The FDICs 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.
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 FDICs
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
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 groups
application for deposit insurance because of concerns about one of the proposed directors
and officers. In a previous banking position, the individual mixed the banks 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 FDICs 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 FDICs discretion to grant or deny applications for
In 1942, the Supreme Court in
DOench, 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 banks 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.
1950 and 1989, the courts applied both DOench and the statute in tandem, with the
federal common-law rule from DOench 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
DOench, 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
FIRREAs impact on the DOench 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.)
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 FDICs ability to administer properly its
In April 1995, the U.S. District
Court in Miami dismissed the trustees 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 Unions 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