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5000 - Statements of Policy
{{2-29-96 p.5411}}
STATEMENT OF POLICY REGARDING TREATMENT OF COLLATERALIZED LETTERS
OF CREDIT AFTER APPOINTMENT OF THE FEDERAL DEPOSIT INSURANCE
CORPORATION AS CONSERVATOR OR RECEIVER
This Statement of Policy sets forth the treatment that the Federal
Deposit Insurance Corporation (FDIC) as the conservator or receiver of
an insured depository institution will give certain collateralized
letters of credit issued by insured depository institutions prior to
August 9, 1989.
Background
On August 9, 1989, the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA) was signed into law. This statute
amended the Federal Deposit Insurance Act (FDI Act) to clarify the
FDIC's rights as conservator or receiver to repudiate contracts and to
limit claims for damages upon repudiation to those actual, direct
compensatory damages determined as of the date of the appointment of
the conservator or receiver. 12
U.S.C. 1821(e)(3)(A). With regard to secured contracts, the FDI
Act provides that the repudiation provisions contained in 12 U.S.C.
1821(e) are not to be construed as permitting the avoidance of any
legally enforceable or perfected security interest in any assets of the
institution, except where such interest is taken in contemplation of
the institution's insolvency or with the intent to hinder, delay, or
defraud the institution or the institution's creditors. 12 U.S.C.
1821(e)(11).
Generally, contingent obligations do not give rise to provable
claims against a receivership or conservatorship, and any claims based
upon such obligations have no provable damages because the damages are
not fixed and certain as of the date of the appointment of the receiver
or conservator. Accordingly, no provable claims in a receivership or
conservatorship can be based on contingent obligations unless the
default by the account party conferring a right to draw under the
obligations occurred prior to the appointment of the receiver or
conservator.
Reading section 11(e) of the FDI Act, 12 U.S.C. 1821(e), as a whole,
it is clear that even secured contracts may be repudiated; that damages
are limited to the extent set forth in the statute; and that legally
enforceable or perfected security agreements will be honored to the
extent of such damages but no further or otherwise. In other words, if
there is a repudiation, the collateral securing the contract may be
liquidated and the proceeds paid to or retained by the creditor up to
the damages allowed by the statute. The remaining collateral or
proceeds will be remitted or returned to the conservator or receiver as
property of the institution or its estate, or to a bona fide junior
lienholder to the extent applicable.
Statement of Policy
The FDIC has considered a number of relevant policy factors with
respect to the treatment of certain collateralized letters of credit
after its appointment as conservator or receiver of insured depository
institutions. Specifically, it has considered its legal rights and
powers under FIRREA; the assurances provided by the Federal Home Loan
Bank Board prior to the enactment of FIRREA; the assurances provided by
the Resolution Trust Corporation in its September 15, 1990 statement of
policy on the treatment of collateralized letters of credit; market
reliance on these assurances; the need for market certainty and
stability; and the potential long-term cost to the FDIC of the
repudiation of certain collateralized letters of credit. Based on its
consideration and balancing of such factors, the FDIC has determined to
adopt and implement the following Policy on the treatment of certain
collateralized letters of credit after its appointment as conservator
or receiver of insured depository institutions. This Policy is
substantively the same as the RTC's September 25, 1990 policy statement
on collateralized letters of credit and conforms to the RTC and FDIC
policy statements on collateralized put obligations. As a consequence,
adoption of the proposed policy statement will promote market certainty
and stability upon the transition of receivership responsibilities from
the RTC to the FDIC on July 1, 1995, 12 U.S.C.
1441a(b)(3)(A)(ii).
{{2-29-96 p.5412}}
This Policy will apply only to collateralized letters of credit
utilized in capital markets financing transactions originally issued by
insured depository institutions prior to August 9, 1989, and any
subsequent renewal, replacement or extension of such letters of credit.
In addition, this Policy will apply only in such transactions where the
underlying security interest is in collateral owned and pledged by the
insured depository institution to secure its obligations and the
security interest is both perfected and legally enforceable under
applicable law. These financing transactions include transactions
involving publicly-offered obligations rated by one or more
nationally-recognized credit rating agencies and transactions involving
non-rated privately placed obligations structured in a manner
substantially similar to such rated obligations. The policy does not
apply to trade letters of credit or letters of credit issued for any
other purpose.
After its appointment as conservator or receiver of any insured
depository institution, the FDIC may either (1) continue any
collateralized letters of credit as enforceable under the terms of the
contract during the pendency of the conservatorship or receivership or
(2) call, redeem or prepay any collateralized letters of credit by
repudiation or disaffirmance.
If the FDIC as conservator or receiver exercises its right to call,
redeem or prepay any collateralized letters of credit by repudiation or
disaffirmance, it may do so either directly by cash payment in exchange
for the release of the collateral or by repudiation of the contract
followed by liquidation of the collateral by a trustee or other secured
party. If the FDIC in its capacity as conservator or receiver
accelerates the collateralized letters of credit by repudiation or
disaffirmance, payment will be made to the extent of available
collateral up to an amount equal to the outstanding principal amount or
accreted value of the secured obligations, together with interest at
the contract rate up to and including the date of payment and expenses
of liquidation, if provided in the contract. If any collateral or
proceeds remain after payment of such amounts, such collateral or
proceeds then must be remitted or returned to the conservator or
receiver as property of the institution or its estate, or to a bona
fide junior lienholder to the extent applicable. If, however, the
collateral securing the contract is insufficient to pay in full the
amounts owing under the contract, the holder will receive a
receivership certificate for any balance remaining due under the
contract.
The FDIC shall have a reasonable time, generally no more than 180
days from the date of the appointment of the FDIC as conservator or
receiver, to elect whether to disaffirm, repudiate, or accelerate a
collateralized letter of credit. In the case of institutions for which
the FDIC already has been so appointed, the period in which to make
such an election shall begin to run as of the date of the adoption of
this Policy and continue for 180 days.
This Policy Statement does not change or amend the FDIC's
longstanding position that standby letters of credit are contingent
obligations. Based on its consideration and balancing of the policy
issues presented, however, the FDIC has adopted this statement of
policy for collateralized letters of credit initially issued prior to
August 9, 1989, and any subsequent renewal, replacement or extension of
such letters of credit. It is understood that the persons involved in
such secured transactions with insured depository institutions may
reasonably rely upon this Policy Statement.
By order of the Board of Directors, May 18, 1995.
[Source: 60 Fed. Reg. 27976, May 26, 1995, effective May
19, 1995]
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