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UNITED STATES DISTRICT COURT DISTRICT OF COLUMBIA

BEAL BANK, S.S.B., Plaintiff, v. No. 1:02CV02146 RJL FEDERAL DEPOSIT INSURANCE CORPORATION AS RECEIVER FOR SUPERIOR BANK, F.S.B., AND IN ITS COPORATE CAPACITY, Defendants. _____________________________________/

REPLY OF THE FEDERAL DEPOSIT INSURANCE CORPORATION IN ITS CORPORATE CAPACITY IN SUPPORT OF ITS MOTION TO DISMISS OR

FOR STAY

In its Motion to Dismiss (Document #73 at 7-10), FDIC-C demonstrated that

Beal’s request for Declaratory Judgment concerning the meaning of the Guaranties issued

by FDIC-C was inappropriate because FDIC-Receiver (FDIC-R) had the funds to cover

any likely obligation with regard to the subprime loans at issue, and therefore, the lack of

any urgency precluded this Court from exercising jurisdiction. FDIC-C alternatively

argued (Doc. #73 at 10-13) that the Guaranties were collection rather than payment

guarantees, and, under New York law, could not be invoked prior to the termination of

the judicial proceedings against FDIC-R. Finally, the FDIC-C contended (Doc. #73 at

13-14) that at the very least a stay of the case against FDIC-C was appropriate until such

time as the Court and the parties were able to ascertain with some reasonable certainty

that the liabilities of FDIC-R will be sufficiently high that the Guaranties will likely come

into operation. Beal has filed a Memorandum in Opposition (“Opp.”) (Document #76)

disputing FDIC-C’s contentions.

Case 1:02-cv-02146-RJL Document 77 Filed 06/11/2008 of 14

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A. Beal’s Estimate of the Receiver’s Potential Liabilities is Too High and Unrealistic. In order for the Guaranties to come into operation, two conditions must be

satisfied. First, FDIC-R must be found to be liable to Beal. Second, FDIC-R must fail to

pay that liability. As FDIC-C has shown, it is highly unlikely that the second condition

will ever be satisfied in light of the $247.5 million in the receivership on which Beal has

a priority claim.1

Beal offers (Opp. at 3-4, 6-7) an inflated, speculative set of figures to show the

likelihood that FDIC-R will fail to pay a liability. These figures totally lack credibility.

As FDIC-C demonstrates, that attempt relies on a misreading of the record and an

incorrect reading of the law. Deflating these figures is not difficult.

1 Beal incorrectly states (Opp. at 6 and n.5) that “[t]he FDIC has provided no assurance regarding the existence and scope of other administrative claims that may currently be pending against the receivership or may be filed in the future, . . . .” To the contrary, the financial statement appended to the Declaration of Robert Ferrer (Doc. #73-3) provides a complete tally of the currently pending claims that compete with Beal’s under the heading “Administrative Liabilities.” The $247.5 million to which Beal has first claim results from subtracting the total of those competing claims ($13.9 million) from the total assets of the receivership ($261.4 million). Moreover, the latest Superior receivership dates from 2002. There are time limits for making receivership claims, and those have run. In addition, we would expect that other dissatisfied purchasers of loans, if any, would have filed claims long ago. Finally, Beal has failed to specify any scenario which is likely to change “what assets may exist in the future” in the receivership. Thus, the only competition Beal will have for the $247.5 million is relatively trivial claims from trade creditors currently furnishing services to the receivership, e.g., companies providing IT services. Thus, the speculative nature of Beal’s contention undercuts any implication that it somehow needs an answer to its question now. FDIC-C notes that the total receivership assets available to pay Beal’s claim will be subject to some fluctuation from time to time as the receivership pays dividends on other claims already proven to its satisfaction. Clearly, should the payment of the dividends result in the available assets dropping to a level at which operation of the Guaranties becomes a realistic possibility, it will be appropriate at that time, but not before, to adjudicate the issues relating to them.


