5000 - Statements of Policy
STATEMENT OF POLICY REGARDING TREATMENT OF COLLATERALIZED PUT OBLIGATIONS AFTER APPOINTMENT OF THE FEDERAL DEPOSIT INSURANCE CORPOATION AS CONSERVATOR OR RECEIVER
This statement of policy sets forth the treatment that the Federal Deposit Insurance Corporation (FDIC) as the conservator or receiver of an insured depository institution will give collateralized "put" options issued by the insured depository institution.
On August 9, 1989, the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) was signed into law. This statute amended the Federal Deposit Insurance Act (FDI Act) to clarify the FDIC's rights as conservator or receiver to repudiate contracts. With regard to secured contracts, the FDI Act provides that the repudiation provisions are not to be construed as permitting the avoidance of any legally enforceable or perfected security interest in any assets of the institution except where such interest is taken in contemplation of the institution's insolvency or with the intent to hinder, delay, or defraud the institution or the institution's creditors. 12 U.S.C. 1821(e)(11). Absent this provision for legally enforceable or perfected security interests, the conservator or receiver arguably could avoid such security interests and render any claim on the repudiated contract unsecured.
Reading these statutory provisions as a whole, it is clear that even secured contracts may be repudiated; that damages are limited to the extent set forth in the statute; and that legally enforceable or perfected security agreements must be honored to the extent of such damages but no further or otherwise. In other words, if there is a repudiation, the collateral securing the contract may be liquidated and the proceeds paid to or retained by the creditor up to the damages allowed by the statute, i.e., damages for actual direct compensatory losses measured as of the date of the appointment of the conservator or receiver. The remaining collateral or proceeds must then be remitted or returned to the conservator or receiver as property of the institution or its estate, or to a bona fide junior lienholder to the extent applicable.
While the preceding statement sets forth the existing law and is applicable to all contracts which have been or will be repudiated by a conservator or receiver after August 9, 1989, regardless of when the contract was entered into, certain issues have been raised regarding collateralized put options.
The FDIC has maintained a longstanding position that contingent obligations have no provable damages under the FDI Act's statutory damages limitation, if repudiated by the receiver or conservator, because the damages are not fixed and certain as of the date of the appointment of the receiver or conservator. As FIRREA has made this result more apparent, market certainty and stability have been affected.
Statement of Policy
The FDIC has considered a number of relevant policy factors, including its legal rights and powers under FIRREA; the assurances provided by the Federal Home Loan Bank Board prior to the enactment of FIRREA and market reliance on those assurances; the need for market certainty and stability; the potential long-term cost to the FDIC of outright repudiation of collateralized put options; and the potential for immediate acceleration of the isser's obligations under these collateralized put options. Based on its consideration and balancing of such factor, the FDIC has determined to adopt and implement the following Policy with respect to the treatment of collateralized put options after its appointment as conservator or receiver of insured depository institutions having these types of obligations:
(1) This policy will apply to collateralized put options in all respects where the collateralized put options were originally issued by insured depository institutions prior to August 9, 1989.
(2) It is recognized that the FDIC as conservator or receiver has the right to call, redeem or prepay any collateralized put options by repudiation or disaffirmance either directly by cash payment in exchange for release of the collateral or by the repudiation of the contract evidencing such borrowings followed by liquidation of the collateral by a trustee or other secured party. Accordingly, the FDIC in its capacity as conservator or receiver may accelerate the collateralized put options, in which event payment will be made to the extent of available collateral up to an amount equal to the outstanding principal amount or accreted value of the secured obligations, together with interest at the contract rate up to (and including, if so provided in the contract) the date of payment, plus expenses of liquidation, if so provided in the contract. If the holder of the options for any reason fails to accept the amount tendered, the FDIC will deem the options contract and the related collateral arrangement terminated. If the FDIC does not accelerate the contract, the terms of the contract will be enforceable during the pendency of the conservatorship or receivership.
(3) The FDIC shall have a reasonable time, which is specfically defined as 180 days from the date of appointment of any conservator or receiver, to make a determination whether or not to accelerate a collateralized put option. In the case of institutions for which the FDIC already has been so appointed, the 180-day period shall begin to run as of the date of adoption of this policy.
(4) This policy is intended to cover only collateralized put options issued in connection with capital markets financing transactions, including the formation of publicly offered unit investment trusts and other sales of insured depository institutions' portfolio securities in capital markets transactions.
(5) This policy shall apply in all respects to collateralized put options issued on or after August 9, 1989 only if the put option was issued in renewal, replacement or extension of a put option issued prior to the enactment of FIRREA.
(6) This policy shall only apply to transactions where the underlying security interest is in collateral owned and pledged by the insured depository institution to secure its obligations and the security interest is both perfected and legally enforceable.
(7) It is understood that persons involved in secured transactions with insured depository institutions may reasonably rely upon this policy statement.
By order of the Board of Directors, July 9, 1991.
[Source: 56 Fed. Reg. 36152, July 31, 1991]