fdic

WHAT IF THE FDIC LIQUIDATES DORAL?

A little while ago, a friend asked me what would happen if the FDIC took over Doral. I was curious, so while people were shopping for TVs and things they don’t need just because they are on sale, I decided to find out.

Doral is a bank regulated, inter alia, by the Federal Deposit Insurance Corporation (FDIC). This year it has issued warnings as to Doral’s liquidity, sparking rumors and fears that the bank will be liquidated. First, the FDIC regulates Doral in its corporate capacity. If it were to close Doral as an insolvent bank, it would do so in its receivership capacity. As a regulator, the FDIC has full powers against Doral but almost none against third parties such as Governments. For example, it is not until it begins the liquidation of a bank that it can intervene in Court, see Allen v. FDIC, 710 F.3d 978 (9th Cir. 2013) and 12 U.S.C. § 1821 . Hence, the FDIC lacks the power to compel the Government of Puerto Rico to pay Doral at this time. Moreover, the concept of federalism requires the respect of the Federal Government and Court system to State Court systems. In Younger v. Harris, 401 U.S. 37, 44-45 (1971)  , the Court explains it well:

This, perhaps for lack of a better and clearer way to describe it, is referred to by many as “Our Federalism,” and one familiar with the profound debates that ushered our Federal Constitution into existence is bound to respect those who remain loyal to the ideals and dreams of “Our Federalism.” The concept does not mean blind deference to “States’ Rights” any more than it means centralization of control over every important issue in our National Government and its courts. The Framers rejected both these courses. What the concept does represent is a system in which there is sensitivity to the legitimate interests of both State and National Governments, and in which the National Government, anxious though it may be to vindicate and protect federal rights and federal interests, always endeavors to do so in ways that will not unduly interfere with the legitimate activities of the States. It should never be forgotten that this slogan, “Our Federalism,” born in the early struggling days of our Union of States, occupies a highly important place in our Nation’s history and its future.

Hence, even if it wanted, the FDIC cannot compel or ask Puerto Rico’s government to pay out what is owed to Doral. Both statute and doctrine preclude it. Having said that, there is no doubt in my mind that the FDIC must be putting pressure on Hacienda for it to pay Doral in order for the liquidator not to have to incur in billions of dollars in costs to liquidate the bank. Actually, the FDIC should join Doral in trying to obtain the money in order to benefit the bank and the American Taxpayer.

The most frequently used method by the FDIC to handle bank liquidations is the purchase and assumption transaction (P&A). For example, between 2008 and 2012, the FDIC resolved 440 of the 465 failed insured institutions with this method  at page 8. See also, at page 876. What this means is that the FDIC will sell to a “healthy” bank certain assets and will assume certain liabilities of the failed institution. The FDIC usually reserves for itself claims against former directors and officers, claims under banker’s bonds, and directors and officer insurance policies, prepaid assessments and tax receivables, see  at page 8.

We all know, however, that P.R. has very few banks remaining, to wit, Banco Popular, First Bank (these two having received almost $1.5 billion in TARP funds), Oriental Bank, Banco Santander and Scotiabank. Of these three, Scotia and Santander have mentioned the possibility of leaving the island. Also, they all have large exposures to PR Government debt. Hence, we have very few banks and it is not clear whether they would be considered “healthy” enough to take over part of Doral’s business. If the FDIC, contrary to its policy, where to sell this “credit”, it is entitled to do so even if Hacienda’s laws and regulations or the contract itself prohibited it. See  at page 9; and  at pages 216-217.

However, as I mentioned before, if the FDIC decides to liquidate Doral, it would probably retain the tax credit that the Court of First Instance has already declared valid. If the FDIC decided to retain this credit, it would receive the $46 plus million a year payment for five years to offset the cost of the case. Federal law, 12 U.S.C. § 1823(c)(4)(A)  specifically requires that the procedure taken by the FDIC to liquidate a failed bank is the least costly to the corporation. In other words, the credit, instead of going to Doral for use in PR, it would be received by the FDIC to offset the cost of liquidation. Therefore, to believe that the FDIC will not collect from the Doral agreement, declared valid by the Court of First Instance, is ludicrous. The FDIC will collect that which has already been deemed a valid contract as required by law.