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Beal claims (Opp. at 6-7) that there are “far more than 1778 defective loans [the

number Beal submitted] among the 5315 that the FDIC sold to Beal.” However, as

FDIC-R has pointed out in its Motion for Partial Summary Judgment (Doc. # 75 -- Partial

SJ Motion), of 5315 loans, only about 1500 potentially meet the two necessary conditions

for liability -- (i) breach of a representation or warranty that (ii) caused a material loss.

Of the remaining loans, 247 have been repurchased already; an estimated 2600 have been

paid off by the borrowers; and approximately 600 are performing.2 Although the parties

cannot determine the exact numbers in each of these categories of loans until all of the

loan files and servicing files have been reviewed, it appears that, at most, a third are

likely to give rise to liability. Thus FDIC-R’s repurchase of all of these loans, even at

face value, would come nowhere near depleting the $247.5 million.3

Beal also alleges (Opp. at 7) that the FDIC’s consultants concluded in a study

done in 2004 that 56% of the loans were "defective." Aside from the fact just adverted to

that these loans may contain breaches of representations or warranties without creating

liability for damages, Beal’s reliance on the document attached to its Memorandum in

Opposition (Doc. # 76-4 at 3) is misplaced. A close examination of that document

reveals that it is dated May 14, 2004 and appears to be a draft. The final version of the

report, dated June 30, 2004 (excerpts attached as Exhibit A hereto) contains none of the

pages relied on by Beal. Moreover, as the Executive Summary (Ex. A at 4, final

2 The fact that Beal submitted a loan to FDIC-R does not mean that there is FDIC-R liability since it could fit into one of the categories listed above which would not create liability. Thus, the 1778 figure is, itself, misleading. 3 The fact that a large number of loans have been paid off means that, under any damages theory, Beal’s recovery would be substantially decreased by the setoff from the paid-off loans and end up well within the $247.5 million.


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paragraph) makes clear, the consultants’ best estimate of the FDIC’s total liability was

$21 million:

Based on our analysis detailed herein, we estimated appropriate reserve allocation or potential loss amount to the FDIC for remaining potential claims loans to be within the range of $12 MM to $30 MM. Our most likely estimate of $21 MM is reliant on the principal determination from our sampling and loan review process suggesting that 21% of the remaining loans . . . had material claims associated with them. As such, the most that the Bank should be entitled to is $21 MM. The consultants also attempted to calculate the total potential repurchase liability

assuming that FDIC-R had to repurchase all of the loans with material breaches (Ex. A at

25). That figure is $63 million. Thus, the consultants’ final report paints a quite different

picture; FDIC-R’s potential liability is much lower than what appears from the material

Beal has excerpted from a draft of the report.

Beal also erroneously relies (Opp. at 4, emphasis in original) on a draft internal

FDIC memorandum from 2004 (Doc. # 76-5 at 4) that Beal now knows was prepared by

a mid-level staff member, and was never even seen by Mitchell Glassman, Director of the

Division of Resolutions and Receiverships, much less submitted to the FDIC's Board of

Directors. To the extent the document has any relevance at all, as indicated by the

paragraph following the one Beal quotes, this FDIC analyst believed that the outer limit

of any recovery by Beal would be $70 million. At his deposition, this same analyst stated

his personal opinion that the FDIC's liability was in the $8 to $12 million range.4 Beal

alleges that two other components of potential liability are likely to ratchet up

significantly the ultimate figure: interest and attorneys' fees. Beal’s analysis is wrong

with respect to both. Beal alleges (Opp. at 7) that it will be entitled to interest at the New

4 Exhibits B and C, attached hereto, contain the relevant excerpts from the depositions of Mitchell Glassman and Victor Robert, the staff member who prepared the memorandum.


