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2.9 Treatment of Contracts Entered Into Prior to Appointment of the Receiver; Authority to Repudiate

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2.9 Treatment of Contracts Entered Into Prior to Appointment of the Receiver; Authority to Repudiate

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            2.9.       Treatment of Contracts Entered Into Prior to Appointment of the Receiver; Authority to Repudiate.  The FDIC is given a very broad power to repudiate contracts.  In the depository institution receivership context, the exercise of this authority and its potential for undoing significant pre-receivership transactions such as securitizations has generated significant litigation regarding FDIC's exercise of this authority and counterparty concerns regarding actions that an FDIC receiver might take.  These considerations will now play out in connection with the hypothetical receivership of a new category of entities.  [§210(c)]

                        2.9.1.      General Authority to Repudiate Contracts.  The FDIC as receiver may disaffirm or repudiate any contract or lease:

·         to which the covered financial company is a party;

·         the performance of which the FDIC as receiver, in the discretion of the FDIC, determines to be burdensome; and  

 

·         the disaffirmance or repudiation of which the FDIC as receiver determines, in its discretion, will promote the orderly administration of the affairs of the covered financial company.

 

The FDIC as receiver must determine whether to exercise its repudiation rights within a reasonable period of time. 

                  2.9.2.      Claims for Damages for Repudiation.  As a general matter, the liability of the FDIC as receiver for the disaffirmance or repudiation of any contract is limited to actual direct compensatory damages, and is determined as of (i) the date of the appointment of the receiver, or (ii) in the case of a qualified financial contract ("QFC"), the date of the disaffirmance of such contract or agreement.   The term "actual direct compensatory damages" does not include (i) punitive or exemplary damages, (ii) damages for lost profits or opportunity, or (iii) damages for pain or suffering.  In certain instances, special damages rules apply as discussed below. 

                              2.9.2.1. Damages for Repudiation of a QFC.   In the case of a transaction treated as a QFC, compensatory damages shall be deemed to include normal and reasonable costs of cover or other reasonable measures of damages utilized for such contract and agreement claims.

                              2.9.2.2. Damages for Repudiation of Debt Obligations.  In the case of any debt for borrowed money or evidenced by a security, actual direct compensatory damages generally shall be no less than the amount lent plus accrued interest plus any accreted original issue discount as of the date the FDIC is appointed receiver.                          

2.9.2.3. Damages for Repudiation of a Contingent Obligation.  In the case of any contingent obligation of a covered financial company that consists of any obligation under a guarantee, letter of credit, loan commitment, or similar credit obligation, the FDIC may by rule or regulation, prescribe that actual direct compensatory damages shall be no less than the estimated value of the claim as of the date the FDIC was appointed receiver, as such value is measured based on the likelihood that such contingent claim would become fixed and, if so, its probable magnitude.       

                        2.9.2.4. Damages for Leases Under Which the Company Is Lessee.  Damages for the repudiation of the company's position as a lessee are limited to the amount of contractual rent accruing before the later of the date notice of repudiation is mailed or the repudiation becomes effective.  The lessor shall have no claim for damages under any acceleration clause or other penalty provision.  The lessor shall have a claim for any unpaid rent, subject to all appropriate offsets and defenses, due as of the date of the appointment of the FDIC as receiver.

                        2.9.2.5. Damages for Leases Under Which the Company is the Lessor.  If the FDIC repudiates an unexpired lease where the lessee is not in default, the lessee may treat the lease as terminated or remain in possession for the balance of the term, unless the lessee defaults after the date of repudiation.

                        2.9.2.6. Damages for Contracts for Sale of Real Property.  If the FDIC repudiates a contract for the sale of real property, and the purchaser is in possession and is not in default on the date of repudiation, the purchaser may either treat the contract as terminated or remain in possession subject to continuing to making all payments due under the contract.

