Construction Law Today : Construction Lawyer & Attorney : Joshua Glazov : Design Build Contracts, Construction Bankruptcy

Which requirements get relaxed? These requirements:

• In the regular course of business. The FDIC may be an HDC of notes they acquire outside the regular course of business, i.e., notes they acquire in bulk. Ordinarily, if you acquire promissory notes in bulk, you won't qualify as a holder in due course. The FHDC Rule makes a special exception for the FDIC because the FDIC nearly always acquires notes in bulk, either:
  • Directly as the receiver for a failed bank, or
  • Acting in their corporate capacity buying notes through a Purchase and Assumption Transaction from "colleagues" operating as a failed bank's receiver
• Without notice. What would often be enough notice of defenses against payment to another, private, note holder won't be notice to the FDIC. Ordinarily, if you (or someone in your company) have even the remotest inkling of a borrower's, or guarantors', defenses to payment when you acquire a promissory note, you don't qualify as an HDC. But the FHDC Rule relaxes that requirement for the FDIC, at least when the FDIC buys a note in their corporate capacity as part of a Purchase and Assumption Transaction.
  When the FDIC acquires a promissory note in their corporate capacity through a Purchase and Assumption Transaction, there's a presumption that they acquire the note without knowledge or notice of any defense that the borrower, or a guarantor, has against payment. It's very hard to overcome this presumption. You must prove the FDIC had actual knowledge of the defense when they acquired the note.
  Even if files the FDIC seizes from a failed bank on the Appointment Date include papers from pre-Appointment Date litigation over the borrower's defenses, the FDIC still takes the note without notice of those defenses. Paraphrasing another panel of federal judges' rebuke to a borrower opposing this rule:

  The borrower ignores earlier cases and argues that the FDIC is not equivalent to an HDC. She argues that the FDIC had actual knowledge because the bank brought the original lawsuit and she raised defenses before the FDIC was appointed as receiver and before the FDIC acquired the note under the purchase and assumption agreement. Thus, according to borrower, the FDIC actually knew of her defenses before purchasing the note, or at least must be charged with actual knowledge because, if reviewed before purchase, the records of the bank would have revealed the lawsuit and her defenses to the FDIC. This argument is wholly without merit.

Loan Buyers Are Holders In Due Course Too

Several judicial decisions say that if the FDIC is an HDC of a promissory note under the FHDC Rule, then whoever buys that note from the FDIC (e.g., other banks, vulture funds) is an HDC too. So, neither the borrower, nor guarantors, can raise personal defenses against the buyer's collection on the note. The borrower and guarantors may still pursue their claims (e.g., fraud), against someone else who had the note before the FDIC, or the FDIC's buyer. Unfortunately for borrowers and guarantors, all too often that's the failed bank. And there's usually little, if anything, left in the bank's receivership estate to pay those claims.

Receiver as a Federal Holder In Due Course?

From our discussion above, it's pretty clear that the FHDC Rule helps the FDIC qualify as an HDC when operating in their corporate capacity after buying a promissory note through a Purchase and Assumption Transaction. Whether the FHDC Rule also helps the FDIC operating as receiver of a failed bank is controversial. Judges disagree. Some say yes, some say no.

Upcoming Posts

In the next bank insolvency post, we're going to talk about whether the D'Oench, Duhme doctrine and FHDC Rule still operate at all. The U.S. Supreme Court's 1994 decision in O'Melvany & Myers v. FDIC suggests that they don't. But no one's sure. Several lower federal courts of appeal disagree among themselves on this one. That'll be our focus next time.