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4000 - Advisory Opinions

Circumstances Under Which FDIC as Receiver Will Not Seek to Avoid Security Interest or Collateral Pledge Under 12 U.S.C. 1823(e)


February 2, 1993

Michael H. Krimminger, Senior Counsel

This will respond to your request for advice on the applicability of North Arkansas Medical Center v. Barrett and 12 U.S.C. 1823(e) to deposits in commercial banks in excess of the federally insured amount of "registry funds," or monies belonging to litigants before the federal courts, that are secured by collateral pledges. As we understand the facts at issue, commercial banks are permitted to accept registry deposits in excess of the $100,000 insured by the FDIC if collateral is pledged to secure this excess in an amount required by the Secretary of the Treasury. You have expressed concern that under North Arkansas Medical Center and 12 U.S.C. 1823(e), the FDIC could avoid certain collateral pledges securing such registry deposits because the collateral is often posted in advance and the specific collateral may change from time to time.

The FDIC does not provide binding determinations except through regulations and orders. Without careful consideration of all of the particular facts, relevant documents, and other circumstances surrounding an individual situation, it is impossible to state whether the FDIC as receiver would seek to avoid any security interest. Nonetheless, we are willing to give some general guidance on the FDIC's policy in such situations.

Initially, while the opinion by the Eighth Circuit in North Arkansas Medical Center contains certain language that has given rise to public concern, we do not view the decision as sanctioning the avoidance of security interests simply because the collateral is pledged before the public funds are deposited or the specific collateral pledged may change from time to time. In its opinion, the Eighth Circuit concluded that an enforceable security interest protected under 12 U.S.C. 1821(e)(11) must comply with the requirements of section 1823(e) and applicable state law. Id. at 789. The parties in North Arkansas Medical Center, 962 F.2d at 786, agreed that the security interest did not comply with section 1823(e). In fact, the purported security interest in North Arkansas Medical Center did not satisfy several of the elements of section 1823(e). Id. at 783. Accordingly, the Medical Center's security interest was not enforceable.

It is the FDIC's policy that it will not seek to avoid a security interest or collateral pledge solely because that arrangement does not meet the "contemporaneous" requirement of 12 U.S.C. 1821(d), 1821(n)(4)(I), and 1823(e), assuming that it is properly perfected, and was not taken in contemplation of the institution's insolvency or with the intent to hinder, delay, or defraud the institution or its creditors. However, the agreement evidencing the security interest must satisfy 12 U.S.C. 1823(e), as well as other applicable state law. For your convenience, copies of sections 1821(e)(11) and 1823(e) are attached to this letter. To the extent that no agreement satisfying each of the elements of section 1821(e)(11) and Section 1823(e) supports the collateral deposit of a specific institution, then 1823(e) and 1821(e)(11) will preclude enforcement should the depository institution fail and the FDIC be appointed Receiver.

It is impossible to determine from the facts given to us whether the arrangement you discuss would satisfy 1823(e) in each case. It may be of some assurance to you that where a security interest is evidenced by an agreement in writing, which is signed by the proper parties and approved by the board of directors of the institution, is continuously an official record of the institution, and meets each of the assumptions listed below, it is the FDIC's position that it would not, pursuant to 12 U.S.C. 1823(e), avoid that security interest solely because the deposit secured or the specific collateral pledged was not acquired by the institution simultaneously with execution and approval of the security agreement, the specific collateral pledged would change from time to time, or the aggregate amount of collateral pledged would increase. (See FDIC advisory opinion 91--24, attached).

Although we cannot state with certainty whether a given arrangement will satisfy Section 1823(e) without knowing the facts and circumstances surrounding that individual situation, we offer the following guidance in fashioning enforceable security agreements. The agreement must set forth the entire arrangement among the parties. Under D'Oench Duhme & Co., Inc. v. FDIC, 315 U.S. 447 (1942) and Section 1823(e), a court will not look to extraneous writings for interpretation of that agreement. The agreement should grant or create a security interest in the collateral, should be signed by the institution and the secured party (the custodian of the registry funds). Appropriate financing statements should be filed in compliance with all applicable state law requirements. The transaction should be approved by the institution's board of directors, and the agreement should be continuously an official record of the institution. Assuming the agreement meets these requirements, and provided the collateral is held by the custodian pursuant to a properly perfected security interest in the ordinary course of business with no evidence of fraud or collusion, the FDIC would not seek to avoid the security interest in the collateral if the institution were declared insolvent.

For the purposes of the foregoing opinion, I have assumed the following:

1.  The creditor possesses a security interest in the collateral securing the obligation, perfected as against the insured institution and the FDIC as receiver of the filed institution as of the date the FDIC is appointed receiver.

2.  The arrangement is a bona fide, arm's length transaction.

3.  The secured party is not an insider or affiliate of the failed institution.

4.  The grant of the security interest in the collateral and the incurrence of the secured obligation are for adequate consideration and are not avoidable under other provisions of law, such as the law of fraudulent conveyances.

5.  The security interest was not taken in contemplation of the institution's insolvency.

6.  The underlying obligation for which the security has been pledged is a fixed and certain obligation of the institution prior to its failure.

I appreciate the opportunity to respond to your inquiry and trust that the foregoing has been helpful. I would like an opportunity to discuss these matters with you further in order to provide the greatest possible cooperation by the FDIC in addressing these issues. Consequently, do not hesitate to contact me at your convenience at (202) 736-0336.

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