                        2.9.2.7. Damages for Service Contracts.  In the case of any contract for services, any claim for services performed before the appointment of the receiver shall be deemed to have arisen on the date the receiver was appointed.  If the receiver accepts services from the provider after its appointment, the party shall be paid under the terms of the contract for pre-repudiation services and the amount of such payment shall be treated as an administrative expense of the receivership.

            2.9.3.        Treatment of QFCs.  As a general matter, no party will be stayed or prohibited from exercising (i) any right the party has to cause the termination, liquidation, or acceleration of any QFC with a covered financial company which arises upon the date of appointment of the FDIC as receiver for such company at any time after such appointment, (ii) any right under any security agreement or arrangement or other credit enhancement related to one or more QFCs, or (iii) any right to offset or net out any termination value, payment amount, or other transfer obligation arising under or in connection with one or more QFCs.  A QFC means any securities contract, commodity contract, forward contract, repurchase agreement, swap agreement, and any similar agreement that the FDIC determines by regulation, resolution, or order to be a QFC.         

2.9.3.1. Transfer of QFCs.   In making any transfer of assets or liabilities of a covered financial company in default, which includes any QFC, the FDIC as receiver must either (i) transfer to one financial institution which is not in receivership or bankruptcy all QFCs between a person or any affiliate thereof and the company, and related claims, security property, and credit enhancements, or (ii) transfer none of the QFCs, claims, property or credit enhancements.  The FDIC must provide notice if it transfers any QFC by not later than 5:00 p.m. Eastern time on the day after the FDIC is appointed receiver.  A person that is a party to a QFC with a covered financial company may not exercise any right to terminate, liquidate or net such contract solely by reason of the appointment of the FDIC as receiver or the insolvency or financial condition of the company until the earlier of (i) the time at which the person has received notice that the QFC has been transferred, or (ii) 5:00 p.m. Eastern time on the business day following the date of the appointment of the FDIC.

                        2.9.3.2. Repudiation of QFCs.  In exercising its repudiation rights with respect to any QFC, the FDIC shall either repudiate all QFCs between any person and its affiliates and the covered financial company, or repudiate none of the QFCs.

            2.9.4.      Certain Security Interests Are Not Avoidable.  The FDIC's repudiation power does not permit it to avoid any legally enforceable or perfected security interest in any assets of any covered financial company, except as permitted with respect to fraudulent, preferential or unauthorized transfers, or to avoid any legally enforceable interest in customer property, security entitlements in respect of assets, or property held by the company for any security entitlement holder.

            2.9.5.      Authority to Enforce Contracts.  The FDIC as receiver may enforce any contract (other than certain insurance policies) notwithstanding any provision of the contract providing for termination, default, acceleration, or exercise of rights upon, or solely by reason of, insolvency, the appointment of the FDIC as receiver, the filing of a petition for receivership, or related matters.

            As a general matter, no person may exercise any right or power to terminate, accelerate, or declare a default under any contract to which the covered financial company is a party (and no such provision shall be enforceable) or to obtain possession of or exercise control over any property of the company or affect any financial rights of the company without the consent of the FDIC as receiver during the 90 day period beginning from the appointment of the FDIC.  This provision does not apply to certain insurance policies, or to the rights of parties to a QFC or certain netting contracts. Nor may it be construed to permit the FDIC to fail to comply with otherwise enforceable provisions of a contract.             

            2.9.7.      Contracts to Extend Credit to a Covered Financial Company.  In the event that the FDIC as receiver enforces any contract to extend credit to a covered financial company or bridge financial company, any valid and enforceable obligation to repay such debt shall be paid by the FDIC as receiver, as an administrative expense of the receivership.  

            2.9.8.      Limitation on Court Action.  Except as otherwise permitted in  Title II, no court may take any action to restrain or affect the exercise of powers or functions of the receiver, and any remedy against the FDIC or receiver shall be limited to money damages.

            2.9.9.      Claims Against Directors and Officers.  A director or officer of a covered financial company may be held personally liable for monetary damages in a civil action based on a claim for gross negligence or more serious conduct brought by the FDIC.