Lawson v. FDIC

UNITED STATES COURT OF APPEALS

FOR THE FIRST CIRCUIT

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No. 92-2429

MARY E. LAWSON AND

MATT LAWSON,

Plaintiffs, Appellants,

v.

FEDERAL DEPOSIT INSURANCE CORPORATION, ET AL.,

Defendants, Appellees .

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APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MAINE

[Hon. Gene Carter, U.S. District Judge ]

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Before

Torruella, Cyr and Boudin, Circuit Judges .

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Edward T. Joyce with whom Deborah I. Prawiec , Raymond A. Fylstra , Joyce and Kubasiak, P.C ., William D. Robitzek , David G. Webbert and Berman and Simmons, P.A . were on brief for appellants.

Jerome A. Madden , Counsel, Federal Deposit Insurance Corporation, with whom Ann S. DuRoss , Assistant General Counsel, Federal Deposit Insurance Corporation, and Richard J. Osterman, Jr ., Senior Counsel, Federal Deposit Insurance Corporation, were on brief for appellee, Federal Deposit Insurance Corporation.

Roy S. McCandless with whom P. Benjamin Zuckerman , Patricia Nelson-Reade and were on brief for appellee, Fleet Bank of Maine.

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August 23, 1993

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BOUDIN, Circuit Judge . The facts of this case are straightforward. In January 1991, plaintiffs Mary and Matt Lawson purchased five one-year certificates of deposit ("CDs") from the Maine Savings Bank, representing a deposit payment in each case of approximately $92,000. Each CD had an interest rate of 7.9 percent per year, giving the CDs a maturity value of $100,000 each. A CD reflects a deposit coupled with an agreement by the depositor to leave the funds in the bank for a fixed period. It appears that Maine Savings Bank was in financial difficulty when the CDs were sold to the Lawsons and that the interest rate offered was a favorable one.

Maine Savings Bank was declared insolvent on February 1, 1991, and the Federal Deposit Insurance Corporation was appointed receiver. As it often does, the FDIC transferred certain accounts to a healthy bank, in this case defendant Fleet Bank of Maine.

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The accounts transferred in this case included deposit accounts such as the Lawsons' CDs. The purchase and assumption agreement between Fleet Bank and the FDIC authorized Fleet Bank to reduce the interest rates paid on the transferred accounts after fourteen days, provided that the reduced rates did not go below the rate customarily paid by Fleet Bank on passbook savings accounts and provided that the depositors were given the opportunity to withdraw the funds without penalty.

On February 13, 1991, Fleet Bank notified the Lawsons that it had accepted Maine Savings' deposit accounts and would honor the original interest terms on the CDs until February 22, but thereafter would reduce the interest rates pursuant to a schedule enclosed with the notice. The notice gave the Lawsons the option of withdrawing their deposits without penalty, or maintaining the accounts at the lower rate. The Lawsons elected to withdraw the funds and bring this suit in Maine state court against Fleet Bank for breach of contract, denominating it a class action. Fleet Bank then impleaded the FDIC, and the FDIC removed the action to federal court. The Lawsons completed the cycle by filing their own suit against the FDIC, which was then consolidated with the removed suit against Fleet Bank.

The district court granted Fleet Bank's motion for summary judgment on the ground that the purchase and assumption agreement authorized Fleet Bank to reduce the interest rate. It also granted the FDIC's motion to dismiss, holding that the FDIC was not liable to the Lawsons for more than the deposits and accrued interest, which Fleet Bank had already paid. The Lawsons then took this appeal. We consider first the claim against the FDIC and then that against Fleet Bank, and we affirm the district court as to both.

The FDIC is best known in its "corporate" role as the statutory insurer of funds deposited in federally insured financial institutions, generally up to $100,000 per account. See See id

As insurer, the FDIC was required by statute to guarantee the Lawsons' "insured deposits," either by paying them in cash or "by making available to each depositor a transferred deposit in a new insured depository institution . . . in an amount equal to the insured deposit of such depositor." Id A "deposit," in turn, is defined generally as "the unpaid balance of money or its equivalent received or held by a bank or savings association in the usual course of business . . . ." Id Id

the balance of principal and interest unconditionally credited to the deposit account as of the date of default of the insured depository institution, plus the ascertainable amount of interest to that date, accrued at the contract rate . . ., which the insured depository institution in default would have paid if the deposit had matured on that date and the insured depository institution had not failed.

