Vineyard National Bancorp v. Federal Deposit Insurance Corporation, Receiver fo

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UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
LOS ANGELES DIVISION
In re
VINEYARD NATIONAL BANCORP,
Debtor.
Case No.: 2:10-BK-21661RN
Chapter 11
BRADLEY SHARP, AS LIQUIDATING
TRUSTEE OF THE LIQUIDATING
TRUST OF VINEYARD NATIONAL
BANCORP,
Plaintiff and
Counter-Defendant,
v.
FEDERAL DEPOSIT INSURANCE
CORPORATION, in its capacity
as receiver for Vineyard
Bank, National Association,
Defendant and
Counter-Plaintiff.
Adv. No.: 2:10-AP-01815RN
MEMORANDUM OF DECISION RE:
PLAINTIFF’S MOTION FOR PARTIAL
SUMMARY JUDGMENT AS TO (I)
CAPITAL MAINTENANCE CLAIM
ASSERTED BY FDIC-R; AND (II)
OWNERSHIP OF TAX REFUNDS
DATE: April 16, 2013
TIME: 2:00 p.m.
PLACE: Courtroom 1645
INTRODUCTION
This opinion addresses the issue of whether summary judgment
should be awarded to Counter-Defendant and Liquidating Trustee
Bradley Sharp’s (“Liquidating Trustee” or “Counter-Defendant”) and
FILED & ENTERED
MAY 03 2013
CLERK U.S. BANKRUPTCY COURT
Central District of California
BY DEPUTY CLERK	gae
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against the Counter-Plaintiff FDIC-R (“Counter-Plaintiff” or “FDIC-
R”) on the issue of whether this Court should disallow the FDIC-R’s
claim for damages in the sum of $579 million on account of Debtor
Vineyard National Bancorp’s (“Debtor”) breach of its commitment to
maintain sufficient capitalization for the Bank based on its
statutory and regulatory duties to the Bank (the “Capital
Maintenance Claim”). The Capital Maintenance Claim was also
memorialized in the proof of claim (Claim #44) the FDIC-R filed
against the Debtor’s estate on January 15, 2010 (“POC”) which the
Liquidating Trustee seeks to disallow in the Complaint.
The general allegations concerning this adversary proceeding
were laid out in this Court’s Memorandum of Decision re (1) Motion
of the Federal Deposit Insurance Corporation, as Receiver for
Vineyard Bank, N.A., to Dismiss Count IV of the Adversary Complaint;
and (2) Plaintiff’s Motion for Partial Summary Judgment as to (i)
Capital Maintenance Claim Asserted by FDIC-R; and (ii) Ownership of
Tax Refunds (“Tax Refund MOD”).
In Liquidating Trustee’s Motion for Summary Judgment (“MSJ”),
Liquidating Trustee argues that the Capital Maintenance Claim should
be disallowed on the ground that no capital maintenance commitment
exists and the FDIC-R cannot produce evidence of a capital
maintenance agreement. As a result, the FDIC-R does not have a
claim even in the form of an unsecured claim against Debtor’s
estate.
In response (“Opp’n”), the FDIC-R argues that there are genuine
issues of material fact regarding (i) whether the Written Agreement,
the Capital Program, and the Capital Plan (each as defined below)
constitute a binding capital maintenance commitment; and (ii)
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whether approval by the Federal Reserve Bank of San Francisco
(“Federal Reserve” or “FRB”) was required to make the foregoing
documents binding commitments. It further asserts the Debtor signed
three binding documents that evidence the Debtor’s commitment to
fund capital to its subsidiary bank Vineyard Bank, N.A. (“Bank”).
The reply (“Reply”) denies that these three documents
demonstrate that the Debtor made a binding and unconditional
commitment to fund capital to the Bank.
DISCUSSION
The Court has recited the legal standard for granting summary
judgment in its Tax Refund MOD which the Court incorporates herein
by reference and will not be repeated here. Based on the facts and
legal authorities cited by both parties, the Court concludes the
case is ripe for summary judgment. There are no questions of
material fact. The issues raised by the FDIC-R are not issues of
fact but go to the interpretation of various documents relating to
the Debtor’s purported capital maintenance commitment and whether
such documents should be read to establish such a binding
commitment.
