[Federal Register Volume 66, Number 243 (Tuesday, December 18, 2001)]
[Proposed Rules]
[Pages 65144-65146]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-31162]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 360

RIN 3064-AB92


Payment of Post-insolvency Interest in Receiverships With Surplus 
Funds

AGENCY: Federal Deposit Insurance Corporation.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Federal Deposit Insurance Corporation is publishing for 
notice and comment a proposed rule regarding the payment of post-
insolvency interest in insured depository institution receiverships 
with surplus funds. The purpose of the rule is to establish a single 
uniform interest rate, calculation method, and payment priority for 
post-insolvency interest. The proposed rule provides that where funds 
remain after the satisfaction of the principal amount of all creditor 
claims, post-insolvency interest will be paid in the order of priority 
set forth in section 11(d)(11)(A) of the Federal Deposit Insurance Act; 
paid at the coupon equivalent yield of the average discount rate set on 
the three-month Treasury bill at the last auction held by the United 
States Treasury Department during the preceding calendar quarter; 
adjusted each quarter after the receivership is established; and based 
on a simple interest method of calculation.

DATES: Comments must be received by February 19, 2002.

ADDRESSES: Send written comments to Robert E. Feldman, Executive 
Secretary, Attention: comments/OES, Federal Deposit Insurance 
Corporation, 550 17th Street, NW., Washington, DC 20429. Comments may 
be hand-delivered to the guard station located at the rear of the 17th 
Street building on F Street on business days between 7 a.m. and 5 p.m. 
Comments may also be faxed or emailed (FAX number (202) 898-3838; 
Internet address: [email protected]). Comments may be posted on the 
FDIC internet site at http://www.fdic.gov/regulations/laws/ Federal/
propose.html and may be inspected and photocopied at the FDIC Public 
Information Center, Room 100, 801 17th Street, NW., Washington, DC 
between 9 a.m. and 4:30 p.m. on business days.

FOR FURTHER INFORMATION CONTACT: Thomas Bolt, (202) 736-0168; or Rodney 
Ray, (202) 898-3556.

SUPPLEMENTARY INFORMATION:

I. Background

    For receiverships established after August 10, 1993, payment of 
receivership claims is governed by section 11(d)(11)(A) of the Federal 
Deposit Insurance Act, which section is also known as the national 
depositor preference statute. Because the national depositor preference 
statute does not specifically mention post-insolvency interest, and in 
the absence of a regulation regarding its payment, the FDIC's practice 
in receiverships subject to the national depositor preference statute 
that have surplus funds has been to follow the common law rule. The 
common law rule is that post-insolvency interest should be paid pro 
rata to all creditors regardless of priority. The exception to this 
approach is the case of an institution subject to a state law that 
specifically provides for a different distribution priority. (Several 
states' statutes provide that after the principal amounts of all claims 
within the same class have been satisfied, interest is to be paid at 
the same priority as the claim on which it accrues.) With respect to 
the interest rate for post-insolvency interest, the FDIC, in 
receiverships subject to the national depositor preference statute, has 
used the federal judgment rate for federal or ``federalized'' 
institutions (state-chartered institutions where the FDIC has exercised 
its self-appointment authority under section 11(c) of the FDI Act). For 
state institutions, the FDIC used the applicable rate provided for by 
state law. Consequently, different distribution priorities and interest 
rates have been used depending on the type of institution involved and 
the applicable law.
    In December 2000, Congress granted the FDIC express rulemaking 
authority regarding the payment of post-insolvency interest in 
receiverships with surplus funds. The American Homeownership and 
Economic Opportunity Act of 2000 added new subparagraph (C) to section 
11(d)(10) of the FDI Act, which reads as follows:

    (C) Rulemaking Authority of Corporation. The Corporation may 
prescribe such rules, including definitions of terms, as it deems 
appropriate to establish a single uniform

[[Page 65145]]

interest rate for or to make payment of post-insolvency interest to 
creditors holding proven claims against the receivership estates of 
insured Federal or State depository institutions following 
satisfaction by the receiver of the principal amount of all creditor 
claims.

