Imperial Credit v. Fdic

Citation: Not availableDocket: 05-56073

Court: Court of Appeals for the Ninth Circuit; June 4, 2008; Federal Appellate Court

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The Ninth Circuit Court of Appeals is addressing the insolvency of Southern Pacific Bank (SPB) and its parent company, Imperial Credit Industries (Imperial). In February 2002, the FDIC informed SPB of its undercapitalization, requiring a capital restoration plan. SPB submitted a plan and a guaranty from Imperial but failed to implement the plan, prompting the FDIC to demand payment of $18,375,800 from Imperial under the guaranty. Imperial, in Chapter 11 bankruptcy, raised several defenses, all of which the district court rejected, granting partial summary judgment to the FDIC. The court concluded that under section 365(o) of the Bankruptcy Code, Imperial must remedy its deficit to remain in Chapter 11. Imperial's Trustee, Edward M. Wolkowitz, appealed, questioning the binding nature of the guaranty, the calculation of liability, and the validity of the performance guaranty as a fraudulent conveyance. The appellate court upheld the district court's rulings on the guaranty and liability calculations but reversed the fraudulent conveyance claim for further proceedings. Following the appeal, Imperial converted to Chapter 7 bankruptcy to circumvent the district court's order. The FDIC then sought a declaratory judgment on the priority of its claim, which the district court granted as entitled to administrative priority under 11 U.S.C. § 507(a)(2). Wolkowitz appealed this decision, asserting that the FDIC's claim should rank only as ninth priority under 11 U.S.C. § 507(a)(9), resulting in the appellate court reversing the district court's summary judgment favoring the FDIC on this priority issue. The procedural history includes the initial FDIC notice to SPB and the subsequent filing of the capital restoration plan.

On February 27, 2002, SPB's holding company, Imperial, executed a performance guaranty to ensure SPB's compliance with a capital restoration plan required by the FDIC following a Prompt Corrective Action notification. The guaranty, adopted by Imperial's Board, aimed to comply with Section 38 of the Federal Deposit Insurance Act, committing Imperial to guarantee SPB's performance under the Capital Plan. The liability under this guaranty was limited to the lesser of 5% of SPB's total assets as of December 31, 2001, or the amount necessary to restore SPB to adequate capital levels.

The FDIC did not approve SPB's initial March 1 plan and subsequently rejected revised plans submitted on April 12 and May 9, 2002. However, a later amendment submitted on May 24, proposing a $55 million capital infusion, was approved by the FDIC, despite lacking an attached performance guaranty. SPB failed to implement this plan by the July 22, 2002, deadline, leading to a second Prompt Corrective Action notice from the FDIC, which enforced restrictions on SPB as a significantly undercapitalized institution.

Both Imperial and SPB attempted recapitalization, with Imperial transferring $5 million to SPB on two occasions in 2002. However, SPB was declared insolvent on February 7, 2003, and the FDIC was appointed as receiver. Subsequently, on July 17, 2003, Imperial filed for Chapter 11 bankruptcy to liquidate its assets. The FDIC later demanded $18,375,800 from Imperial for non-compliance with the performance guaranty. Imperial responded by filing an adversary action against the FDIC in bankruptcy court, which was later transferred to district court. Although the FDIC moved to dismiss most claims, the court allowed Imperial to proceed with its equitable subordination claim and replead its fraudulent inducement and conveyance claims.

On November 12, 2004, Imperial amended its complaint and reasserted its fraudulent conveyance claim, which the district court dismissed again, stating that Imperial had not sufficiently pleaded actual fraud. On December 13, 2004, the FDIC sought an order for Imperial to fulfill its obligation under a performance guaranty as mandated by 11 U.S.C. § 365(o), requiring Chapter 11 debtors to "immediately cure" any deficits owed to federal regulatory agencies. The court, ruling on February 15, 2005, indicated that if Imperial had guaranteed SPB’s capital restoration plan, it was obligated to remedy any capital deficit to remain in Chapter 11. However, the court postponed a final decision to allow Imperial to present "obligor" defenses that had not been fully addressed; five of Imperial's claims were recognized as "obligor" defenses. Conversely, its equitable subordination and fraudulent conveyance claims were labeled "trustee" defenses, which could not be pursued until Imperial cured its deficit and obtained Chapter 11 trustee status. As a result, the fraudulent conveyance claim was rendered moot due to prior dismissal.

