FDIC Bankruptcy Claim Defeated, Bloomberg Law Reports®
On June 6, 2011 the Federal Deposit Insurance Corporation (FDIC) suffered a setback in its effort to obtain funds from a failed thrift’s holding company when the U.S. District Court for the Northern District of Ohio ruled that the thrift’s business plans and the government’s enforcement actions did not constitute binding capital commitments for purposes of the Bankruptcy Code.
The Fall of Amfin Financial Corporation and AmTrust Bank
Amfin Financial Corporation (AFC) is a savings and loan holding company and was the parent of AmTrust Bank (Bank). In 2008 and 2009, the Bank’s financial condition deteriorated due to weaknesses in its residential loan portfolio. In response to an unfavorable examination by the Office of Thrift Supervision (OTS), AFC and the Bank prepared a joint management action plan (MAP) in which they contemplated maintaining minimum consolidated capital ratios, and a strategic business plan that assumed that AFC would raise and contribute $240 million in capital to the Bank in the third quarter of 2008. When these plans failed to materialize, OTS issued separate cease and desist orders (C&Ds) against each entity. The Bank’s C&D required it to maintain minimum capital levels while AFC’s C&D required it to develop plans to augment the Bank’s capital and ensure the Bank’s compliance with its C&D. In November 2009, OTS declared that the Bank was “significantly undercapitalized” for prompt corrective action purposes and directed it to submit a capital restoration plan, which, OTS informed the Bank, it would not accept unless AFC guaranteed the Bank’s performance under the plan. AFC did not agree to guarantee the Bank’s performance and the Bank never submitted a capital restoration plan.
Shortly thereafter, AFC filed a petition under Chapter 11 of the Bankruptcy Code. OTS subsequently closed the Bank and appointed FDIC as receiver. FDIC estimated that the Bank’s failure cost the Deposit Insurance Fund approximately $2 billion.
Section 365(o) of the Bankruptcy Code, 11 U.S.C. § 365(o), generally requires the debtor to immediately cure deficiencies under “commitments to maintain the capital of an insured depository institution” made to a federal banking regulator. FDIC asserted that the MAP, strategic business plan, and C&Ds each constituted “commitments” for purposes of Section 365(o) and sought an order directing AFC to cure deficiencies under the alleged commitments. The issue was withdrawn from the bankruptcy court to the district court for resolution.
Earlier Cases Show Mixed Results
Section 365(o) does not prescribe a particular form or content for capital maintenance commitments. Instead, it is up to courts to determine whether materials exchanged by a holding company and a regulator rise to the level of a capital maintenance commitment. Prior to Amfin, five other courts addressed this issue. These cases are listed in the table below. In the most recent of the five cases (and the only one involved an institution swept up in the recent wave of bank failures), the court held that no capital maintenance commitment existed. Courts in the other four cases found that the holding company made a commitment to maintain its subsidiary bank’s capital that could service as the basis for a claim requiring immediate cure under Section 365(o). However, in one of these four cases, which involved a regulatory conservatorship, the court ultimately rejected the regulator’s Section 365(o) claim because there was no capital deficiency for the holding company to remedy.
|In re Colonial Bancgroup, Inc.||Bankrutpcy – M.D. Ala. (2010)||No commitment|
|Wolkowitz v. FDIC (In re Imperial Credit Industries)||9th Cir. (2008)||Commitment|
|Franklin Savings Corporation v. OTS||Bankruptcy – D. Kan. (2004)||Commitment, but no capital deficiency and, thus, no claim|
|OTS v. Overland Park Financial Corp.||10th Cir. (2001)||Commitment|
|RTC v. Firstcorp, Inc. (In re Firstcorp, Inc.)||4th Cir. (1992)||Commitment|
Business Plans and Enforcement Orders Were Not “Commitments”
Before the court, FDIC and AFC each argued that the relevant materials were unambiguous and the issue was ripe for summary judgment. The court, after hearing arguments and reviewing the documents, concluded otherwise and convened an advisory jury to weigh in on the question of whether the MAP, strategic business plan, or C&Ds created an enforceable commitment for AFC to maintain the Bank’s capital. After a brief trial, the advisory jury concluded that none of the materials created a binding commitment.
The court agreed with the jury. It noted that AFC had no obligation under applicable banking or thrift law to maintain the Bank’s capital. It also observed that FDIC did not participate in the negotiation or drafting of any of the documents nor was it a party to the C&Ds. As a result, it had “no first-hand knowledge relative to the intent or meaning of any of the documents or agreements at issue.”
The court also commented on each of the applicable materials. The MAP, the court found, contained only consolidated minimum capital requirements. The court determined that AFC could not have intended for it to serve as a binding obligation to maintain the Bank’s capital because the MAP had no Bank-specific capital minimums. Similarly, in the court’s view, the Bank’s strategic business plan set out general expectations rather than concrete obligations or guarantees and could not have formed the basis of an enforceable commitment. The court acknowledged that AFC’s C&D required it to ensure that the Bank complied with its C&D, but the court nonetheless found that there was no evidence that OTS intended this provision to create a binding obligation on AFC or that OTS ever sought to enforce the provision. Finally, the court cited AFC’s unwillingness to guarantee the Bank’s capital restoration plan as “powerful evidence” that AFC never had any intention of guaranteeing the Bank’s capital position.
Accordingly, the court ruled in favor of AFC and dismissed FDIC’s claim.
Federal Deposit Insurance Corporation
Thrift Holding Companies
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