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5000 - Statements of Policy
{{12-31-91 p.5335}}
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.
Background
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
{{12-31-91 p.5336}}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]
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