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York statutory rate of 9% from the date of the purchase of the loans to the entry of

judgment. However, the case Beal cites in support, Wechsler v. Hunt Health Sys., 330

F.Supp.2d 383, 434-35 (S.D.N.Y. 2004), holds only that state law determines the interest

rate. While the state law cited by Beal, N.Y.C.P.L.R. § 5004, imposes a 9% interest rate,

it does not apply in cases in which the contract has a specific provision governing

interest. E.g., Citibank, NA v. Liebowitz, 110 A.D.2d 615, 487 N.Y.S.2d 368, 369 (App.

Div. 2d Dept. 1985). In this case, as FDIC-R’s Motion points out (Partial SJ Motion at

22), the Mortgage Loan Purchase Agreements each have specific provisions governing

interest on loans FDIC-R repurchases. Interest accrues at the Mortgage Loan rate in each

case, and depending on the agreement, accrues either up to but not including the date of

repurchase (November 2001 Agreement) or for a period not to exceed 60 days (March

and April 2002 Agreements). Thus, whatever the number of loans that FDIC-R finally is

liable to repurchase, the interest it will be required to pay will be substantially less than

9% on each of these loans from the date Beal acquired them.

Beal also points to attorneys' fees as an element potentially contributing

significantly to FDIC-R’s ultimate liability (Opp. at 4). However, as FDIC-R’s Motion

makes clear (Partial SJ Motion at 21-22), the attorneys' fees to which Beal will be entitled

are only those incurred in connection with dealing with specific loans (e.g., workouts,

foreclosures and the like), not the fees incurred in prosecuting this suit. Accordingly,

these fees will not likely add significantly to FDIC-R’s ultimate liability.

In sum, there appears to be no plausible scenario in which FDIC-R’s ultimate

liability would come close to the $247.5 million in assets to which Beal has first claim.


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B. Even If the Guaranties are Payment Guaranties, the Court Lacks Jurisdiction to Grant Declaratory Relief. Beal’s argument (Opp. at 5-7) on why this Court should exercise its jurisdiction to

grant declaratory relief is straightforward. In its view, its complaint states a claim for

relief under Fed. R. Civ. P. 12(b)(6), and that is all that is necessary (Id. at 5).

Additionally, it contends (Id. at 5-7) that the size of the potential FDIC-R liability, which

it deems “irrelevant for purposes of a motion to dismiss” (Id. at 5), nonetheless is likely

enough to cause the Guaranties to operate so that the Court should not dismiss the case.

As FDIC-C has just shown, the second point, as a factual matter, is based on a misreading

of the record and law. However, Beal is also in error with respect to the first point.

The inquiry into this Court’s authority to issue a declaratory judgment does not

end even if this Court concludes that Beal’s complaint states the elements of breach of

contract. Declaratory relief is a form of relief rather than a substantive claim and is

subject to certain limitations. As set forth in FDIC-C’s Motion to Dismiss (at 6-7, 8-9),

the test in this Circuit for whether the Court has jurisdiction to grant declaratory relief is

whether the dispute has the “immediacy” necessary to warrant declaratory relief,

Penthouse International, Ltd. v. Meese, 939 F.2d 1011, 1018 (D.C. Cir. 1991) (citations

omitted), and whether it will put an end to “uncertainty and insecurity,” see Tierney v.

Schweiker, 718 F.2d 449, 456 (D.C. Cir. 1983). Yet, nothing in Beal’s submission

explains why there is any necessity or even a point to this Court’s adjudicating the

meaning of the Guaranties now rather than later, other than Beal’s desire, for some

unspecified reason, to have a decision. Beal gives no hint of any “immediacy” or

“insecurity” which might drive its request.


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As FDIC-C has previously demonstrated (Motion at 7-8), the uncertainty existing

at this time appears academic. FDIC-R will almost certainly have adequate assets to

fund any judgment Beal receives. Even if under different facts there were some doubt

about the receivership’s ability to fund a judgment, there would still be no urgency in this

Court deciding the issue at this time, since there will be time enough at the end of the

judicial proceedings against FDIC-R for Beal to join FDIC-C and ask the Court to

adjudicate a claim that would finally have some immediacy. Beal’s Opposition is silent

concerning any reason why having a decision now will provide any concrete benefit to

either party.

