�౦��Ϸ����

AAC- 2007-03 (September 5, 2007)

DECISION

*** (“Bank A”) (“A”) filed an appeal with the Assessment Appeals Committee (“Committee”) of the Federal Deposit Insurance Corporation (“�౦��Ϸ����”) by letter dated May 29, 2007. A is appealing a determination issued by the �౦��Ϸ����’s Division of Finance (“DOF”) on May 17, 2007. DOF had determined *** (“Bank B”)(“B”) to be the successor to the one-time assessment credit ($45,364.60) of *** (“Bank C”) (“C”). A claims entitlement to the C assessment credit under the provisions of the de facto rule in the �౦��Ϸ����’s assessment regulations. That rule requires a “successor” institution to have assumed “substantially all of the deposit liabilities” and acquired “substantially all of the assets” of another institution. 12 C.F.R. § 327.31(c), (g). A contends that a 2001 purchase and assumption transaction involving its predecessor (*** (“Bank D”) (“D”)), *** (“Bank E”) (as the predecessor to B),1 and C satisfies these regulatory requirements. The Committee must decide whether A’s response to B’s request for review more than 30 days after A received notice from the �౦��Ϸ���� of B’s request, bars this appeal, and, if not, whether the de facto rule entitles A to C's assessment credit. 

At its meeting held on July 30, 2007, the Committee allowed A and B, pursuant to the Guidelines for Appeals of Deposit Insurance Assessment Determinations,2 to make oral presentations in support of their positions. After carefully considering all of the written and oral submissions and the facts of this case, the Committee has decided to grant A’s appeal and award it the one-time assessment credit of C.

BACKGROUND

On September 17, 2001, B consummated a merger transaction with C. Contemporaneously, B transferred assets acquired and liabilities assumed from C to D. The applicable purchase and assumption agreement reflects that D purchased all of C’s assets and liabilities; B retained only C’s charter. A is the successor institution to D. 

On February 8, 2006, the Federal Deposit Insurance Reform Act of 2005 (“the Reform Act”) became law. The Reform Act mandated a one-time assessment credit of approximately $4.7 billion to be allocated among “eligible insured depository institution[s]” or their “successor[s].” 12 U.S.C. § 1817(e)(3)(A). To be eligible for the one-time assessment credit under the statute, an institution must have been in existence on December 31, 1996, and have paid a deposit insurance premium prior to that date, or must be a successor to such an institution. Section 1817(e)(3)(C).

The regulation implementing the one-time credit was approved by the �౦��Ϸ���� Board of Directors on October 6, 2006, becoming effective on November 17, 2006. 12 C.F.R. § 327.30-.36. The relevant portion of the rule defines “successor” institution as the “resulting institution” (i.e., the “acquiring, assuming, or resulting institution in a merger”) or “an insured depository institution that acquired part of another insured depository institution’s 1996 assessment base ratio under paragraph 327.33(c) … under the de facto rule.” Section 327.31(f), (g).

Under the rules, therefore, two avenues exist for becoming the successor institution to an institution that was eligible for the one-time assessment credit: via an actual merger or under the de facto rule.

Under the de facto rule, an institution may become a successor to an institution that was eligible for the one-time assessment credit through “any transaction in which an insured depository institution assumes substantially all of the deposit liabilities and acquires substantially all of the assets of any other insured depository institution at the time of the transaction.” Section 327.31(c). A successor institution under the de facto rule takes its proportionate share of the eligible institution’s 1996 assessment base ratio based on the deposit liabilities it assumed in the transaction. Section 327.33(c). In short, for purposes of entitlement to the one-time assessment credit, an institution acquiring under the de facto rule will be treated the same as the acquiring institution in a merger, except that, if less than 100 percent of deposit liabilities are acquired by purchase and assumption, then a portion of the credit and 1996 assessment base ratio will stay behind with the selling institution.