Moreover, in all likelihood, the FDIC would do this in federal case. Federal law, 12 U.S.C. § 1819(B)(2)(b)  allows for the removal 90 days after the FDIC is substituted as a party and it can done even after there is a judgment, see, NCNB Texas Nat. Bank v. Johnson, 11 F.3d 1260 (5th Cir. 1994). Moreover, the limitations of 12 U.S.C. § 1819(B)(2)(b)(2)(D), to wit:

any action—

(i) to which the Corporation, in the Corporation’s capacity as receiver of a State insured depository institution by the exclusive appointment by State authorities, is a party other than as a plaintiff;

(ii) which involves only the preclosing rights against the State insured depository institution, or obligations owing to, depositors, creditors, or stockholders by the State insured depository institution; and

(iii) in which only the interpretation of the law of such State is necessary, shall not be deemed to arise under the laws of the United States. 

This section is not applicable since Doral/FDIC would be in a plaintiff’s capacity and case law is clear that “[u]nder the language of the statute, each of these three prongs must be established by a party to defeat removal.” See, Castleberry v. Goldome Credit Corp.,
408 F.3d 773, 785 (11th 2005) and Lazuka v. FDIC, 931 F.2d 1530, 1538 (11th Cir.1991). I think there would not be any doubt of what a federal court would say of the FDIC’s case against Hacienda would be.

There are other consequences to Doral’s liquidation by the FDIC, however. Not only will the island lose one more bank, of which we have precious few, not only will over 1,000 jobs be lost, but hundreds of other commercial and financial contracts and instruments would be in peril. It is little known that 12 U.S.C. § 1821(d) and (f) give the FDIC the power allow or disallow claims. In other words, your proof of claim must be filed no later than 90 days of the publication of the notice of receivership, 12 U.S.C. § 1821(d)(3)(B)(1) and the corporation has 180 days to allow or disallow the claim, 12 U.S.C. § 1821(d)(5)(A)(1). If the 180 days expire, it is automatically disallowed, 12 U.S.C. § 1821(d)(5)(C). Since I have been involved as an attorney dealing with this, it is very difficult to get the claim allowed. This requirement affects many, such as lawyers, CPA’s, brokers, realtors, etc. See also, at page 886-889 and 893.

The FDIC can also terminate contingent liabilities, burdensome leases, and contracts, seize securitized assets, see,  at page 16-17. This power to repudiate has been extensively used by the FDIC in matters such contracts for services, real state, financial instruments including bonds, certificates of deposit and letters of credit, see IBJ Schroeder Bank & Trust Co. v. RTC, 26 F.3d 370, 373 (2d Cir. 1994), cert. denied, 514 U.S. 1014 (1995); Lawson v. FDIC, 3 F.3d 11, 12-14 (1st Cir. 1993) and Credit Life Ins. Co. v. FDIC, 870 F. Supp. 417, 426 (D.N.H. 1993). See also here, at page 2.

In synthesis, not only will an FDIC intervention NOT save Hacienda from paying but also if it does happen, the money will leave PR. Moreover, it would a nefarious precedent of the Government, far from helping a distressed local bank, contributing to its demise, the loss of employment for a 1,000 heads of family families and mayhem to its suppliers. Is that what we want the Government of Puerto Rico to do? I thought they wanted to create employment, not destroy it.

¿QUE OCURRE SI EL FDIC TOMA A DORAL?

Hace un tiempo, un amigo me pregunto que pasaría si el FDIC toma a Doral. Me picó la curiosidad así que mientras las personas compraban televisores y cosas que no necesitan pero que están en especial, decidí averiguar.