    By virtue of this rulemaking authority, the proposed rule regarding 
post-insolvency interest would preempt any inconsistent state law by 
providing a single uniform interest rate and priority of distribution 
for post-insolvency interest in receiverships established after the 
rule becomes effective. See City of New York v. FCC, 486 U.S. 57, 63 
(1988) (regulation promulgated by federal agency acting within the 
scope of its congressionally delegated authority may preempt state 
law). The proposed rule will apply to receiverships established after 
the effective date of the rule. Historically, relatively few 
receiverships have generated sufficient recoveries to enable post-
insolvency interest to be paid. Consequently, the proposed rule will 
probably apply to only a small number of receiverships in the future.

II. The Proposed Rule

    New section 11(d)(10)(C) of the FDI Act provides that post-
insolvency interest will be paid after satisfaction of the principal 
amount of all creditor claims. The proposed rule provides that after 
the satisfaction of the principal amount of all creditor claims, post-
insolvency interest will be paid in the order of priority set forth in 
section 11(d)(11)(A), the national depositor preference statute. This 
differs from the FDIC's existing practice of following the common law 
rule that post-insolvency interest should be paid pro rata to all 
creditors regardless of priority, except in the case of an institution 
subject to a state law that specifically provides for a different 
distribution priority. Nevertheless, the approach in the proposed rule 
appears to be more consistent with Congress's objective, as expressed 
in the national depositor preference statute, that the deposit 
liabilities be preferred over other liabilities in the liquidation of 
an insured depository institution.\1\
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    \1\ According to the legislative history, Congress enacted 
depositor preference primarily to reduce the FDIC's cost of 
resolving failed institutions by increasing its recoveries as 
subrogee of insured deposit claims, thereby benefiting the deposit 
insurance funds. ``Under depositor preference, the FDIC and RTC will 
have a first claim on the assets of all failed banks and thrifts, 
thereby increasing the savings to the Federal deposit insurance 
funds.'' 139 Con. Rec. H6150 (daily ed. Aug. 5, 1993) (statement of 
Rep. Gonzalez). Furthermore, Congress was aware that depositor 
preference would result in diminished recoveries for general 
creditors. See H.R. Rep. No. 111, 103d Cong., 1st Sess. 1993, 
U.S.C.C.A.N. 378.
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    The alternative approach would be to follow the common law rule and 
pay post-insolvency interest on a pro rata basis to all creditors, 
without regard to the priority of payment of the principal amount of a 
creditor's claim under section 11(d)(11)(A). Depending on the amount of 
assets available in a receivership to pay post-insolvency interest, 
either approach could affect the recoveries of certain classes of 
creditors.\2\
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    \2\ The following discussion is provided to illustrate the 
potential impact that selecting one distribution method over the 
other could have on different classes of receivership creditors. The 
FDIC believes, however, that the actual impact of either approach 
will depend significantly on the particular facts and circumstances 
surrounding future receiverships, therefore, the following 
discussion is based on generalized observations of how receivership 
distributions in future FDIC-administered receiverships might be 
affected and is not an attempt to describe definitively how any 
particular class of creditors will be affected by either approach.
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    If post-insolvency interest was paid to receivership creditors 
based on the priority accorded the principal amount of a creditor's 
claim under section 11(d)(11)(A), creditors holding deposit claims 