The preamble to the rulemaking included guidance regarding application of the de facto rule: “the �౦��Ϸ���� considers an assumption and acquisition of at least 90 percent of the transferring institution’s deposit liabilities and assets at the time of transfer as substantially all of that institution’s assets and deposit liabilities. Any successor institution qualifying under that threshold would be entitled to a pro rata share, based on the deposit liabilities assumed, of the transferring institution’s remaining 1996 assessment base ratio at the time of transfer.” 71 Fed. Reg. 61,374, 61,378-79 (Oct. 18, 2006). The �౦��Ϸ���� acknowledged that inclusion of the de facto rule into the regulation departed from the “clear, bright line that a strictly applied merger definition would provide” but viewed it as “fairer” than a strict merger approach. 71 Fed. Reg. at 61,379.

The �౦��Ϸ����’s rules also provided insured institutions with the opportunity to request review if they disagreed with the �౦��Ϸ����’s determination of eligibility (or ineligibility) to receive the assessment credit, with the �౦��Ϸ����’s calculation of the credit amount, or if they believed that the Statement of One-Time Assessment Credit did not fully or accurately reflect their own 1996 assessment base ratios or appropriate adjustments for successors. Section 327.36(a)(1). Institutions were given 30 days from the effective date of the rule (that is, until December 18, 2006) to submit a request for review of the one-time assessment credit. Section 327.36(a)(1). Failure to file a timely request for review of the one-time assessment credit bars institutions from subsequently requesting review. Section 327.36(b)(2).

The �౦��Ϸ����’s rules further provided that an institution requesting review “shall notify, to the extent practicable, any other insured depository institution that would be directly and materially affected by granting the request for review and provide such institution with copies of the request for review, the supporting documentation, and the �౦��Ϸ����’s procedures for requests under this subpart.” Section 327.36(c). The rule also requires the �౦��Ϸ���� to make reasonable efforts to determine that such institutions have been identified and notified.

Once a “potentially affected” institution is notified of the filing of a request for review, it may submit a response, along with any supporting documentation, within 30 days. Section 327.36(e). If the notified institution does not submit a response, the rules provide that it may not subsequently dispute the information submitted by the other institution on the transaction at issue, or appeal the decision of the DOF director. Section 327.36(e)(1), (2).

On October 18, 2006, the �౦��Ϸ���� issued Financial Institution Letter (“FIL”) 93-2006. The FIL transmitted the one-time assessment credit rule and notified the industry that the �౦��Ϸ���� would be providing a preliminary Statement of One-Time Assessment Credit to all eligible institutions. According to the FIL, “A successor institution is defined as the acquiring, assuming, or resulting institution in a merger or consolidation or the acquiring institution under a de facto rule. The de facto rule recognizes a transfer of at least 90 percent of an institution’s assets and deposit liabilities as a substantial transfer of the transferring institution’s business.” The FIL further noted that “[b]ecause the amounts shown in the Statements [of One-Time Assessment Credit] will not reflect credits as a result of transfers under the de facto rule, an institution claiming credits under this rule must file a request for review.”

The �౦��Ϸ����’s Structure Information Management System (“SIMS”) - the �౦��Ϸ����’s corporate database3 - recorded the 2001 merger transaction in a manner inconsistent with the FIL. Instead of recording the transaction as a merger between B and C, SIMS incorrectly recorded it as a merger between D (A’s predecessor) and C.

Preliminary Statements of One-Time Assessment Credit were made available to all open and active insured depository institutions on October 18, 2006, via �౦��Ϸ����connect, the �౦��Ϸ����’s e-business website.

Because of the error on SIMS, A’s preliminary statement listed the assessment credit resulting from the C transaction, while B’s preliminary statement did not. Consequently, the obligation to file a request for review to seek C’s assessment credit, which under the FIL should have fallen to A as the de facto rule claimant, fell instead to B, the successor by merger claimant.

On December 8, 2006, B filed a request for review with DOF seeking consideration for the one-time C assessment credit. With its request, B submitted, among other documents, the June 11, 2001 Purchase and Assumption Agreement for the transaction. Sections 2.1 and 2.2 of that agreement provide for the purchase by D (A’s predecessor) of all of the assets of C and the assumption by D of all of the liabilities of C.

Despite the requirement in the �౦��Ϸ����’s rules that B notify A - as an institution that would be directly and materially affected - and provide A with a copy of the request for review, the supporting documentation, and the �౦��Ϸ����’s procedures, B failed to do so.