Doral es un banco regulado, inter alia, por el Federal Deposit Insurance Corporation (FDIC). Este año este ha emitido advertencias sobre la liquidez de Doral, desatando rumores y temores que el banco será liquidado. En primer lugar, el FDIC regula a Doral en su capacidad corporativa. Si fuera a cerrar Doral como un banco insolvente, lo haría en su capacidad como recibidor. Como regulador, el FDIC tiene poderes plenarios contra Doral pero casi ninguno contra terceros como el Gobierno. Por ejemplo, no es hasta que comienza la liquidación de un banco que el FDIC puede intervenir en corte, ver, Allen v. FDIC, 710 F.3d 978 (9th Cir. 2013) y 12 U.S.C. § 1821  . Por ende, el FDIC carece del poder de obligar al Gobierno de Puerto Rico a pagarle a Doral en este momento. Más aún, el concepto del federalismo requiere el respeto del Gobierno Federal y del sistema de Corte Federal al sistema de gobierno y cortes estatales. En Younger v. Harris, 401 U.S. 37, 44-45 , el Tribunal lo explica así:

This, perhaps for lack of a better and clearer way to describe it, is referred to by many as “Our Federalism,” and one familiar with the profound debates that ushered our Federal Constitution into existence is bound to respect those who remain loyal to the ideals and dreams of “Our Federalism.” The concept does not mean blind deference to “States’ Rights” any more than it means centralization of control over every important issue in our National Government and its courts. The Framers rejected both these courses. What the concept does represent is a system in which there is sensitivity to the legitimate interests of both State and National Governments, and in which the National Government, anxious though it may be to vindicate and protect federal rights and federal interests, always endeavors to do so in ways that will not unduly interfere with the legitimate activities of the States. It should never be forgotten that this slogan, “Our Federalism,” born in the early struggling days of our Union of States, occupies a highly important place in our Nation’s history and its future.

Por ende, aún si quisiera, el FDIC no puede obligar o solicitar del Gobierno de Puerto Rico que pague a Doral lo que se le debe. Los estatutos y la doctrina lo prohíben. Habiendo dicho eso, no tengo duda que el FDIC debe estar poniendo presión a Hacienda para que le pague a Doral para así no tener que incurrir en los billones de dólares que costar el liquidar el banco. En realidad el FDIC debería unirse a Doral para obtener el reembolso para beneficio del banco y contribuyente de USA.

El método más frecuentemente utilizado por el FDIC para manejar liquidaciones bancarias es el “purchase and assumption transaction” (P&A). Por ejemplo, entre 2008 and 2012, el FDIC resolvió 440 of the 465 liquidaciones de fallidas instituciones asegurados con este método  la página 8. Ver también, la página 876. Lo que esto quiere decir es que el FDIC venderá a un banco “saludable” ciertos haberes y asume ciertos pasivos de la institución liquidada. El FDIC usualmente se reserve para si mismo las reclamaciones contra los antiguos directores and oficiales, reclamaciones bajo “banker’s bonds”, reclamaciones bajo las pólizas de directores and oficiales, “assessments” prepagados y “tax receivables”, ver  la página 8.

Todos sabemos, sin embargo, que a PR le quedan muy pocos bancos. Estos son Banco Popular, First Bank (estos dos habiendo recibido casi $1.5 billones en fondos TARP), Oriental Bank, Banco Santander y Scotiabank. De estos últimos tres, Scotia y Santander han mencionado la posibilidad de abandonar la isla. Además, tienen gran exposición a la deuda pública del Gobierno de PR. Por ende, tenemos muy pocos bancos y no es claro si se pueden considerar suficientemente “saludables” para operar los negocios de Doral. Si el FDIC, contrario a su política fuera a vender el bien de lo que el Gobierno debe a Doral, lo podría hacer aún si las leyes y regulaciones de Hacienda o el contrato con el banco lo prohibiera. Ver, la página 9; y las páginas 216-217.

Sin embargo, como mencioné anteriormente, si el FDIC decide liquidar, probablemente retendría el crédito contributivo que el Tribunal de Primera Instancia indicó le corresponde a Doral. Si el FDIC decide retener este crédito, recibirá en exceso de $46 millones al año por 5 años para abaratar los costos del caso. La ley Federal, 12 U.S.C. § 1823(c)(4)(A)  específicamente requiere que el procedimiento que lleve a cabo el FDIC para liquidar un banco insolvente es el menos costoso a la corporación. En otras palabras, el crédito, en vez de ir a Doral para su uso en PR, será recibido por el FDIC para abaratar el costo de liquidación. Por lo tanto, pensar que el FDIC no le cobrará del acuerdo con Doral, declarado válido por el Tribunal de Primera Instancia, es ridículo. El FDIC cobrará aquello que ya ha sido declarado un contrato válido en derecho.