A. FDIC-R’s Proof of Claim
The FDIC-R asserts a priority claim against the Debtor
pursuant to § 507(a)(9) of the Code. (MSJ Ex. 1.) FDIC-R claims
Debtor failed to comply with 12 U.S.C. 1831o which imposes a capital
maintenance obligation and mandates cash infusions to its
subsidiary, the Bank. Id. Debtor further failed to meet its
binding commitments in connection with its proposed capital
maintenance plans to regulators. Id.
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Section 507(a)(9) of the Code gives priority to “allowed
unsecured claims based upon any commitment by the debtor to a
Federal depository institutions regulatory agency1 (or predecessor
to such agency) to maintain the capital of an insured depository
institution.” The claim arises from § 365(o) of the Code which
provides in relevant part:
“In a case under chapter 11 of this title, the
trustee shall be deemed to have assumed
(consistent with the debtor's other obligations
under section 507), and shall immediately cure
any deficit under, any commitment by the debtor
to a Federal depository institutions regulatory
agency (or predecessor to such agency) to
maintain the capital of an insured depository
institution, and any claim for a subsequent
breach of the obligations thereunder shall be
entitled to priority under section 507.” 11 USC
§ 365(o).
In order for the FDIC-R’s priority claim to be allowed, it must meet
its burden to demonstrate that the Debtor made a “commitment” to a
“regulatory agency” to “maintain the capital of [the Bank].” The
“commitment” can be “any commitment”. Id.; 11 USC § 507(a)(9).
B. The Debtor did not commit to provide capital to the Bank for
purposes of §§ 365(o) and 507(a)(9).
In support of its position, the FDIC-R identified three
documents evidencing the Debtor’s binding commitment to provide
capital to the Bank. The Court disagrees that these documents
1 Section 101(21B)(A) defines the term “federal depository institutions regulatory” to include the federal reserve board.
Furthermore, the 1994 Amendments to § 507 “redesignated para. (8) as para. (9) and in such para. substituted ‘Ninth’ for
‘Eighth’ and substituted ‘a Federal depository institutions regulatory agency (or predecessor to such agency)’ for ‘the
Federal Deposit Insurance Corporation, the Resolution Trust Corporation, the Director of the Office of Thrift Supervision,
the Comptroller of the Currency, or the Board of Governors of the Federal Reserve System, or their predecessors or
successors. . . .’”
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support a finding that the Debtor made the type of capital
commitment contemplated by § 507(a)(9).
In the wake of the Bank’s ultimate collapse, the Debtor, on
September 23, 2008, signed an agreement (“Written Agreement”) with
the Federal Reserve in which, the Debtor, inter alia, agreed to do
the following with respect to the Capital Plan: to submit to the
FRB within 60 days of the agreement “an acceptable written plan to
maintain sufficient capital position at the consolidated
organization and the Bank.” (App. of Exs. in Supp. of Pl.’s MSJ,
vol. 1, Ex.4.)
Among other things, the Capital Plan must, at the minimum,
address/contain the following: (i) the Bank and the Debtor’s current
and future capital requirements; (ii) the adequacy of the Bank’s
capital including current and projected asset growth and projected
earnings; (iii) the source and timing of additional funds to fulfill
the Debtor and the Bank’s future capital requirements; (iv) the
requirement that the Debtor serve as the source of strength to the
Bank; and (v) a notification procedure to inform the Federal Reserve
30 days at the end of every quarter when the capital ratios fall
below the minimum and submit to the Federal Reserve an acceptable
written plan to cure the deficiency. Id.