There is no case or controversy under Article III between the parties because Beal

is asking the Court to provide an advisory opinion on a hypothetical question. We can

encapsulate the substance of Beal’s complaint concerning the Guaranties in the following

question: if this Court ultimately concludes that the liability of FDIC-R will be of an

amount that exceeds the assets in the receivership estate, what would be the extent of

liability of FDIC-C under the Guaranties? To state the issue this way makes clear that the

question is hypothetical and outside the jurisdiction of this Court. Under Article III,

courts “do not render advisory opinions.” See, e.g., DKT Memorial Fund v. AID, 887

F.2d 275, 296 (D.C. Cir. 1989) (citations omitted); Louisiana Environmental Action

Network v. USEPA, 172 F.3d 65, 72 (D.C. Cir. 1999) (Sentelle, J., concurring) (where the

terms describing the “current injury” are a would/if sentence, the current injury is

speculative and decision thereon would violate the prohibition on advisory opinions);

Gavett v. Alexander, 477 F. Supp. 1035, 1040 (D.D.C. 1979) (“[courts] may not decide

hypothetical questions or provide advisory opinions to parties who would not be injured


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if they did not prevail.”). See also Unified School District No. 259, Sedgwick County,

Kansas v. Disability Rights Center of Kansas, 491 F.3d 1143, 1147 (10th Cir. 2007)

(advisory opinion not appropriate in a declaratory judgment action).

Ultimately, by asking the Court to decide this claim now, Beal is inviting the

Court to do one of two things. In the most likely scenario -- that the Guaranties never

come into play -- Beal is asking the Court to issue an advisory opinion, which it lacks

jurisdiction to do. If, contrary to expectation, the Guaranties become operational, Beal is

asking the Court to decide the case against FDIC-C in a piecemeal, inefficient fashion

instead of once at the end of the proceedings against FDIC-R. This Court should decline

Beal’s invitation.

C. The Context of the Guaranties’ Issuance Militates In Favor of Their Construction as Collection Guarantees. Although the Guaranties do not use the term “collection,” the circumstances

strongly suggest that the parties understood that the Guaranties were for collection rather

than payment. Indeed, interpreting them as payment guaranties avails Beal nothing, a

state of affairs that the parties to the Guaranties would have understood at the time they

executed the Guaranties. As a practical matter, Beal ultimately must present its claims to

FDIC-R for determination and litigate any adverse determinations. It cannot bypass this

process. Thus, the Guaranties, in effect, are collection guarantees, and interpreting them

to be anything else makes no sense.

In interpreting the Guaranties, it is important for the Court to bear in mind that

context is important. As the New York courts have recognized, a court should interpret

the contract before it to give fair meaning to “all of the language employed” and with a

view to realizing the parties “reasonable expectations.” See, e.g., Patrick v. Guarniere,


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204 A.D.2d 702, 704 (App. Div. 1994) (emphasis in original, citations and internal

quotation marks omitted); IBM Credit Financing Corp. v. Mazda Motor Mfg. Corp., 170

Misc.2d 15, 647 N.Y.S.2d 322, 327 (Sup. Ct. 1996) (interpretation in light of “reasonable

expectation” of parties); Restatement (Second) of Contracts § 203 (interpretation in light

of trade practice and custom).5

One crucial aspect of the context is the Agreements themselves to which the

Guaranties relate. Most of the cases in which courts have attempted to determine the

type of guarantee at issue have involved loan repayments where determination of default

presented little problem. E.g., Evergreen Bank v. Sullivan, 980 F. Supp. 747 (D. Vt.