Aún más, con toda probabilidad, el FDIC hará esto en corte federal.

Federal law, 12 U.S.C. § 1819(B)(2)(b)  allows for the removal 90 days after the FDIC is substituted as a party and it can done even after there is a judgment, see, NCNB Texas Nat. Bank v. Johnson, 11 F.3d 1260 (5th Cir. 1994). Moreover, the limitations of 12 U.S.C. § 1819(B)(2)(b)(2)(D), to wit:

any action—

(i) to which the Corporation, in the Corporation’s capacity as receiver of a State insured depository institution by the exclusive appointment by State authorities, is a party other than as a plaintiff;

(ii) which involves only the preclosing rights against the State insured depository institution, or obligations owing to, depositors, creditors, or stockholders by the State insured depository institution; and

(iii) in which only the interpretation of the law of such State is necessary, shall not be deemed to arise under the laws of the United States.

Esta sección no es applicable ya que Doral /FDIC estaría como demandante y la casuística es clara que “[u]nder the language of the statute, each of these three prongs must be established by a party to defeat removal.” Ver, Castleberry v. Goldome Credit Corp.,
408 F.3d 773, 785 (11th 2005) y Lazuka v. FDIC, 931 F.2d 1530, 1538 (11th Cir.1991). Creo que no hay duda lo que la corte federal diría sobre el caso del FDIC contra Hacienda.

Hay otras consecuencias a la liquidación de Doral por el FDIC, sin embargo. No solo perdería la isla otro banco, de los cuales hay muy pocos, no solo se perderán sobre 1,000 empleados, pero cientos de otros contratos financieros y comerciales e instrumentos estarían en peligro. No es muy conocido que el 12 U.S.C. § 1821(d) and (f) le proveen al FDIC el poder de permitir o denegar reclamaciones. En otras palabras, su reclamación tiene que ser radicada no más tarde de la publicación de la notificación de la administración regulatoria, 12 U.S.C. § 1821(d)(3)(B)(1) y la corporación tiene 180 días para permitir o denegar la reclamación, 12 U.S.C. § 1821(d)(5)(A)(1). Si los 180 días expiran, es automáticamente denegada, 12 U.S.C. § 1821(d)(5)(C)  . Ya que he estado envuelto como abogado en estos asuntos, puedo decir que es bien difícil conseguir que se permita una reclamación. Este requisito afecta a muchos, tales como abogados, CPA’s, corredores de bolsa y corredores de bienes raíces, etc. Ver también, las páginas 886-889 and 893.

El FDIC puede también terminar pasivos contingentes, alquileres y contratos gravosos, tomar (seize) “securitized assets,” ver,  las páginas 16-17. Este poder de repudiar ha sido usado extensamente por el FDIC en contratos de servicio, bienes raíces, instrumentos financieros incluyendo bonos, certificados de deposito y cartas de crédito, ver IBJ Schroeder Bank & Trust Co. v. RTC, 26 F.3d 370, 373 (2d Cir. 1994), cert. denied, 514 U.S. 1014 (1995); Lawson v. FDIC, 3 F.3d 11, 12-14 (1st Cir. 1993) and Credit Life Ins. Co. v. FDIC, 870 F. Supp. 417, 426 (D.N.H. 1993). Ver también,   la página 2.

En síntesis, una intervención del FDIC NO SALVARÁ a Hacienda de pagar, pero si ocurre, el dinero saldrá de PR. Más aún, sería un nefasto precedente para el Gobierno, que lejos de ayudar a un banco en problemas, contribuye a su disolución, más la pérdida de 1,000 empleos de jefes de familia y desastre para sus suplidores. ¿Es esto lo que queremos que el Gobierno de Puerto Rico haga? Yo pensaba que quería crear empleos, no destruirlos.