Here, the FDIC as insurer complied with the statute and regulations by transferring the Lawsons' deposit accounts to Fleet Bank, which in turn made available to the Lawsons the principal plus interest that had accrued at the contract rate up to February 22, 1991. This was actually a step beyond the agency's legal obligation as insurer, since it was obliged to pay accrued interest only to the date of Maine Savings Bank's default. Thus the FDIC more than satisfied its duty as insurer. The Lawsons do not appear to claim that they were short-changed under the insurance provisions. Instead, they argue that the FDIC is liable as the inheritor of the contractual obligations of the Maine Savings Bank, that is, as the receiver for the failed bank.

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The Lawsons point out that section 1821(i) as a whole applies only to "the rights of the creditors (other than insured depositors)." Id. to their insurance protection and not to other claims that they may have.

It is a miracle that anyone, let alone a busy district judge, can cope with the profusion of arguments that the FDIC and Resolution Trust Corporation unleash in cases of this kind. To some extent they reflect the complexity of the statutory provisions but, after seeing a number of these cases, one may come to believe that the agencies' litigating style has some role in the confusion. Like a giant squid releasing ink, agency counsel pour out arguments and citations, heaping defense upon defense, sometimes without heed for the merits of the contention. It is not clear that this approach serves the long-run interests of bank regulators who have a stake in coherent and consistent interpretation by the courts.

no money available even for partial payment of that claim.

5:

The FDIC has made a separate argument that, even if the assets were sufficient to pay the Lawsons for future interest, nineteenth century case law provides a basis for cutting off future interest obligations to depositors of a failed bank as of the date of insolvency. See White v. Knox , 111 U.S. 784 (1884). The status of this line of authority, and its application to a fixed interest/fixed period CD contract, need not be resolved in this case.

It appears that the district court had in mind its prior discussion in its opinion which shows, by analysis that we have condensed in our own earlier discussion, that the FDIC's insurance Nevertheless, we believe that the FDIC as receiver is not liable for this differential on future interest between the market rate and the apparently greater rate promised by Maine Savings Bank. As we recently explained in Howell v. FDIC The Lawsons argue that some courts have found that the FDIC's repudiation authority under FIRREA is limited to executory contracts, that is, contracts in which performance is still due from both sides. See , e.g. , First Nat'l Bank v. Unisys Fin. Corp. , 779 F. Supp. 85, 86-87 (N.D. Ill. 1991), aff'd on other grounds , 979 F.2d 609 (7th Cir. 1992). The contracts here were executory: at the time of repudiation, the bank was still performing its promise to continue paying interest, and the Lawsons were performing their ongoing obligation to keep their funds on deposit.

The Lawsons argue that if a repudiation occurred, it was not done by the FDIC but by Fleet Bank, and that the statute does not allow such a delegation of repudiation authority. This argument has some surface appeal since the statute authorizes "a conservator or receiver" to repudiate contracts, id ., and says nothing about the delegation of this function or its performance by one to whom a contract is assigned. We need not pursue this interesting question because we believe that the purchase and assumption agreement was in substance a repudiation of the CD contracts by the FDIC .

While the FDIC might have attempted to substitute Fleet Bank for Maine Savings Bank as obligor under the CD contracts, that is not what the FDIC did here. As we explain below, the purchase and assumption agreement did not commit Fleet Bank to the prior CD contracts including their interest rate obligations. Rather, Fleet Bank agreed with the FDIC to repay only the deposit and accrued repudiated

The Lawsons contend that the FDIC, in violation of Maine contract law, improperly "split" the CD contracts into principal and interest components and attempted to transfer one obligation without the other. The transfer of the deposits to Fleet Bank was expressly authorized by federal statute and was in that sense a lawful federal act. At the same time, it was a repudiation and breach of the contracts represented by the CDs since the FDIC, which had inherited the contracts, effectively declined to pay the promised interest in the future or commit Fleet Bank to do so. Whether called "improper splitting" or something else, the outcome is the same: Fleet Bank is bound only by what it promised the FDIC, but the FDIC as receiver is left with a contract claim against it.