On April 4, 2005, the FDIC filed for partial summary judgment to enforce Imperial's deficit, which the court granted on June 15, 2005, rejecting all five "obligor" defenses. A final appealable judgment was entered on July 6, 2005, requiring Imperial to pay the FDIC $18,375,800 within 30 days, but the court noted that a conversion to Chapter 7 would relieve Imperial of the immediate payment obligation while maintaining the status of the cure obligation in the Chapter 7 case according to bankruptcy law. Imperial appealed on July 15, 2005, but did not secure a stay and subsequently converted its case to Chapter 7, postponing immediate payment. In the Chapter 7 proceedings, the FDIC sought a declaration for priority administrative expense status for the cure obligation, which the court granted on October 6, 2006. The parties eventually agreed to dismiss remaining claims, resulting in a judgment favoring the FDIC on November 28, 2006, which Imperial appealed.

The summary judgment decisions by the district court are subject to de novo review, assessing whether genuine material facts exist and if the law was appropriately applied. The dismissal of the fraudulent conveyance claim is also reviewed de novo, with dismissal only permissible if it is evident that the claimant cannot establish any set of facts to support the claims.

Imperial's performance guaranty, signed on February 27, 2002, applies to SPB’s May 24 capital plan as confirmed by the district court's ruling in favor of the FDIC. The Trustee's appeal argues that the guaranty was only for the March 1 capital plan. Both parties acknowledge that California contract interpretation rules apply, focusing on the mutual intent of the parties as evidenced by the contract language and surrounding circumstances. The court determined that the guaranty is valid and enforceable for the May 24 plan, emphasizing that it must be interpreted alongside relevant statutes and regulations, which required its execution. Specifically, under 12 U.S.C. § 1831o(e)(2), Imperial, as SPB’s holding company, was mandated to guarantee SPB’s performance under the capital restoration plan. The performance guaranty recognized its necessity in the recapitalization process and expressed an intention to comply with the Federal Deposit Insurance Act requirements. After the FDIC rejected SPB’s March 1 plan, SPB submitted several revised plans, ultimately gaining approval for the May 24 plan without any objections from either party. The Trustee's claim that Imperial did not intend the guaranty to cover the May 24 plan contradicts the statutory compliance promise within the guaranty and is inconsistent with Imperial's actions to facilitate SPB's recapitalization. The performance guaranty clearly indicates Imperial's intent to adhere to the legal framework governing undercapitalized banks.

Imperial was aware that a performance guarantee was essential for the FDIC's approval of SPB's capital plan and collaborated with both the FDIC and SPB to facilitate SPB’s recapitalization. The performance guaranty indicated that Imperial's liability would be based on the 'approved' capital plan, which included future iterations beyond the March 1 plan, establishing a maximum liability of 5% of SPB's assets as of December 31, 2001. The Trustee's argument that Imperial did not intend to cover the May 24 plan is unconvincing, as the terms of the guaranty apply to the 'approved capital plan' broadly, not limited to the March 1 plan. The FDIC's rejection of the March 1 plan did not negate the guaranty, which was explicitly linked to the approved plan. Under California law, absolute guaranties are enforceable without notice of acceptance. The district court upheld the applicability of the performance guaranty to the May 24 plan and granted summary judgment in favor of Imperial.

Regarding the liability calculation, the district court accepted the FDIC’s assessment of Imperial’s obligation under the guaranty at $18,375,800. The Trustee contended that the calculation should rely on data as of July 22, 2002, rather than SPB’s June 30, 2002, Call report data, and argued that a $5 million payment made to SPB on July 30, 2002, should offset this obligation. However, the court found that the FDIC's use of the June 30 data was appropriate and within its discretion, as the performance guaranty allowed for flexibility in data sources. The guaranty limited Imperial's liability to the lesser of 5% of SPB’s assets as of December 31, 2001, or the amount necessary to restore SPB’s capital measures. It was established that SPB failed to comply with the May 24 plan by the July 22, 2002, deadline for raising $55 million.

