Here's What We Know:
- On March 12, 2023, Signature Bank, New York, NY (SB) was closed by the New York State Department of Financial Services, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver.[1] “[T]he FDIC transferred all the deposits and substantially all of the assets of Signature Bank to Signature Bridge Bank, N.A. (SBB), a full-service bank” operated by the FDIC pending the bank’s sale or liquidation.[2] The FDIC “also transferred all Qualified Financial Contracts (as defined in 12 USC 1821(e)) of the failed bank to the bridge bank.”[3]
- On March 20, 2023, the FDIC entered into a Purchase and Assumption Agreement (PAA) for substantially all deposits and certain loan portfolios of SBB by Flagstar Bank, National Association, Hicksville, New York (Flagstar), a wholly owned subsidiary of New York Community Bancorp, Inc., Westbury, New York (NYCBI).[4]
- Since then, the 40 former branches of SBB have been operating as Flagstar. Notices to depositors about their accounts should start issuing shortly from Flagstar.
What Flagstar Bought:
- $38.4 billion of SB assets, including loans of $12.9 billion, pursuant to a PAA.[5] Purchase and assumption is a transaction in which a healthy bank purchases and assumes liabilities, including all deposits, and is the preferred vehicle for the FDIC for failing banks. Here, Flagstar assumed liabilities for:
- All deposits except digital banking;
- Liabilities for acceptance or commercial letter of credit, to the extent secured by Acquired Assets;
- Liabilities for “standby letters of credit” as defined in 12 C.F.R. § 337.2(a) issued by Signature Bank or SBB in connection with an Acquired Asset, but excluding any other standby letters of credit;
- Liabilities, if any for Commitments with respect to Loans that are purchased; and,
- Other Liabilities listed in Article II of the PAA.
What Flagstar Did Not Buy:
- $4 billion of deposits relating to SBB’s digital banking business; and
- Approximately $60 billion in loans, which remain with the FDIC as receiver, some or all of which may be administered by Flagstar under an interim servicing agreement, pending disposition by the FDIC as receiver.
Highlights from the PAA:
- Liabilities for acceptance or commercial letters of credit, which are typically used in international shipping transactions, are only acquired to the extent they are secured by acquired assets.
- Liabilities for standby letters of credit, typically used in lease transactions as a form of security, but only “in connection with an Acquired Asset”.
- Caveat: Section 2.2 of the PAA appears to retain the FDIC’s repudiation powers with respect to letters of credit.
- Section 3.4 of the PAA permits puts of assets to the FDIC as receiver of certain assets, including loans.
- Section 3.5 defines assets not acquired by Flagstar to include, among others: certain bonds, rights against SB or SBB officers, tangible personal property, goodwill, third-party servicing contracts, multifamily loans, acquisition, development and construction loans, credit card loans, and subscription lines of credit.
- Flagstar is acquiring the Trust Business of SBB. Section 4.5.
- Flagstar has an option to purchase or lease SBB bank locations, or put them back to the FDIC as receiver.
- Flagstar is required to give notice to depositors within seven days of closing of how much money is available and how to claim it, and to honor checks in the ordinary course.
- Flagstar is required to service asset pools that are not acquired by Flagstar under the terms of an Interim Asset Servicing Agreement.
- The FDIC as receiver is entitled to an “equity-kicker” as described in the “Equity Appreciation Instrument” attached to the PAA.
What Does This Mean for Me?
- Banking as usual for depositors, with notices coming shortly from Flagstar;
- Continued confusion in the letter of credit space, because of the difficulty of ascertaining whether a letter of credit has been transferred “in connection with an Acquired Asset” and due to the retention of loans and repudiation rights by the FDIC, as receiver;
- Under 12 U.S.C. § 1821(e)(3), when the FDIC repudiates a contractual obligation like one afforded by a letter of credit, it relieves the FDIC from performing any unperformed obligations of the contract and only entitles the other party to a claim for actual direct compensatory damages against the assets of the failed financial institution. With a repudiated letter of credit, it would render the beneficiary or account party a limited-rights creditor of the FDIC as receiver;
- Presently, and based largely on the well-publicized efforts to restore confidence in the banking system, we expect that letters of credit will be honored for their intended purposes, such as non-payment of rent by tenants, but we are uncertain about how and when the exercise of the FDIC’s repudiation powers will be exercised;
- We suggest that beneficiaries and account parties seek confirmation of availability under letters of credit from Flagstar, and consider alternatives based their individual situations; and
- Parties to credit card, multi-family, construction, development and subscription finance loans or commitments should consider alternative lenders, as these loans remain with the receiver and subject to further sale. While a buyer may emerge, there is no certainty as to the time frame or identity of that buyer.
How We Can Help:
Our highly experienced multi-disciplinary Task Force is assisting clients with navigating their individual situations.
[1] https://www.fdic.gov/news/press-releases/2023/pr23018.html.
[2] https://www.fdic.gov/news/press-releases/2023/pr23018.html.
[3] Id.
[4] https://www.fdic.gov/news/press-releases/2023/pr23021.html
[5] A copy of the PAA is available here. https://www.fdic.gov/resources/resolutions/bank-failures/failed-bank-list/signature-ny-p-and-a.pdf