(including the FDIC's subrogated deposit claim against the 
receivership) would receive all of their post-insolvency interest 
payments, before the receivership creditors holding claims in the lower 
priority classes received any post-insolvency interest payments. This 
approach, therefore, would result in post-insolvency interest payments 
being made to the depositors of the failed institution, but it may also 
result in little or no post-insolvency interest payments being made to 
creditors holding claims in the lower priority classes. Also, if 
federal income tax claims have been allowed against the receivership 
estate, this approach, combined with federal tax laws and tax 
regulations, may result in the federal income tax claims being paid pro 
rata with post-insolvency interest payments to the general creditors of 
the receivership estate.\3\
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    \3\ The proposed rule would not affect the calculation or 
accrual of interest on any federal income tax liability pursuant to 
sections 6601 and 6621 of the Internal Revenue Code.
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    Alternatively, if post-insolvency interest was paid to all 
receivership creditors holding allowed claims on a pro rata basis, 
regardless of the priority accorded the principal amount of the 
underlying claim under section 11(d)(11)(A), all of the receivership's 
creditors (except the Internal Revenue Service) would receive a pro 
rata share of the assets available for post-insolvency interest 
payments. Again, a combination of this approach with federal tax laws 
and tax regulations, however, may result in the federal income tax 
claims against the receivership being paid only after all of the other 
receivership creditors (including subordinated debt holders) had 
received post-insolvency interest payments, but before any 
distributions were made to the equityholders of the failed institution.
    Another component of the proposed rule involves the interest rate 
to be applied for purposes of calculating post-insolvency interest 
payments. The FDIC believes a publicly available, market-based rate 
would be preferable to a single numerical interest rate because the 
market-based rate should be more reflective of the interest rate 
environment in existence during the life of future receiverships. In 
addition, as indicated earlier, the FDIC has utilized the federal 
judgment rate in receiverships of federally chartered institutions and 
in federalized receiverships of state institutions to calculate post-
insolvency interest payments. In the proposed rule, however, the post-
insolvency interest rate for all FDIC-administered receiverships would 
be based on the coupon equivalent yield of the average discount rate 
set on the three-month Treasury bill, rather than the federal judgment 
rate. This rate was selected, instead of the federal judgment rate, 
because the three-month Treasury bill is considered to be widely 
recognized as a cash management investment performance benchmark and 
its yield has historically tracked, to some degree, changes in the rate 
of inflation.
    Whether the interest rate should be fixed or ``float'' is also an 
issue addressed in the proposed rule. Presently, when a new 
receivership is established, if assets ultimately become available for 
post-insolvency interest payments, the rate that exists on the date the 
receivership is established is fixed for purposes of calculating post-
insolvency interest. This approach is consistent with the way the 
federal judgment rate is applied to judgments entered by the federal 
courts because the allowance of a claim against a receivership estate 
has been viewed as the general equivalent of a judgment being entered 
against the receivership estate. This approach may not be reflective, 
however, of the economic conditions and interest rate environment in 
existence during the life of the receivership. Therefore, the proposed 
rule provides that the post-insolvency interest rate would be adjusted 
quarterly. This is being proposed to mitigate interest rate risk