Wolkowitz contends that Imperial's liability should be assessed as of July 22, 2002. The FDIC counters that the Trustee confuses 'defined' with 'calculated' concerning capital measures and levels relevant to a bank’s liability at the time of failure. Neither the performance guaranty nor the applicable regulation specifies how to calculate Imperial’s liability or mandates calculation at the time SPB fails to comply with its capital plan. Both parties agree that 5% of SPB’s assets as of December 31, 2001, would exceed the necessary capital at the time of non-compliance. The district court ruled that the performance guaranty and associated regulation did not clearly outline the calculation of Imperial’s obligation, thus deferring to the FDIC’s interpretation using SPB’s June 30, 2002, Call report, which was the most current data available.

The Trustee challenges this deference, arguing that the performance guaranty is a contract, not a regulation, making agency deference inappropriate. However, the district court maintained that deference is justified as the agreement was designed to resolve an ongoing regulatory issue. The Trustee also claims that the FDIC benefits from its interpretation, but the potential impact on Imperial’s obligation remains unclear. Additionally, the Trustee asserts that FDIC's interpretation lacks support from regulations or established practices. However, established case law permits deference when the agency's position is not wholly unsupported. The FDIC’s reliance on quarterly Call reports is consistent with its regulatory practices, as these reports are essential for assessing capital levels and other regulatory requirements. The Trustee’s argument regarding an internal memo that suggests liability calculations occur only upon non-compliance with capital plans is countered by the notion that the memo pertains to the timing of liability measurement rather than the data used for calculation.

The district court's calculation of Imperial's liability under the performance guaranty, based on SPB's June 30, 2002 Call report data, is affirmed. The court ruled that a $5 million transfer from Imperial to SPB on July 31, 2002, did not reduce Imperial's liability because the contract explicitly prohibited any reduction in liability due to circumstances such as counterclaims or deductions. The Trustee argued that this payment was not a deduction but a partial payment of liability; however, the court defined the $5 million payment as a deduction, aligning with the Trustee's own definition. The court clarified that while this payment did not reduce Imperial's liability, other payments made upon demand could potentially be credited toward it. The timing of the payment in relation to the FDIC's demand further suggested no intention from Imperial to reduce liability.

Additionally, the court found that the district court erred in dismissing Imperial's fraudulent conveyance claim, which sought to avoid obligations under the performance guaranty as a constructive fraudulent conveyance under 11 U.S.C. § 548. The district court dismissed this claim as barred by 12 U.S.C. § 1828(u)(1), requiring actual fraud, which Imperial could not demonstrate. The FDIC contended that the claim was a 'trustee defense' barred by 11 U.S.C. § 365(o). However, the court noted that § 365(o) applies to Chapter 11 debtors, while Imperial was a Chapter 7 debtor, thus allowing Imperial to pursue the fraudulent conveyance claim without the requirement to cure its deficit to the FDIC. The dismissal of the fraudulent conveyance claim was not upheld based on the 'trustee defense' argument.

The district court dismissed Imperial's fraudulent conveyance claim, citing § 1828(u) as a bar. However, with Imperial's transition to Chapter 7, the dismissal cannot be upheld based on the 'trustee defense' argument, making the fraudulent conveyance defense potentially viable unless barred by § 1828(u). The Trustee contends that § 1828(u) limits its application to claims for asset recovery, not for voiding obligations such as performance guaranties. The district court previously rejected this view, but it is found that the statute's language and legislative history support the distinction between assets and obligations. Specifically, § 1828(u) prohibits fraudulent conveyance claims against federal banking agencies solely concerning asset transfers, not obligations. The FDIC's argument for a broader interpretation is unsubstantiated by statutory text or case law. Additionally, concerns regarding the enforceability of performance guaranties against insolvent parent companies do not negate this interpretation. Consequently, the dismissal of the fraudulent conveyance claim is reversed, and the case is remanded for further proceedings. The district court also determined that the FDIC is owed $18,375,800 under the performance guaranty, with a requirement for Imperial to address its deficit to remain in Chapter 11.