By letter dated December 15, 2006, the �౦��Ϸ���� notified A of B’s request for review and of A’s right to respond. The notice letter provided information regarding the de facto rule, outlined A’s right to demonstrate that it be deemed C’s successor, and included a portion of B’s supporting documentation. The �౦��Ϸ����’s letter also informed A that under the rules it had 30 days - that is, until January 16, 2007 - to submit a response to B’s request for review.

On February 28, 2007, 43 days past the January 16, 2007 due date, A submitted a response to DOF. In the response, A asserted that all of the assets and liabilities of C were transferred to its predecessor, D, citing the relevant Purchase and Assumption Agreement, which A included, along with other documentation. According to A, B retained only C’s charter. A concluded that under the �౦��Ϸ����’s de facto rule, C’s one-time assessment credit should be transferred to A, the ultimate successor to D. A did not address the late filing of its response.

DOF granted B’s request for review in two letters, one directed to B and the other directed to A, each letter dated May 17, 2007.

In its letter to B, DOF stated that “an apparent error in the �౦��Ϸ����’s records shows D as the successor to C.” According to DOF, “the documentation submitted by B with its request for review supports B’s claim to be deemed the resulting institution in the merger between B and C.” DOF also noted that the credit would be held in abeyance pending any A appeal.

In its letter to A, DOF again referenced the “apparent error in the �౦��Ϸ����’s records” that showed D as the successor to C. Within this context, it was noted that A did not “inform the �౦��Ϸ���� by the December 18, 2006, deadline that D did not acquire C’s charter, or provide sufficient documentation to demonstrate D’s eligibility as the ‘de facto’ successor to C.” DOF also noted that A’s February 28, 2007 response was not timely. Finally, DOF advised A how to appeal its determination.

In its May 29, 2007 appeal to this Committee, A argues that it should be deemed C’s successor under the de facto rule because its predecessor assumed all of C’s deposit liabilities and all of its assets. Further, A argues that B’s request for review was time barred, that B violated the �౦��Ϸ����’s rules by failing to notify A of its request for review, and that B would be unjustly enriched by DOF’s determination. A acknowledges its response was not timely, but asserts (in its written appeal and at oral presentation) difficulties in retrieving documents from storage, office relocation, staffing problems, and inclement weather as grounds for excusal.

ANALYSIS

It is undisputed that A acquired all of the assets and assumed all of the liabilities of C, as required by the de facto rule. All of the evidence submitted by both institutions in this appeal has been considered by the Committee and supports A’s contention that its predecessor, D, assumed all of the liabilities and acquired all of the assets of C in the 2001 purchase and assumption transaction. B agreed that A had acquired all of C's assets and assumed all of its liabilities in that transaction. Accordingly, A has satisfied the substantive requirements of the �౦��Ϸ����’s de facto rule and would be entitled to the one-time assessment credit of C. 12 C.F.R. § 327.31(c). B, however, has raised the issue of A's untimeliness in responding to its request for review.

The issue remains, therefore, whether A may bring this appeal in light of its late-filed response to B’s request for review. Resolution of that issue will determine whether A may obtain relief from this Committee.

An institution that would be directly and materially affected by granting a request for review may submit a response within 30 days of being notified. Section 327.36(e). According to the regulation, an institution that is notified and “does not submit a response” may not appeal the decision of the DOF director. Section 327.36(e)(2). The regulation, however, does not expressly address the situation presented here, where A did submit a response, albeit 43 days late. The preamble to the rulemaking offers the further guidance that any institution that does not submit a “timely response” would be “foreclosed from any appeal of the decision by the Director of the Division of Finance ….” 71 Fed. Reg. 61,374, 61,380 (Oct. 18, 2006). The preamble language regarding “timely response” does not appear in the regulation; the question remains whether on the unusual facts of this case the regulation must be so interpreted.

A does not dispute that its response was filed 43 days after the date set in DOF’s notice letter. A has cited recovery of archived files, office relocation, staff turnovers, and inclement weather as extenuating grounds. While these factors by themselves may merit some consideration, lapses other than A’s may also have affected - perhaps significantly - A’s posture in this appeal.

