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September 4, 1979

SOL NEIL CORBIN, as Trustee in Bankruptcy of Franklin New York Corporation, Plaintiff, and CONNECTICUT GENERAL LIFE INSURANCE COMPANY, et al., Plaintiff-Intervenors, against FEDERAL RESERVE BANK OF NEW YORK, FEDERAL DEPOSIT INSURANCE CORPORATION, in its corporate capacity and as Receiver of FRANKLIN NATIONAL BANK, Defendants.

The opinion of the court was delivered by: POLLACK


This suit, presented at a Bench trial, seeks a reduction in the interest payable to the defendant Federal Reserve Bank of New York (FRB-NY) on its agreement to forbear for three years the collection of a past due $ 1.7 billion secured indebtedness of Franklin National Bank. The agreement was made with defendant Federal Deposit Insurance Corporation (FDIC) on the latter's purchase of assets from the Receiver of Franklin National Bank FNB and FDIC's assumption as primary obligor of the FNB indebtedness. The forbearance agreement and assumption were made with FDIC in its corporate capacity. FNB had been declared insolvent at the close of business on October 8, 1974 and FDIC was named as its Receiver by the Comptroller of the Currency. Pursuant to statutory authorization as the Receiver, FDIC sold the assets of the closed bank here involved to FDIC in its corporate capacity for purposes of liquidation. *fn1"

 The plaintiff is the Trustee in Bankruptcy of FNB's parent, viz., Franklin New York Corporation, which owns all the outstanding stock of FNB, except directors' qualifying shares, and also holds a claim against FNB as a creditor thereof for $ 136,000. On October 16, 1974 the parent holding company filed a petition in bankruptcy and plaintiff was appointed as Trustee in Bankruptcy. He purports to bring this suit as a creditor of the FNB receivership estate and derivatively on behalf of FDIC-Receiver. He asserts that FDIC, as Receiver, owed a fiduciary duty to the creditors and stockholders of FNB which it breached by permitting FDIC in its corporate capacity to agree to the interest rate provisions of the assumption agreement; that those rates were unfair and that FDIC as Receiver in permitting the same did not act in respect thereto as a prudent fiduciary with proper regard for the interests of the creditors and shareholders of FNB.

 This action was commenced on October 6, 1977, nearly three years after the declaration of FNB's insolvency and the substantial execution of the transactions referred to above. Shortly prior to the trial, holders of FNB's Subordinated Capital Debentures which are subordinate to the principal of and interest upon all liabilities of FNB, were granted leave to intervene on the side of the plaintiff and to participate in the trial, with certain limitations.

 The defendants have contested the Court's jurisdiction and at all events have denied liability on the merits.

 It appears by the preponderance of the credible evidence and the circumstances and the reasonable inferences to be drawn therefrom that the interest rate arrangements which have been questioned were part of a global negotiation of a series of interdependent and complex matters that were negotiated at arm's length, were agreed to in the exercise of sound judgment by the Receiver and FDIC (corporate), were fair to the receivership estate and were not a breach of fiduciary duty and that FRB-NY did not act unfairly or overreach the Receiver. Accordingly, the complaint must fail.


 The Background

 In 1974, FNB was the twentieth largest bank in the United States. It had 104 banking offices. Early in May, 1974, FNB publicly announced massive losses in foreign exchange transactions during the first quarter of 1974. These disclosures caused a withdrawal of credit and deposits which threatened to close FNB and to severely disrupt the banking industry and the national economy. FNB was forced to turn to the Federal Reserve discount window for emergency borrowings which were available to member banks. A few days before the announcement, FRB-NY offered FNB discount window assistance on a daily basis as needed "within the limits of the collateral that can be supplied."

 Commencing on May 8, 1974, with a loan of $ 135 million, FRB-NY began to make such emergency window one-day secured loans to FNB in amounts which increased sharply after May 13 and continued to mount until October 7, 1974. These window loans were made to avoid a liquidity crisis at FNB and the threat of a bank run, panic in the banking industry and a disruption of the national economy. The immediate effect of these window loans was to permit FNB to repay its large daily and short-term borrowings of unsecured federal funds from other banks that were not renewed after May 13. By law, the advances by FRB-NY to FNB had to be and were secured by FNB assets. *fn2"

 To the extent that FNB furnished collateral "eligible" for purchase or discount by the Reserve Banks, the window loans made by FRB-NY thereon carried interest at the rate of 8% Per annum; *fn3" the balance of the window loans, representing the bulk of FNB's borrowings, were secured by collateral acceptable as "satisfactory" by the Reserve Banks and these by law carried interest at a rate not less than one-half of one per-cent per annum higher than the highest discount rate in effect at the Reserve Bank making the loan (here made at 8 1/2 %). *fn4"

