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FRANKLIN BANK v. FDIC

April 13, 1994

FRANKLIN BANK, Plaintiff,
v.
FEDERAL DEPOSIT INSURANCE CORPORATION, in its corporate capacity and as receiver for Financial Center Bank, N.A., Defendant.



The opinion of the court was delivered by: WILLIAM H. ORRICK

 In 1989, the Congress of the United States, reacting to the dramatic increase in bank failures, adopted the Financial Institution Reform Recovery and Enforcement Act of 1989 ("FIRREA"), Pub. L. 101-73, § 212(d) (codified as amended at the Federal Deposit Insurance Act, 12 U.S.C. § 1821(d)).

 This action brought by plaintiff, Franklin Bank ("Franklin"), an approved creditor of the receivership estate of Financial Center Bank, N.A. ("Financial Center"), against defendant, Federal Deposit Insurance Corporation ("FDIC"), in its capacity as receiver for Financial Center, raises a question not heretofore put to the Supreme Court or any United States Court of Appeals, namely: Does FIRREA give the FDIC power to make payment to an approved creditor of a failed bank by delivering a "Certificate of Award" rather than payment in cash? The parties pose this issue by cross-motions for summary judgment. *fn1" In ruling that FIRREA gives the FDIC power to make payment by a Certificate of Award, the Court, for the reasons hereinafter stated, grants FDIC's motion for summary judgment and denies Franklin's motion for summary judgment.

 I.

 A.

 The facts are summarized as follows: *fn2"

 In March 1990, Franklin and Financial Center entered into a Master Whole Loan Sale Agreement ("Agreement") pursuant to which Financial Center sold to Franklin a pool of loans secured by first and second deeds of trust on single-family residential real property, including the Bloyer Loan and the Nielson Loan. The Agreement contained warranties and representations concerning the loans Franklin purchased, and obligations of Financial Center to repurchase any loan for which the warranties and representations were breached. The borrowers on both the Bloyer Loan and the Nielson Loan defaulted, and the two properties were foreclosed upon. The Nielson property was sold at a loss to Franklin; the Bloyer property has never been sold and Franklin still holds title to the property.

 Financial Center refused to repurchase the Bloyer loan and compensate Franklin for the loss on the Nielson loan, as it was obligated to do under the Agreement. Franklin filed an arbitration action against Financial Center. Prior to May 4, 1992 (the date Financial Center was declared insolvent), an Award ("Award") was rendered that awarded Franklin $ 477,434.98 in damages. The Award also stated that "upon payment of the Award, Franklin Bank shall restore to Financial Center Bank the Bloyer loan . . . ." (Stipulated Facts, Ex. 2, P 4.)

 On May 4, 1992, after the Award was rendered but before Financial Center had complied with the terms of the Award, the Office of the Comptroller of the Currency declared Financial Center insolvent and appointed the FDIC as its receiver. The FDIC notified all creditors of Financial Center to file proofs of claim with it in order to have their claims considered. On June 23, 1992, Franklin submitted a Proof of Claim to the FDIC for the full amount of the Award. The FDIC approved this claim in a letter dated December 18, 1992, and provided Franklin with a Certificate of Proof of Claim in the amount of $ 441,876.87. *fn3" (Id., Ex. 6, Receiver's Certificate #142.)

 The FDIC made ratable distributions to Franklin of $ 304,934.81; $ 136,942.06 of the approved claim remains to be paid.

 After Financial Center went into receivership, the house on the Bloyer property was substantially destroyed by fire. Franklin received and still holds $ 90,000 in casualty insurance proceeds. This action involves a dispute as to who has a legal right to the fire insurance proceeds.

 B.

 The cross-motions for summary judgment involve the second cause of action in which Franklin seeks a declaration by the Court that it may retain the $ 90,000 in insurance proceeds rather than pay it to the FDIC.

 Franklin moves for summary judgment on two alternative grounds: (1) that Franklin does not owe the FDIC $ 90,000 in casualty insurance proceeds because Financial Center's receivership estate has not paid the Award in full, which is a condition precedent to payment of the insurance proceeds; or (2) Franklin is entitled to set off ...


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