A month after the Written Agreement was signed, the Debtor and
the Bank submitted a memorandum dated October 22, 2008 (“October 22,
2008 Memorandum”) to the Office of the Comptroller of the Currency
(“OCC”) and the Federal Reserve in compliance with the Written
Agreement and Consent Order. The October 22, 2008 Memorandum
included, as an exhibit, a 3-year capital model (“Capital Plan”)
that reflected how funds will be used upon the Debtor’s successful
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attempt to raise capital for the Bank. (App. of Exs. In Supp. of
Def. Opp’n to Pl.’s MSJ, Ex. A.) Particularly, the October 22, 2008
Memorandum provided that the Debtor will attempt to raise capital
and downstream $100 million to the Bank to comply with the
regulator’s capital ratio requirements. Id. The October 22, 2008
Memorandum further contemplates raising capital would require
selling stock of the Debtor and potential sale of the Bank’s real
estate loans. Id. The October 22, 2008 Memorandum clearly states
that the Capital Plan is “contingent upon the successful completion
of the capital raise” described therein. Id. Lastly, the October
22, 2008 Memorandum provided that the Capital Plan is subject to
further review, approval and refinement by the Debtor’s board based
on several factors. The Debtor asserts the October 22, 2008
Memorandum complies with the requirements of the Written Agreement
and the Consent Order. Id.
The Court agrees with the Liquidating Trustee that the October
22, 2008 Memorandum, the Capital Plan and the Written Agreement did
not create a “commitment” for purposes of §§ 507(a)(9) and 365(o)
because the funding of the Bank was contingent upon the “capital
raise” proposed in the Capital Plan. The Court further finds that
the Written Agreement only required the Debtor’s submission of a
Capital Plan and not a commitment to maintain the Bank’s capital.
While “commitment” is not defined in the Bankruptcy Code,
Courts have defined it to mean an agreement or pledge that the
parties to the transaction intended to be binding or enforceable.
Resolution Trust Corp. v. FirstCorp (In re FirstCorp), 973 F.2d 243,
249 n. 5 (4th Cir. 1992); In re Colonial BancGroup, Inc., 436 B.R.
713, 736-38 (Bankr. M.D. Ala. 2010). Here, there is no enforceable
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capital maintenance commitment because the proposal to fund the Bank
was contingent upon raising the capital to do so. As such, the
condition precedent did not exist for the Debtor to commit to fund
the Bank’s capital needs. FDIC v. Amtrust Fin. Corp. (In re Amtrust
Fin. Corp.), 694 F.3d 741, 755 (6th Cir. 2012).
While the circuit courts in FirstCorp and Office of Thrift
Supervision v. Overland Park Fin. Corp. (In re Overland Park Fin.
Corp.), 236 F.3d 1246 (10th Cir. 2001), found a binding commitment
for purposes of § 365(o), those cases are distinguishable. Both
cases involved the acquisition of a bank for which the primary
condition to acquisition was the infusion of capital. FirstCorp,
973 F.2d at 244-45; Overland Park Fin Corp), 236 F.3d at 1249.
Overland Park Fin. Corp. stipulated to maintain the net worth of the
bank it acquired and to infuse sufficient additional equity capital
to effectuate compliance with the applicable statutory requirements.
236 F.3d at 1249. Similarly, the Fourth Circuit in FirstCorp found
a clear recognition by the debtor of its capital maintenance
obligation when the debtor sought forbearance from its obligation.
973 F.2d at 245.
Unlike the Debtor here, none of the foregoing cases included a
contingency that the debtor raise the funds to implement a capital
plan. As in In re Colonial BancGroup, Inc., 436 B.R. 713, 736-38
(Bankr. M.D. Ala. 2010), the commitment has to be enforceable to be
entitled to priority. Here, the commitment, if any, was not
enforceable because it was contingent upon Debtor’s raising the
necessary capital from outside sources which never happened. Debtor
agreed to try to raise the capital but it could not do so. This is
supported by the Federal Reserve’s March 2009 report to the Debtor
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stating that the Debtor is noncompliant with paragraph 3 of the
Written Agreement because “an effective restoration plan has not
been implemented.” (App. of Exs. In Supp. of Pl.’s MSJ, Ex. 6.)
The Debtor’s letter to the FRB in May 2009 also acknowledged that
the Debtor could not comply with paragraph 3 of the Written
Agreement regarding the submission of an effective capital plan.
