The FDIC long has held that a holding company is 100% responsible for the capital guarantee, has no leverage to question this, and that FDIC's claim against the holding company is of virtually the highest priority in bankruptcy. But the decision handed down last June by the 9th Circuit Court of Appeals says FDIC is not correct. Instead, FDIC's claim against the holding company for not coming through on the guarantee now can be sidestepped. Plus, any resulting claim by FDIC under Chapter 7 bankruptcy can be relegated to a lower priority.
"The FDIC has uniformly taken the position in these cases that a parent holding company's obligations under a performance guarantee are absolute and not subject to avoidance," Reisner says - even though this is not the case in other industries and with other holders of guarantees.
That's because "fraudulent transfer" laws prohibit the transfer of assets or placing obligations for less than reasonable value if the transaction makes the company insolvent, Reisner explains. FDIC contended that it had immunity from the fraudulent transfer laws under the Federal Deposit Insurance Act. Imperial, on the other hand, said it was not obliged to pay the $18 million deficit, and the matter ended up in court, where Imperial was ordered to pay up within 30 days. This forced it into Chapter 7 to fulfill the $18 million claim.
Imperial appealed, and the 9th Circuit Court - while agreeing that Imperial may owe the $18 million by statute - ruled that the guarantee could be challenged as a fraudulent transfer and that FDIC did not have high priority under Chapter 7, below that of taxing authorities, employee wages and other claims.
"This ‘leveling of the playing field' is important for holding companies and their boards who must guide the company in the best interest of all creditors," Chesley says. What's more, FDIC now is a potential target for recovery for holding company creditors, he adds, pointing out similar efforts by creditors of Washington Mutual Bank (WaMu).
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