combined with federal tax laws and tax
regulations, may result in the federal income tax claims being paid pro
rata with post-insolvency interest payments to the general creditors of
the receivership estate.\3\
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\3\ The proposed rule would not affect the calculation or
accrual of interest on any federal income tax liability pursuant to
sections 6601 and 6621 of the Internal Revenue Code.
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Alternatively, if post-insolvency interest was paid to all
receivership creditors holding allowed claims on a pro rata basis,
regardless of the priority accorded the principal amount of the
underlying claim under section 11(d)(11)(A), all of the receivership's
creditors (except the Internal Revenue Service) would receive a pro
rata share of the assets available for post-insolvency interest
payments. Again, a combination of this approach with federal tax laws
and tax regulations, however, may result in the federal income tax
claims against the receivership being paid only after all of the other
receivership creditors (including subordinated debt holders) had
received post-insolvency interest payments, but before any
distributions were made to the equityholders of the failed institution.
Another component of the proposed rule involves the interest rate
to be applied for purposes of calculating post-insolvency interest
payments. The FDIC believes a publicly available, market-based rate
would be preferable to a single numerical interest rate because the
market-based rate should be more reflective of the interest rate
environment in existence during the life of future receiverships. In
addition, as indicated earlier, the FDIC has utilized the federal
judgment rate in receiverships of federally chartered institutions and
in federalized receiverships of state institutions to calculate post-
insolvency interest payments. In the proposed rule, however, the post-
insolvency interest rate for all FDIC-administered receiverships would
be based on the coupon equivalent yield of the average discount rate
set on the three-month Treasury bill, rather than the federal judgment
rate. This rate was selected, instead of the federal judgment rate,
because the three-month Treasury bill is considered to be widely
recognized as a cash management investment performance benchmark and
its yield has historically tracked, to some degree, changes in the rate
of inflation.
Whether the interest rate should be fixed or ``float'' is also an
issue addressed in the proposed rule. Presently, when a new
receivership is established, if assets ultimately become available for
post-insolvency interest payments, the rate that exists on the date the
receivership is established is fixed for purposes of calculating post-
insolvency interest. This approach is consistent with the way the
federal judgment rate is applied to judgments entered by the federal
courts because the allowance of a claim against a receivership estate
has been viewed as the general equivalent of a judgment being entered
against the receivership estate. This approach may not be reflective,
however, of the economic conditions and interest rate environment in
existence during the life of the receivership. Therefore, the proposed
rule provides that the post-insolvency interest rate would be adjusted
quarterly. This is being proposed to mitigate interest rate risk

[[Page 65146]]

due to changes in economic conditions during the life of the
receivership.
Finally, the proposed rule provides that post-insolvency interest
distributions would be calculated using a simple interest method,
rather than a compound interest method. The simple interest method is
proposed because it appears to provide a reasonable amount of interest
to compensate receivership creditors for the time value of money owed
from the time the receivership is established until dividend payments
are received.

III. Request for Public Comment

The FDIC hereby solicits comments on all aspects of the proposed
rule, and specifically whether post-insolvency interest should be paid
according to the order of priority described in the national depositor
preference statute or alternatively pro rata to all creditors
regardless of priority.

IV. Paperwork Reduction Act

The proposed rule will not involve any collection of information
under the Paperwork Reduction Act (44 U.S.C. 3501 et seq.).
Consequently, no information has been submitted to the Office of
Management and Budget for review.

V. Regulatory Flexibility Act

Pursuant to section 605(b) of the Regulatory Flexibility Act (5
U.S.C. 601 et seq.) the FDIC certifies that the proposed rule will not
have a significant economic impact on a substantial number of small
entities. The proposed rule will only apply to FDIC-administered
receiverships established after the effective date of the rule, and it
does not impose new reporting, recordkeeping or other compliance
requirements on receivership creditors. The proposed rule continues the
FDIC's existing practice of making post-insolvency interest
distributions to creditors holding proven claims in surplus
receiverships prior to making distributions to equityholders, based on
their equity interests, in a failed insured depository institution. In
addition, the proposed rule will provide interested parties, including
small entities, with greater certainty in future FDIC-administered
receiverships by establishing a single uniform interest rate and method
for making post-insolvency interest distributions. Accordingly, the
Act's requirements relating to an initial regulatory flexibility
analysis are not applicable.

VI. The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families

The FDIC has determined that the proposed rule will not affect
family well-being within the meaning of section 654 of the Treasury and
General Government Appropriations Act, enacted as part of the Omnibus
Consolidated and Emergency Supplemental Appropriations Act of 1999
(Public Law 105-277, 112 Stat. 2681).

List of Subjects in 12 CFR Part 360

Banks, banking, Savings associations.
For the reasons set forth in the preamble, the FDIC Board of
Directors proposes to amend 12 CFR part 360 as follows:

PART 360--RESOLUTION AND RECEIVERSHIP RULES

1. The authority for part 360 is revised to read as follows:

Authority: 12 U.S.C. 1821(d)(1), 1821(d)(10)(C), 1821(d)(11),
1821(e)(1), 1821(e)(8)(D)(i), 1823(c)(4), 1823(e)(2); Sec. 401(h),
Pub. L .101-73, 103 Stat. 357.

2. Section 360.7 is added to part 360 to read as follows:

Sec. 360.7 Post-insolvency interest.

(a) Purpose and scope. This section establishes rules governing the
calculation and distribution of post-insolvency interest to creditors
with proven claims in all FDIC-administered receiverships established
after [effective date of final rule].
(b) Definitions--(1) Equityholder. The owner of an equity interest
in a failed depository institution, whether such ownership is
represented by stock, membership in a mutual association, or otherwise.
(2) Post-insolvency interest. Interest calculated from the date the
receivership is established on proven creditor claims in receiverships
with surplus funds.
(3) Post-insolvency interest rate. For any calendar quarter, the
coupon equivalent yield of the average discount rate set on the three-
month Treasury bill at the last auction held by the United States
Treasury Department during the preceding calendar quarter, and adjusted
each quarter thereafter.
(4) Principal amount. The proven claim amount and any interest
accrued thereon as of the date the receivership is established.
(5) Proven claim. A claim that is allowed by a receiver or upon
which a final non-appealable judgment has been entered in favor of a
claimant against a receivership by a court with jurisdiction to
adjudicate the claim.
(c) Post-insolvency interest distributions. (1) Post-insolvency
interest shall only be distributed following satisfaction by the
receiver of the principal amount of all creditor claims.
(2) The receiver shall distribute post-insolvency interest at the
post-insolvency interest rate prior to making any distribution to
equityholders. Post-insolvency interest distributions shall be made in
the order of priority set forth in section 11(d)(11)(A) of the Federal
Deposit Insurance Act, 12 U.S.C. 1821(d)(11)(A).
(3) Post-insolvency interest distributions shall be made at such
time as the receiver determines that such distributions are appropriate
and only to the extent of funds available in the receivership estate.
Post-insolvency interest shall be distributed on the outstanding
balance of a proven claim, as reduced from time to time by any interim
dividend distributions, from the date the receivership is established
until such time as the principal amount of a proven claim has been
distributed but not thereafter.
(4) Post-insolvency interest shall be determined using a simple
interest method of calculation.

By order of the Board of Directors.

Dated at Washington, DC this 10th day of December, 2001.