5000 - Statements of Policy
STATEMENT OF POLICY REGARDING TREATMENT OF SECURITY
The power of the Federal Deposit Insurance Corporation (FDIC) to repudiate contracts of a federally-insured depository institution (an Institution) for which the FDIC is appointed conservator or receiver),1 is among the most important and powerful statutory rights the FDIC exercises.
Congress recognized this when it amended the Federal Deposit Insurance Act (the Act) in 1989 to codify the FDIC's rights as conservator or receiver to repudiate contracts and to make special provision for security interests.2 In effect, Congress intended to strike a reasonable balance between the rights of the FDIC, on the one hand, and the reasonable expectations of the marketplace, on the other.
The FDIC Board of Directors also recognizes the importance of these provisions. Recent inquiries to the FDIC demonstrate concern regarding the enforceability of security interests for public deposits in insured depository institutions.3 In an effort to avoid misunderstanding or uncertainty by market participants involved in secured transactions with Institutions generally, the FDIC is adopting this "Statement of Policy Concerning Treatment of Secured Obligations After Appointment of the FDIC as Conservator or Receiver."4
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) was signed into law on August 9, 1989.5 FIRREA codified in section 11(e) of the Act the FDIC's repudiation right as conservator or receiver.6
Section 11(e) also provides that the right is not to be construed as permitting the avoidance of any legally enforceable or perfected security interest in any of the assets of any depository institution except where such an interest is taken in contemplation of the institution's insolvency or with the intent to hinder, delay, or defraud the institution or the creditors of such institution.7 Therefore, if the FDIC repudiates a legally enforceable and perfected security agreement, it cannot avoid any legally enforceable and perfected security interest in the collateral to the extent of the statutory damages allowed by section 11(e) of the Act.
In April 1992, the U.S. Court of Appeals for the Eighth Circuit addressed the meaning of "legally enforceable" as used in the statute.8 It held that the term required strict compliance with each of the affirmative requirements of section 13(e) of the Act, including the "contemporaneous" requirement,9 and the D'Oench doctrine.10 The court also held that all state law requirements applicable to the legal enforceability and perfection of security interests must be met.11
That decision prompted some concern by those who have entered into or propose to enter into secured deposit or credit transactions with an Institution.
Construing sections 11(e) and 13(e) of the Act together, it remains clear that security interests that are not perfected and legally enforceable may be avoided by the FDIC as conservator or receiver. For this purpose, the term "legally enforceable" requires compliance with sections 11(d)(9), 11(n)(4)(I), and 13(e) of the Act.
Regardless of the date of the contract, the foregoing summary of existing law applies to all contracts to which an Institution is a party, if the FDIC is or was appointed conservator or receiver of such Institution on or after August 9, 1989.
Historical Position of the FDIC
The FDIC has maintained that it will not seek to avoid otherwise legally enforceable and perfected security interests solely because the security agreement does not meet the "contemporaneous" requirement of sections 11 and 13 of the Act.12
Similarly, the FDIC has not sought to avoid an otherwise legally enforceable and perfected security interest solely because the secured obligation or the collateral subject to such security interest (a) was not acquired by the Institution contemporaneously with the approval and execution of the security agreement granting the security interest and/or (b) may change, increase, or be subject to substitution from time to time during the period that the security interest is enforceable and perfected.13
The foregoing analysis assumes that (a) the agreement was undertaken in the ordinary course of business, not in contemplation of insolvency, and with no intent to hinder, delay or defraud the Institution or its creditors; (b) the secured obligation represents a bona fide and arm's length transaction; (c) the secured party or parties are not insiders or affiliates of the Institution; (d) the grant or creation of the security interest was for adequate consideration; and (e) the security agreement evidencing the security interest is in writing, was approved by the Institution's board of directors or loan committee (which approval is reflected in the minutes of a meeting of the board of directors or committee), and has been, continuously from the time of its execution, an official record of the Institution.14
The FDIC considered several factors in the development of this statement of policy. Those factors include the legal rights and powers of the FDIC, assurances that may have been provided in the past by staff of the FDIC and the reliance placed upon those assurances by market participants, and the desirability for market certainty and stability. The FDIC also considered the potential long-term cost to the FDIC of adopting alternative positions or policies, and the potential for redemption or prepayment in the event of acceleration of the maturities of existing secured obligations of Institutions in the event of repudiation.
