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1996 Annual Report


Significant Court Cases


The FDIC’s wide-ranging legal activities include matters relating to the supervision of FDIC-insured institutions, the resolution of failed banks and savings associations, the liquidation of assets, and the pursuit of liability claims against failed institution officers, directors and professionals. The Legal Division, working closely with other divisions and offices, was involved in several noteworthy court cases in 1996. Most involved failed institutions and “standards of care” that the FDIC uses when pursuing professional liability claims against officers and directors of failed institutions.

Goodwill

In the early 1980s, many savings associations had “regulatory goodwill” on their books as a result of taking over troubled thrifts from the Federal Home Loan Bank Board (FHLBB), the predecessor to the Office of Thrift Supervision (OTS). The FHLBB granted the use of goodwill in lieu of providing money as an incentive for healthy thrifts to take over troubled institutions. The goodwill, carried as an asset on the books of the surviving institution, lessened the impact of the merger with a troubled thrift. The FHLBB allowed savings associations to keep this regulatory goodwill on the books for up to 40 years. However, when Congress passed the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), it reduced that period to five years. Many open thrifts and investors in failed thrifts with goodwill on their books responded by suing the government for breach of contract.

One of the cases made it to the U.S. Supreme Court in 1996. In July, the Court decided in Winstar v. United States that changes in the methods of calculating regulatory capital, including restrictions on the use of goodwill, resulted in a breach of contract, making the institution eligible for recoveries from the United States Government. As a result, more than 120 cases pending against the U.S. in the Court of Federal Claims were eligible for recoveries, including approximately 50 cases involving failed institutions. The Court of Federal Claims announced plans to begin hearing cases involving goodwill claims in the spring of 1997.

In November of 1996, the FDIC petitioned the Court of Federal Claims to allow the agency to intervene and be substituted as plaintiff in 45 of the cases involving 38 failed institutions, based on the FDIC’s assertion that it owned the vast majority of the claims and that it is the real party entitled to pursue any recovery. In the summer, the FDIC had successfully joined as plaintiff in two other goodwill cases.

(In February 1997, the Court of Federal Claims ruled that the FDIC may intervene in the 45 cases, but it could not substitute for, or replace, the other plaintiffs.)

Entitlement to Deposit Insurance

In 1993, recipients of a new bank charter in Michigan filed an application with the FDIC for deposit insurance. On June 21, 1994, and two subsequent occasions, the FDIC Board of Directors denied the group’s application for deposit insurance because of concerns about one of the proposed directors and officers. In a previous banking position, the individual mixed the bank’s assets with his personal assets, and demonstrated a continuing inability to identify and understand conflicts of interest. In November 1996, in the case of Anderson v. FDIC, the U.S. District Court for the Eastern District of Michigan granted the FDIC’s request for a summary judgment and dismissed the case. At year-end, the organizers filed an appeal with the U.S. Court of Appeals for the Sixth Circuit in Cincinnati, Ohio.

The case is of importance because it raises issues concerning the FDIC’s discretion to grant or deny applications for deposit insurance.

D'Oench Duhme

In 1942, the Supreme Court in D’Oench, Duhme & Co. v. FDIC established a broad rule protecting the FDIC against any arrangements, including oral or secret agreements, that are likely to mislead bank examiners in their review of a bank’s records. Then, in 1950, Congress established strict approval and recording requirements that, if not met, barred any claim attempting to diminish the interest of the FDIC in assets acquired from a failed bank.

Between 1950 and 1989, the courts applied both D’Oench and the statute in tandem, with the federal common-law rule from D’Oench barring claims even where the statute might not. After enactment of FIRREA in 1989, however, the District of Columbia Circuit in FDIC v. Murphy and the U.S.Court of Appeals for the Eighth Circuit in St. Louis, Missouri, in FDIC v. DiVall concluded that FIRREA displaced the federal common-law rule, and that FIRREA provided the FDIC all the protections to which it is entitled in this area.

In May 1996, the U.S.Court of Appeals for the Eleventh Circuit in Atlanta in Motorcity of Jacksonville, Ltd. v. FDIC disagreed with the Murphy and DiVall decisions and barred claims under the broad rule established in D’Oench, which the court found survived the enactment of FIRREA.

In July 1996, the plaintiff in Motorcity asked the Supreme Court to resolve this apparent disagreement among the circuits. The FDIC opposed review by the Supreme Court. It argued that the issue of FIRREA’s impact on the D’Oench doctrine need not be resolved because the alleged agreement to mislead the FDIC examiners was entered into before FIRREA was enacted.

(On January 21, 1997, the Supreme Court sent the case back to the Eleventh Circuit for reconsideration in light of its January 14, 1997, opinion in Atherton v. FDIC, an RTC professional liability suit involving related, but distinguishable, federal common-law issues.)

Scott Watson & Jerry Madden of the Legal Diviison

Legal Division counsels Scott Watson (l) and Jerry Madden, shown outside the U.S. Supreme Court, spearheaded the FDIC's efforts to preserve the "D'Oench Duhme" doctrine and related statutory protections.

Brandt v. FDIC

In March 1991, Southeast Bank Corporation (SBC), the holding company that owns all of the stock of Southeast Bank, N.A. and Southeast Bank of West Florida, agreed to make the banks’ financial information available to First Union National Bank to evaluate a possible merger.

The agreement also prohibited First Union from publicly disclosing the financial information and the negotiations taking place. Although the agreement specifically provided that this prohibition did not apply to “federally assisted transactions,” the trustee for SBC sued First Union for alleged breaches of contract and tortious actions that occurred in the six months before the two Southeast banks were closed. The trustee also alleged that First Union violated the terms of the agreement by having discussions with the FDIC and other federal regulators. The trustee also alleged that these acts ultimately caused Southeast to be placed into receivership. The FDIC, in its corporate capacity, intervened because the resolution of this action could limit the FDIC’s ability to administer properly its insurance program.

In April 1995, the U.S. District Court in Miami dismissed the trustee’s claims. The court found that the claims were premised on alleged harm to the two Southeast banks, not the holding company, and therefore it was the FDIC, not the trustee, who owned the claims. The district court also concluded that all of First Union’s communications with the federal regulators were permitted under the “federally assisted regulatory transactions” provision of the confidentiality agreement.

The Eleventh Circuit affirmed the dismissal on September 3, 1996, holding that the alleged actions of First Union were not the proximate cause of the banks’ failure. In addition, the Eleventh Circuit held that federal regulators were entitled to the information allegedly given to them by First Union. (The trustee filed a petition appealing the case to the

 

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