This does not end the matter. As we have explained in Howell Howell Id Although the phrase "actual direct compensatory damages" may not be self-executing, the prohibition on recovery of "lost profits or opportunities" does fit the situation like a glove. After all, the Lawsons have recovered immediate use of their money, just as if they were owners of a house whose tenant had departed without completing his lease. The money can be reloaned at current interest rates, just as the house can be re-rented at current rental rates. What has been lost is the chance to earn even more than the current "rental" value of the property, whether the property is a sum of money or a vacant house.

If current interest rates are below the favorable rate promised by Maine Savings Bank, obviously the Lawsons are worse off getting back their deposit and accrued interest than they would have been if the CD commitments had been fulfilled. But it was evidently Congress' intent, in a situation where the failed bank is likely to have fewer assets than debts, to spread the pain by placing a limit on what can be recovered under a repudiated contract. The barring of above-market interest for the period after the money has been returned to the depositor is surely what Congress had in mind when it barred lost profits or opportunities.

This is not mere speculation. Leases are commonly repudiated by bankrupt estates and in FIRREA Congress--in addition to the general limitation on damages--made special provision for computing damages for such leases. Where the failed bank has rented property from another and the receiver seeks to repudiate the lease and return the property, the statute permits recovery of unpaid rent for past occupancy but no recovery for future rent or damages under any acceleration clause or other penalty provision. Id i.e. What is surprising is that the FDIC here asserts that this subrogation provision transfers to the FDIC in its corporate capacity not merely the Lawsons' claim for what they got as a result of the Fleet Bank's actions (the deposits plus accrued interest) but the Lawsons' entire claim including their contractual right to future interest at the favorable rate. At first glance this seems at odds not only with common sense but also with the statute, which subrogates the FDIC "to all rights of the depositor against such institution or branch to the extent of such payment [by the FDIC] or assumption [by a healthy bank] ." Id

Turning finally to the claim against Fleet Bank, it did not assume any obligations with respect to the Lawsons' deposit accounts beyond those set forth in the purchase and assumption agreement. See , 924 F.2d 109, 111 (7th Cir. 1991). Thus, if the bank's conduct was consistent with the agreement, as the district court found, the Lawsons have no case. We agree with the district court. Some analysis of the terms of the agreement is necessary to make the point, but not much.

Section 2.2 of the Agreement provides as follows:

2.2 Interest on Deposit Liabilities Assumed . The Assuming Bank [ i.e. provided , that such rate(s) shall not be less than the rate of interest the Assuming Bank pays with respect to passbook savings Deposit accounts. The Assuming Bank shall permit each such depositor to withdraw, without penalty for early withdrawal, all or any portion of such depositor's Deposit . . . . The Assuming Bank shall give notice to such depositors . . . of interest which it has determined to pay after such fourteen (14)-day period, and of such withdrawal rights.

Faced with this clear language ("at rate(s) it shall determine"), the Lawsons say that section 2.2 merely provides that Fleet Bank "may" reduce interest rates after fourteen days, and that this language "stops short of the explicit authorization to reduce interest rates that Fleet Bank and the District Court say it is." And, they say that if the language were construed to grant such authority, it would conflict with Fleet Bank's promise in section 5.2 to "honor the terms and conditions of each written agreement with respect to each Deposit Account transferred."

Courts are often called upon to interpret opaque contractual provisions but construing section 2.2 is a walk in the park: it authorizes Fleet Bank to reduce the interest rate after fourteen days. As to the supposed inconsistency with section 5.2, it is a familiar precept of contract interpretation that the specific controls the general, and section 2.2's specific authorization to reduce rates trumps the general promise to "honor the terms and conditions of the contract." But the precept is unnecessary here: the paragraph on which the Lawsons rely (section 5.2) begins with

the caveat, "Subject to the provisions of Section 2.2 . . . ." Affirmed .