(App. of Dep. Transcripts In Supp. of Def. Opp’n to Pl’s MSJ, Ex. L
to Dep. Of Jim LeSieur.) It further observed that there was no
viable or effective capital plan for the Debtor. Id.
The Court finds that because no capital plan was in effect
that could be implemented due to the lack of capital raise
sufficient to implement the proposed plan, the Debtor has not made a
capital maintenance commitment that binds the Debtor to infuse
capital to the Bank. Indeed, neither the Written Agreement nor the
October 22, 2008 Memorandum states that the Debtor committed to fund
the Bank notwithstanding an unsuccessful attempt to raise capital.
The proposal was contingent and the contingency did not occur.
Alternatively, even if the terms of the Written Agreement and
the October 22, 2008 Memorandum establish a “commitment” under 11
U.S.C. § 365(o), the Court finds no breach of such commitment that
would support a priority claim under § 507(a)(9). Section 365(o)
requires the Trustee to “cure any deficit” arising from the
commitment. There was no deficit at the time of the petition
because the contingent obligation to fund was not triggered. See
e.g., Clinton v. Acequia, Inc., 94 F.3d 568, 572-73 (9th Cir. 1996)
(a case is not ripe where the existence of the dispute itself hangs
on future contingencies that may or may not occur). Indeed, there
was no evidence that the Debtor abandoned efforts to raise the funds
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needed to implement a capital plan nor was there a deadline to do
so. Thus, the FDIC-R does not have a priority claim under §
507(a)(9).
CONCLUSION
For the reasons stated herein, the Court grants Plaintiff’s
Motion for Partial Summary Judgment on the issue of the FDIC-R’s
Capital Maintenance Claim. The FDIC-R’s claim with respect to its
Capital Maintenance Claim is disallowed.
Date: May 3, 2013
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NOTICE OF ENTERED ORDER AND SERVICE LIST
Notice is given by the court that a judgment or order entitled (specify) MEMORANDUM OF DECISION RE:
PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT AS TO (I) CAPITAL MAINTENANCE CLAIM
ASSERTED BY FDIC-R; AND (II) OWNERSHIP OF TAX REFUNDS was entered on the date indicated as
AEntered@ on the first page of this judgment or order and will be served in the manner indicated below:
I. SERVED BY THE COURT VIA NOTICE OF ELECTRONIC FILING (ANEF@) B Pursuant to controlling
General Order(s) and Local Bankruptcy Rule(s), the foregoing document was served on the following person(s)
by the court via NEF and hyperlink to the judgment or order. As of May 3, 2013, the following person(s) are
currently on the Electronic Mail Notice List for this bankruptcy case or adversary proceeding to receive NEF
transmission at the email address(es) indicated below.
US Trustee’s Office (Los Angeles): ustpregion16.la.ecf@usdoj.gov
Plaintiff’s Counsel Gregory A Martin: gmartin@winston.com; Rolf Woolner: rwoolner@winston.com
Defendant’s Counsel Joshua D Wayser: joshua.wayser@kattenlaw.com; Jessica Mickelson,
Jessica.mickelson@kattenlaw.com;
Service information continued on attached page
II. SERVED BY THE COURT VIA U.S. MAIL: A copy of this notice and a true copy of this judgment or order
was sent by United States Mail, first class, postage prepaid, to the following person(s) and/or entity(ies) at the
address(es) indicated below:
Defendant’s Counsel:
Linda Berberian
FDIC Legal Division
Dallas Regional Office
1601 Bryan Street
Dallas, TX 75201
Service information continued on attached page
III. TO BE SERVED BY THE LODGING PARTY: Within 72 hours after receipt of a copy of this judgment or
order which bears an AEntered@ stamp, the party lodging the judgment or order will serve a complete copy
bearing an AEntered@ stamp by U.S. Mail, overnight mail, facsimile transmission or email and file a proof of
service of the entered order on the following person(s) and/or entity(ies) at the address(es), facsimile
transmission number(s), and/or email address(es) indicated below:
Service information continued on attached page
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