The court acknowledged Imperial's option to convert to Chapter 7, which would establish the status and priority of its unsatisfied cure obligation according to bankruptcy law. After such conversion, a dispute arose regarding the FDIC's claim, with the district court ruling that the FDIC's claim held administrative priority under 11 U.S.C. 507(a)(2). The Trustee contends that the FDIC's claim should be assigned ninth priority per sections 365(o) and 507 of the Bankruptcy Code, while the FDIC maintains that the district court's ruling was correct. The case involves a first impression issue regarding the priority of claims from uncured deficits under section 365(o), enacted as part of legislation aiming to prevent entities associated with federal depository institutions from misusing bankruptcy to avoid capital reserve commitments. Section 365(o) requires a Chapter 11 trustee to immediately cure any deficits related to federal depository institution commitments, failing which the debtor must file under Chapter 7 instead. Furthermore, section 365(o) stipulates that claims arising from breaches of capital maintenance commitments will be prioritized under section 507, specifically assigning such unsecured claims ninth priority as per section 507(a)(9), a provision established by the same legislative act.

L. No. 103-394, 304, 108 Stat. 4186, 4132, addresses the priority of claims in bankruptcy, specifically regarding the FDIC's claim under a performance guaranty related to a capital maintenance commitment. The claim was initially classified by the district court as having administrative priority under 11 U.S.C. § 507(a)(2), which pertains to “administrative expenses” necessary for preserving the estate. The court equated Imperial's failure to address its deficit to the FDIC with an executory contract, which typically holds administrative priority in bankruptcy.

However, this reasoning was deemed unpersuasive. The text notes that 11 U.S.C. § 507(a)(9), which specifically addresses commitments to federal depository institutions, should take precedence over the more general provisions of 11 U.S.C. § 507(a)(2). The court emphasized that administrative expenses are defined as the actual costs necessary to preserve the estate, and it did not find Imperial’s obligation to the FDIC fitting this definition.

Moreover, while executory contracts are generally granted administrative priority to encourage contracting with the bankruptcy estate, the FDIC's capital maintenance agreement presents a unique situation. Under 11 U.S.C. § 365(o), such contracts are automatically assumed when a trustee files for Chapter 11, negating the rationale for granting them administrative priority since there's no discretion involved in their assumption. Thus, the specific treatment of capital maintenance agreements indicates that the FDIC's claim should be classified under the priority outlined in § 507(a)(9) rather than as an administrative expense.

The FDIC's claim is categorized as ninth priority rather than as an administrative expense, as it does not constitute an "actual, necessary" cost of preserving Imperial's Chapter 7 estate. The relevant statutory provision is 11 U.S.C. § 507(a)(9), and the FDIC's claim would be classified as an allowed unsecured claim due to obligations to a federal depository institution regulatory agency. The court argues that treating a Chapter 7 debtor differently based on an initial Chapter 11 filing lacks justification, particularly since both pathways ultimately lead to Chapter 7 without any reorganization benefits. The claim for administrative priority by the FDIC is viewed as erroneous, as it would improperly introduce language into 11 U.S.C. § 365(o), which mandates that a debtor must cure any capital maintenance obligation to reorganize under Chapter 11. Failure to do so prevents entry into Chapter 11, leaving Chapter 7 liquidation as the only option, and does not warrant the FDIC a superpriority claim. This interpretation aligns with legislative intent to prevent misuse of Chapter 11 for financial gain by holding companies unable to meet capital maintenance obligations. Furthermore, the decision is not contradicted by Fourth Circuit precedents, as suggested by the FDIC.

A debtor is required to immediately cure any deficits in capital maintenance obligations to federal depository institutions upon filing for Chapter 11 bankruptcy, as established in Firstcorp. The Fourth Circuit clarified that obligations from pre-petition breaches necessitate immediate cure, while post-petition breaches are assigned ninth priority under the bankruptcy code. The court emphasized that its interpretation of immediate cure obligations under § 365(o) pertains solely to Chapter 11 cases and did not address the priority of claims. It further noted that the issue of priority regarding claims from pre-petition breaches post-conversion to Chapter 7 was not raised in Firstcorp. Consequently, it concluded that a failure to cure a § 365(o) deficit in Chapter 11 does not create administrative priority in Chapter 7, and the FDIC’s claim due to Imperial's failure to cure is entitled only to ninth priority under § 365(o) and § 507(a)(9). The case is remanded to the district court for further proceedings, with each party responsible for its own costs on appeal.