4000 - Advisory Opinions
FDIC Policy Regarding Liquidation of Repurchase Transactions by Insolvent Banks
March 17, 1988
John L. Douglas, General Counsel
This is in reference to your recent inquiry concerning the policy of the Federal Deposit Insurance Corporation ("FDIC") relative to the liquidation of repurchase transactions ("repos") involving insolvent banks of which the FDIC has been appointed receiver.
The actions of the FDIC in its capacity as receiver of a failed FDIC-insured institution are determined on a case-by-case basis, in accordance with applicable law and in light of specific factual situations. For this reason, the FDIC has not adopted any formal policy regarding the liquidation of repos in its receiverships and does not believe it appropriate or in keeping with the multiple legal authorities under which it acts as a receiver to adopt such a policy now. I am willing, however, to provide my views as to what a court would hold in response to an attempt by the FDIC as receiver of a failed FDIC-insured institution to obtain a stay of the liquidation of a repo by a repo participant.
It is my opinion that absent actual intent on the part of a repo holder to delay or defraud creditors of a failed FDIC-insured institution, or such other factors as a court would deem relevant under applicable law, a court would not uphold an attempt by the FDIC as receiver of the insured institution to stay the liquidation of a repo by a repo participant where (1) the repo transaction is structured as a secured lending transaction in which the FDIC-insured institution stands in the position of the borrower and the repo participant in the position of the lender; (2) the repo conforms to the definition of such agreements set forth in section 101(41) of the Bankruptcy Code; (3) the participant seeks to liquidate the repo pursuant to a contractual right as defined in section 559 of the Bankruptcy Code and if the following circumstances are present:
1. The repo participants possesses a security interest in the securities securing the repo, perfected as against the FDIC as receiver of the failed insured institution as of the date the FDIC is appointed receiver thereof.
2. The repo participant promptly liquidates the securities securing the repo in a commercially reasonable manner in accordance with the terms of the repo and with applicable law.
3. The repo participant promptly remits to the FDIC as receiver of the failed insured institution any excess amount above the repurchase price for the underlying securities, including interest and reasonable expenses of liquidation, determined in accordance with terms of the repo and with applicable law.
It is my opinion that, based on the facts and circumstances I have assumed, a court would not uphold an attempt by the FDIC as receiver of the insured institution to stay the liquidation of the repo by the repo participant. I hope that the foregoing is responsive to your inquiry.