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:
(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.