[[Page 65146]]

due to changes in economic conditions during the life of the 
receivership.
    Finally, the proposed rule provides that post-insolvency interest 
distributions would be calculated using a simple interest method, 
rather than a compound interest method. The simple interest method is 
proposed because it appears to provide a reasonable amount of interest 
to compensate receivership creditors for the time value of money owed 
from the time the receivership is established until dividend payments 
are received.

III. Request for Public Comment

    The FDIC hereby solicits comments on all aspects of the proposed 
rule, and specifically whether post-insolvency interest should be paid 
according to the order of priority described in the national depositor 
preference statute or alternatively pro rata to all creditors 
regardless of priority.

IV. Paperwork Reduction Act

    The proposed rule will not involve any collection of information 
under the Paperwork Reduction Act (44 U.S.C. 3501 et seq.). 
Consequently, no information has been submitted to the Office of 
Management and Budget for review.

V. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.) the FDIC certifies that the proposed rule will not 
have a significant economic impact on a substantial number of small 
entities. The proposed rule will only apply to FDIC-administered 
receiverships established after the effective date of the rule, and it 
does not impose new reporting, recordkeeping or other compliance 
requirements on receivership creditors. The proposed rule continues the 
FDIC's existing practice of making post-insolvency interest 
distributions to creditors holding proven claims in surplus 
receiverships prior to making distributions to equityholders, based on 
their equity interests, in a failed insured depository institution. In 
addition, the proposed rule will provide interested parties, including 
small entities, with greater certainty in future FDIC-administered 
receiverships by establishing a single uniform interest rate and method 
for making post-insolvency interest distributions. Accordingly, the 
Act's requirements relating to an initial regulatory flexibility 
analysis are not applicable.

VI. The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families

    The FDIC has determined that the proposed rule will not affect 
family well-being within the meaning of section 654 of the Treasury and 
General Government Appropriations Act, enacted as part of the Omnibus 
Consolidated and Emergency Supplemental Appropriations Act of 1999 
(Public Law 105-277, 112 Stat. 2681).

List of Subjects in 12 CFR Part 360

    Banks, banking, Savings associations.
    For the reasons set forth in the preamble, the FDIC Board of 
Directors proposes to amend 12 CFR part 360 as follows:

PART 360--RESOLUTION AND RECEIVERSHIP RULES

    1. The authority for part 360 is revised to read as follows:

    Authority: 12 U.S.C. 1821(d)(1), 1821(d)(10)(C), 1821(d)(11), 
1821(e)(1), 1821(e)(8)(D)(i), 1823(c)(4), 1823(e)(2); Sec. 401(h), 
Pub. L .101-73, 103 Stat. 357.

    2. Section 360.7 is added to part 360 to read as follows:


Sec. 360.7  Post-insolvency interest.

    (a) Purpose and scope. This section establishes rules governing the 
calculation and distribution of post-insolvency interest to creditors 
with proven claims in all FDIC-administered receiverships established 
after [effective date of final rule].
    (b) Definitions--(1) Equityholder. The owner of an equity interest 
in a failed depository institution, whether such ownership is 
represented by stock, membership in a mutual association, or otherwise.
    (2) Post-insolvency interest. Interest calculated from the date the 
receivership is established on proven creditor claims in receiverships 
with surplus funds.
    (3) Post-insolvency interest rate. For any calendar quarter, the 
coupon equivalent yield of the average discount rate set on the three-
month Treasury bill at the last auction held by the United States 
Treasury Department during the preceding calendar quarter, and adjusted 
each quarter thereafter.
    (4) Principal amount. The proven claim amount and any interest 
accrued thereon as of the date the receivership is established.
    (5) Proven claim. A claim that is allowed by a receiver or upon 
which a final non-appealable judgment has been entered in favor of a 
claimant against a receivership by a court with jurisdiction to 
adjudicate the claim.
    (c) Post-insolvency interest distributions. (1) Post-insolvency 
interest shall only be distributed following satisfaction by the 
receiver of the principal amount of all creditor claims.
    (2) The receiver shall distribute post-insolvency interest at the 
post-insolvency interest rate prior to making any distribution to 
equityholders. Post-insolvency interest distributions shall be made in 
the order of priority set forth in section 11(d)(11)(A) of the Federal 
Deposit Insurance Act, 12 U.S.C. 1821(d)(11)(A).
    (3) Post-insolvency interest distributions shall be made at such 
time as the receiver determines that such distributions are appropriate 
and only to the extent of funds available in the receivership estate. 
Post-insolvency interest shall be distributed on the outstanding 
balance of a proven claim, as reduced from time to time by any interim 
dividend distributions, from the date the receivership is established 
until such time as the principal amount of a proven claim has been 
distributed but not thereafter.
    (4) Post-insolvency interest shall be determined using a simple 
interest method of calculation.

    By order of the Board of Directors.

    Dated at Washington, DC this 10th day of December, 2001.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 01-31162 Filed 12-17-01; 8:45 am]
BILLING CODE 6714-01-P