Initially, we note that the �౦��Ϸ����’s incorrect SIMS entry had the effect of obviating the need in this matter for the de facto rule claimant - A - to file a request for review. The SIMS error caused A’s October 18, 2006 Preliminary Statement of One-Time Assessment Credit to reflect the C credit. But for that SIMS error, A would have been required, by December 18, 2006, to have filed a request for review or forgo its claim. Instead, prior to the filing of B’s December 8, 2006 request for review, A had no cause to take any action to preserve its claim to the credit at issue. In short, the SIMS error reversed A’s position from that of other institutions seeking to assert de facto status under the rule. In this way, the SIMS error altered A’s obligations and associated time limits with respect to the assessment credit at issue, which may have significantly affected its substantive rights.

The SIMS error conversely affected B. Because of that error, the C credit did not appear on B’s preliminary statement of one-time credit. Accordingly, to preserve its claim to the credit, B was required to file a request for review, which it did on December 8, 2006.

In filing its request, however, B failed to comply with the �౦��Ϸ����’s regulations: B did not notify A of the request for review or provide A - as a potentially affected institution - with a copy of the request for review, supporting documentation, and the �౦��Ϸ����’s procedures governing requests. At the oral presentation, B acknowledged this omission. The rules express no penalty for this failure. Nevertheless, had B complied, A would have received notice - and a copy of B’s entire submission, rather than just the excerpts later provided by the �౦��Ϸ���� - earlier than it did. Whether this might have altered the procedural posture of this matter can only be guessed.

This case presents a scenario in which errors by the �౦��Ϸ���� and B caused the process designed by the �౦��Ϸ���� for notice of assessment credits to vary significantly from the implemented administrative scheme. Against this backdrop, on the particular and specific facts of this case, considering the express regulatory language, and keeping in mind notions of fundamental fairness and the interests of justice, the Committee will look for guidance to the excusable neglect standard of Federal Rule of Civil Procedure 6(b) in considering the timeliness issue.4

When analyzing a claim of excusable neglect, it is appropriate to take into account “all of the relevant circumstances surrounding the party’s omission” including “the danger of prejudice to the [other party], the length of the delay and its potential impact on the … proceedings, the reason for the delay, including whether it was within the reasonable control of the [party], and whether the [party] acted in good faith.” Pioneer Investment Services Co. v. Brunswick Associates Ltd. Partnership, 507 U.S. 380, 385 (1993).

The background of errors on the part of the �౦��Ϸ���� and B caused a significant variance in the administrative scheme as it applied to A and that variance may have affected the outcome of this matter. Little prejudice to B appears in allowing this appeal: B did not follow the �౦��Ϸ����’s rules in noticing A of the request for review, and B has conceded that A acquired all the assets and assumed all the liabilities of C; therefore, under the de facto rule, A would be entitled to the credit at issue. Further, A’s 43-day delay in responding appears to have had little or no impact on the proceedings, as the �౦��Ϸ���� did not issue its determination on the request for review for more than two months after that. Moreover, there is no indication of bad faith on A’s part at any point in this proceeding. Finally, A has offered several reasons for the delay - weather, office relocation, staff turnover, archived files - some within its reasonable control, but it is the distortion of the administrative process in this matter that causes our concern. This distortion may have altered A’s obligations and time limits and affected its substantive rights in ways that were never within the reasonable control of any party to this proceeding.

Accordingly, for these reasons and on the particular facts of this case, the Committee finds that A may maintain this appeal of DOF’s assessment credit determination.

CONCLUSION

For the reasons and on the unique facts set out in this decision, the Committee finds that A has satisfied the requirements of the �౦��Ϸ����’s de facto rule and is therefore entitled to the one-time assessment credit of C.

By direction of the Assessment Appeals Committee, dated September 5, 2007.

Valerie J. Best
Assistant Executive Secretary

• 1

  For ease of reference in light of this complicated fact pattern, this decision will refer to B (rather than its predecessor E) when referencing the acquisition of C.

• 2

  The Guidelines are set out at 69 Fed. Reg. 41479, 41486 (July 9, 2004), and in �౦��Ϸ���� Financial Institution Letter (“FIL”) 113-2004 (Oct. 13, 2004).

• 3

  SIMS maintains current and historical non-financial data for all institutions; it offers institution-specific demographic data, including a complete set of information on merger or consolidation transactions.

• 4

  The Committee emphasizes that it is not bound by the Federal Rules and looks to them solely for guidance in this matter.