1997) (payments on a line of credit); Marine Midland Bank v. Elshazly, 753 F. Supp. 20

(D. Conn. 1991) (installment note); General Phoenix Corp. v. Cabot, 89 N.E.2d 238

(N.Y. Ct. App. 1949) (payment of note at maturity). In contrast, in this case, the

Guaranties require Beal to have complied with the Agreements. Paragraph 2 and Section

5 of each of the Agreements provides for a procedure by which Beal must request that the

FDIC-R examine individual loans, and show that there are “material” violations of one or

more of the 27 representations and warranties which “adversely affect” their value.

FDIC-R then considers Beal’s proffer and decides whether: (1) a breach has occurred;

and (2) to cure the breach or repurchase the loan. The price for the cure or repurchase is

5 In interpreting contracts involving the federal government, the United States Court of Appeals for the Federal Circuit has also emphasized the importance of “context” or, put another way, the “meaning that would be derived from the contract by a reasonably intelligent person acquainted with the contemporaneous circumstances.” Metric Constructors, Inc. v. NASA, 169 F.3d 747, 752 (Fed. Cir. 1999) (citations omitted). See also Fifth Third Bank v. U.S., 402 F.3d 1221, 1233 (Fed. Cir. 2005) (motivations and purposes of the parties as well as broader circumstances surrounding the transactions at issue).


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determined pursuant to a formula set forth in the Agreements. Thus, not only must Beal

pursue the issues of the nature and extent of the alleged default with FDIC-R initially by

filing a claim with significant supporting evidence, but that claim may be subject to

significant debate between Beal and FDIC-R. Indeed, as the Hall Declaration filed with

FDIC-C’s Motion makes clear, FDIC-R has approved some of Beal’s claims and denied

others.

In addition, Beal has contracted with a government agency having the assets to

address the problem rather than with private parties who may present some risk.

Whatever the meaning of the Guaranties, Beal can have confidence that, at the end of the

process, it will receive whatever sums are due. Indeed, to date, FDIC-R has tried to pay

all of the Beal approved claims -- totaling in excess of $10 million according to the Hall

Declaration -- within two weeks of approval, and there do not currently appear to be any

approved but unpaid claims.

These two contextual facts – the involved procedures for determining whether and

to what extent the receivership was obligated to pay Beal, and that the government

agency ultimately can pay whatever is due and owing – argue strongly that the parties did

not contemplate that the Guaranties would operate prior to termination of proceedings

against FDIC-R. They render untenable Beal’s suggestion (Opp. at 8) that the mere filing

of a claim with the Receiver and FDIC-R’s failure to pay supports a claim that these are

amounts FDIC-R is “obligated to pay” but has failed to pay under the Guaranties and

that, therefore, FDIC-C is liable.

Moreover, the language of the Guaranties supports the same interpretation. The

crucial language resides in the first two sentences of ¶1 of the Guaranties:


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The FDIC in its corporate capacity (“FDIC-Corporate”) hereby guarantees performance of the Conservator’s obligations to pay monetary amounts to Beal Bank, S.S.B., as those obligations are set forth in Sections 5 and 19 of the Purchase Agreement (“Conservator’s Obligations”). FDIC-Corporate shall be liable hereunder only for such amounts, if any, as the Conservator or a receiver for the Conservator is obligated to pay under the terms of the Conservator’s Obligations but which the Conservator or the receiver for the Conservator fails to pay. Beal argues (Opp. at 9) that the language of the first sentence creates a payment

guarantee.

While courts have interpreted language similar to that in the first sentence to

create a payment guarantee, Beal’s analysis fails to recognize that its interpretation

effectively renders the second sentence superfluous. See, e.g., Int’l Multifoods Corp. v.

