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IN RE FRANKLIN NATL. BANK

October 8, 1974

In the Matter of the Liquidation of FRANKLIN NATIONAL BANK, a National Banking Association

Judd, J.


The opinion of the court was delivered by: JUDD

MEMORANDUM OPINION

JUDD, J.

 The court has been asked to give ex parte approval to transactions involving billions of dollars and at least two federal agencies and two large banks.

 Although the court has determined that such action is proper, approval has not been given without careful consideration during the interval of more than three weeks since the first draft of the basic papers was submitted to the court for consideration.

 The matter was first presented to the writer while he was sitting in Miscellaneous Part in September, and has been assigned to him for action now by designation of Acting Chief Judge John F. Dooling, Jr. pursuant to the "Plan for Prompt Disposition of Protracted, Difficult or Widely Publicized Cases" adopted by Order of this Court dated December 22, 1971.

 Facts

 The affairs of Franklin National Bank (Franklin) have been the subject of high-level consideration by the Comptroller of the Currency, the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve Bank of New York, among other government agencies, since early May 1974. At that time the announcement of substantial losses in Franklin's foreign exchange department triggered a dramatic decline in its deposits and in its ability to obtain shortterm borrowed funds to maintain its liquidity. Advances by the Federal Reserve Bank have enabled Franklin to continue in operation, but these advances had risen from about $135 million on May 10, 1974 to a total of $1.125 billion by May 22, 1974, and now total approximately $1.75 billion.

 FDIC and the Comptroller of the Currency have explored various possibilities for improving the financial situation of Franklin, including a proposal from Franklin's new management. The affidavits filed with the petition show that the Comptroller consulted more than two dozen of the largest banks in the United States, and that FDIC also consulted certain major foreign banks concerning various plans to aid Franklin. A plan of liquidation which was thereafter developed by FDIC contemplated sale of some but not all of Franklin's assets after solicitation of bids on the basis of a proposed purchase and assumption agreement.

 The Federal Reserve Bank of New York informed the Comptroller of the Currency by letter on October 7, 1974 that

 
. . . at the present time, we see virtually no possibility that Franklin can survive for long as an independent institution . . . In all of the circumstances, and with the FDIC plan available, we do not believe that it would be in the public interest for this Bank to continue its program of credit assistance to Franklin.

 The plan developed by FDIC and referred to in the letter of the Federal Reserve Bank of New York contemplated that FDIC would be appointed receiver and would sell certain assets, to be selected by the purchasing bank, in an amount equal to Franklin's deposit liabilities at the time of the receivership (about $1.5 billion at August 30, 1974), minus the amount of a premium to be paid by the purchasing bank. The remaining assets would be retained by FDIC, to meet Franklin's outstanding obligation to the Federal Reserve Bank of New York; any surplus after the payment of liquidating expenses will be returned to the stockholders of Franklin. Apart from preferred stockholders, all of Franklin's stock is owned by Franklin New York Corporation.

 The FDIC in its corporate capacity has agreed to purchase from the receiver (also FDIC) all assets not purchased by the assuming Bank and to assume the Bank's indebtedness to the Federal Reserve Bank of New York, and repay it out of liquidations and collections to the extent possible, but within three years in any event. Other details set forth in the agreements need not be discussed in this Memorandum Opinion, except to mention that Franklin's trust business might be acquired by a separate institution.

 The Comptroller of the Currency on October 8, 1974 at 3:00 p.m. certified that he was satisfied that Franklin "is insolvent, and unable to meet the demands of its depositors and unable to pay its just and legal debts." He thereupon appointed FDIC as receiver of Franklin.

 The papers before the court emphasize the need for prompt action, in that the going concern value of Franklin would be lost if its 104 domestic banking offices do not open on the morning of October 9, 1974, and that the purchasing bank would then have the right to withdraw its bid, ...


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