Statement of Policy
Contemporaneous Requirement. Provided all of the foregoing "Assumptions" are met, the FDIC, acting as conservator or receiver for an Institution, will not seek to avoid an otherwise legally enforceable and perfected security interest solely because the security agreement granting or creating such security interest does not meet the "contemporaneous" requirement of sections 11(d)(9), 11(n)(4)(I), and 13(e) of the Act.
Specifically, the FDIC will not seek to avoid such a security interest solely because the secured obligation or collateral subject to the security interest (a) was not acquired by the Institution contemporaneously with the approval and execution of the security agreement granting the security interest and/or (b) may change, increase, or be subject to substitution from time to time during the period that the security interest is enforceable and perfected.
Right to Redeem or Prepay. Notwithstanding the foregoing, the FDIC retains the right, as conservator or receiver, to redeem or prepay any secured obligation of an Institution by repudiation or otherwise.
Upon repudiation, the secured party is entitled to any damages allowable pursuant to section 11(e) of the Act. The liability of the FDIC as conservator or receiver for exercising its repudiation rights is limited to "actual direct compensatory damages" as provided in section 11(e) of the Act. Such damages are to be determined as of the date of appointment of the conservator or receiver, as contrasted with certain "qualified financial contracts" where resulting damages are determined as of the date of repudiation.15
The FDIC shall have a reasonable period of time, generally, no more than 180 days from the date of appointment of the FDIC as conservator or receiver for an institution, to elect whether to redeem or prepay, by repudiation or otherwise, secured obligations of the Institution.
By order of the Board of Directors, March 23, 1993.
[Source: 58 Fed. Reg. 16833, March 31, 1993]
212 U.S.C. 1821(e)(11). Go back to Text
3The granting of security interests to protect deposits in excess of the $100,000 insured by the FDIC may be authorized or required for public deposits by state and/or federal law. See 12 CFR 7.7410. Go back to Text
4Nothing contained herein should be interpreted as contradicting or impairing the policies expressed in the "FDIC Statement of Policy on Qualified Financial Contracts" (FDIC Statements of Policy 5113 (Dec. 12, 1989)) or in the "Statement of Policy Regarding Treatment of Collateralized Put Obligations After Appointment of the Federal Deposit Insurance Corporation as Conservator or Receiver" (FDIC Statement of Policy 5335 (July 9, 1991)). Go back to Text
5Public Law No. 101--73, 103 Stat. 183 (1989). Go back to Text
6FIRREA § 212(e), 103 Stat. 241, see H.R. Rep. No. 101--54(l), 101st Cong., 1st Sess. 332 (1989). Go back to Text
712 U.S.C. 1821(e)(11). Go back to Text
8North Arkansas Medical Center versus Barrett, 962 F.2d 780 (8th Cir. 1992). Go back to Text
9Id. at 787. Go back to Text
10Id. (citing D'Oench, Duhume & Co. versus FDIC, 515 U.S. 447 (1942)); see id. at 788--89 (purposes of section 1823(e) and D'Oench doctrine "are to facilitate regulation and protect the FDIC from financial loss by assuring that the bank's financial condition can be assessed instantaneously; to assure senior bank officials are aware of unusual transactions before the bank agrees to them; and to prevent collusion between bank employees and customers on the eve of the bank's failure"). Go back to Text
11Id. at 765. Go back to Text
12FDIC Advisory Opinion 89--48 (Dec. 15, 1989). Go back to Text
13FDIC Advisory Opinion 91--24 (Apr. 2, 1991). Go back to Text
1512 U.S.C. 1821(e). Go back to Text