Commercial Union Ins. Co., 309 F.3d 76, 86 (2nd Cir. 2002); Restatement (Second) of

Contracts § 203(a) (preference given to “an interpretation which gives a reasonable and

effective meaning to all terms . . . .”). Cf. Patrick, 612 N.Y.S.2d at 632 (interpretation

must give fair meaning to “all language”). Thus, under Beal’s analysis, the first sentence,

in effect, would suffice to create a payment guarantee. However, the language of the

second sentence must have some function. Thus, when the first sentence is read along

with the second sentence, the only reasonable reading of the provision as a whole is that

the Guaranties only come into play after all proceedings against FDIC-R are exhausted,

effectively creating a collection guarantee. This is particularly true in light of the

interrelationship between the procedures set forth in the Agreements which must be

pursued prior to submission of a claim to FDIC-C.

Moreover, this analysis makes sense as a practical matter. The Guaranties limit

FDIC-C’s liability to those sums that the FDIC-R is obligated to pay but fails to pay.

Thus, FDIC-C retains the defense that FDIC-R is not obligated to pay certain amounts. It


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can litigate this issue even if Beal chooses only to make a demand upon and litigate

against FDIC-C as Beal alleges it is entitled to do because in its view it has a payment

guarantee (Opp. at 9-10). However, because of the complex procedure for determining

liability and remedy under the Agreement and the Guaranties’ requirement to comply

with the Agreements, as a realistic matter Beal must present its claims to FDIC-R and

will not be able to obtain a judgment against FDIC-C without litigating exactly the same

issues it is currently litigating against FDIC-R.

D. If the Court Does Not Dismiss the Case as To FDIC-C, a Stay is Appropriate.

Beal asserts (Opp. at 10-11) that a stay is unwarranted. For the reasons set forth

above, FDIC-C submits that a stay is more than justified. At this point, there seems

almost no likelihood that the Guaranties will come into operation. At a later date, after

further litigation between Beal and FDIC-R, this Court and the parties should have a

much more precise idea of the range of possible damages. At that point, the Court will

be in a better position to decide whether or not the case against FDIC-C should proceed.

It makes sense as a matter of judicial economy and to conserve the resources of the

parties for the Court to wait until that point to determine how to deal with the case against

FDIC-C, should the Court determine that dismissal is inappropriate.6

6 In support of its argument that a stay is inappropriate, Beal cites National Bank of Detroit v. United States, 1 Ct. Cl. 712, 715 (Ct. Cl. 1983). That case involved a somewhat different question from this case – whether the federal court should stay its proceedings pending the outcome of state court proceedings – with a number of jurisdictional and other considerations not present here. See id. at 714 and n.3, 715-16. However, that court’s conclusion that requests for a stay are addressed to this Court’s discretion and the promotion of efficient litigation would certainly bear on this Court’s consideration of FDIC-C’s request. See id.


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CONCLUSION

For the reasons set forth above and in FDIC-C’s Motion to Dismiss, FDIC-C

respectfully requests that the Court dismiss the First Amended Complaint as to FDIC-C.

In the alternative, the Court may wish to defer decision on this issue until the nature and

extent of the claims that will survive against FDIC-R are clearer and permit the Court and

parties to determine how to proceed.

Dated: June 11, 2008 Respectfully submitted,

Charles L. Cope (D.C. Bar #70672) Senior Counsel s/Thomas L. Holzman Thomas L. Holzman (D.C. Bar #950162) Martha W. McClellan (VA Bar # 17255) Counsel Federal Deposit Insurance Corporation 3501 Fairfax Drive Arlington, VA 22226 Phone: 703-562-2369 Fax: 703-562-2477 Email: [email protected]


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CERTIFICATE OF SERVICE

I hereby certify that on June 11, 2008, I electronically filed the foregoing

document with the Clerk of the Court using the ECF system which will send notification

of such filing to the following: Andrew Sandler, Anand Raman, and Thomas Reeves,

and I hereby certify that I have mailed by United States Postal Service the paper

document to the following non-ECF participants: N/A.

.

s/Thomas L. Holzman THOMAS L. HOLZMAN Counsel Federal Deposit Insurance Corporation 3501 Fairfax Drive, D-7024 Arlington, VA 22226 703.562.2369 703.562.2477 (fax) [email protected]


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