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5000 - Statements of Policy
{{4-30-93 p.5377}}
STATEMENT OF POLICY REGARDING TREATMENT OF SECURITY
INTERESTS
AFTER APPOINTMENT OF THE FEDERAL DEPOSIT
INSURANCE CORPORATION AS
CONSERVATOR OR RECEIVER
Introduction
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
Background
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
{{4-30-93 p.5378}}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
Assumptions
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
Factors Considered
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.
{{4-30-01 p.5379}}
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]
[The page following this is 5381.]
112 U.S.C. 1821(e). Go Back to Text
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
14FDIC Advisory Opinion
91--24 (Apr. 2, 1991); FDIC
Advisory Opinion 89--48 (Dec. 15, 1989). Go Back to Text
1512 U.S.C. 1821(e). Go Back to Text
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