 Beginning on September 27, 1974, the interest rate on FNB's emergency window one-day loans became 10% Per annum pursuant to a newly promulgated regulation of the Board of Governors of the Federal Reserve System. *fn5"

 On October 8, 1974, FNB's indebtedness to FRB-NY amounted to $ 1,723,472,054 (the "Indebtedness" hereafter) which bore contract interest at the then 10% Rate and was secured to the satisfaction of FRB-NY by collateral of value in a face amount in excess of $ 2.28 billion. The Indebtedness as incurred was evidenced by a series of one-day FNB promissory notes maturing the next day. During the period of the loans the interest accruing on each one-day note made by FNB was added to the principal amount of the following day's note.


 On October 8, 1974, at 3:00 PM, the Comptroller of the Currency declared FNB insolvent pursuant to 12 U.S.C. § 191 and, as required by 12 U.S.C. § 1821(c), promptly appointed FDIC as FNB's Receiver. FNB's assets were then thought to be worth about $ 4-billion. Prior thereto, at the instance of the Comptroller of the Currency, beginning in July 1974, FDIC had undertaken contingency planning to work out the solution for FNB and had conducted discussions with banking interests concerning the possibility of a take-over of FNB's assets and liabilities or at least a part of them by a purchase and assumption transaction. Coincident therewith, FDIC sought to evolve a three to five-year repayment program for any remaining Indebtedness to FRB-NY pursuant to which FDIC in its corporate capacity would assume that remaining Indebtedness and have time to pay it off from the liquidation of FNB's assets.

 FRB-NY is not ordinarily a long-term lender; its window loans are normally of short duration; it functions to represent the public as a lender of last resort. *fn6" Federal Reserve Act, 12 U.S.C. § 221 Et seq. However, the efforts of FDIC to reach a solution for FNB's predicament bore fruit in the following agreements of October 8, 1974 which were made after FNB was declared insolvent and placed in receivership.

 1. European-American Bank & Trust Company ("EAB"), as successful bidder, agreed pursuant to a "Purchase and Assumption Agreement" to purchase $ 1.54 billion of FNB assets from FDIC as Receiver including the 104 branch offices of FNB, and to pay a $ 125 million premium therefor. The banking offices would thereby be enabled to open the next day for business without interruption. EAB assumed $ 750 million of insured deposits and over $ 900 million of uninsured deposits and other general liabilities. An express condition of this agreement was the release by FRB-NY of its lien upon the assets of FNB.

 2. FDIC as Receiver, sold pursuant to an "Agreement of Sale," all of the remaining assets of FNB not acquired by EAB to FDIC (corporate) for liquidation thereof, the proceeds of those assets to be applied to pay the principal and interest due on the Indebtedness to FRB-NY, the costs of liquidation, any loss which FDIC might sustain on a Capital Note which FDIC (corporate) agreed to purchase from EAB to facilitate EAB's transaction with the Receiver, and a return of 6 1/2 % Per annum on out-of-pocket funds advanced by FDIC (corporate) for the foregoing purposes. Any excess remaining from the liquidation after the proceeds were so applied was to be remitted to the Receiver as contingent additional consideration for the sale to FDIC (corporate) of the remaining assets.

 3. FDIC (corporate) and FRB-NY entered into an "Agreement of Assumption of Indebtedness" by which FRB-NY agreed:

(1) to forbear for a period of three years until the Final Payment Date from enforcing any of its rights relating to the Indebtedness;
(2) to modify the interest rate payable on the FRB Indebtedness by reducing the rate to 7.52% Simple interest per annum on the unpaid principal amount thereof, payable on the Final Payment Date, less an "adjustment" of up to $ 15 million for expenses in liquidating the remaining assets, and by the payment to FRB-NY of an additional amount of interest in the contingency that the liquidation should provide funds therefor, to increase the amount of the total interest to a rate of 8 1/2 % Compounded annually over the three year forbearance. The contingent obligation was not to bear interest for non-payment thereof at the Final Payment Date.
(3) to release its lien on and security interest in such collateral as was purchased by EAB from FDIC as Receiver pursuant to the contemporaneously executed Purchase and Assumption Agreement with EAB;
(4) to release its lien and security interest in the remaining collateral as it was transferred or liquidated by FDIC against payment of the proceeds in reduction of the Indebtedness and payment of the obligations assumed by FDIC absolutely or contingently; and
(5) to release the Receiver unconditionally from its primary liability with respect to the Indebtedness, and to hold it only secondarily liable if FDIC (corporate) did not pay the same.

 FDIC (corporate) agreed:

(a) to liquidate the remaining assets of FNB as agent for the FRB and to remit the proceeds to FRB-NY in payment on account of ...

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