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March 10, 1987

American Insurance Association, Plaintiff,
Robert L. Clarke,* et al., Defendants

The opinion of the court was delivered by: GREEN

 JOYCE HENS GREEN, United States District

 Plaintiff American Insurance Association (AIA) brings this action challenging a ruling by defendant Comptroller of the Currency that would allow Citibank, a national bank subsidiary of a registered bank holding company, to offer a type of municipal bond insurance in the form of standby letters of credit. AIA, joined by amici the National Association of Life Underwriters and the National Association of Professional Insurance Agents, argue that the sale of such insurance is beyond the authority conferred on national banks by the National Bank Act, 12 U.S.C. §§ 1 et seq., is proscribed by judicial precedent, and runs afoul of the strictures of the Bank Holding Company Act of 1956, 12 U.S.C. §§ 1841 et seq. (BHCA). Defendant, the regulatory agency charged with implementing the National Bank Act, along with intervenor Citibank, N.A. (collectively "defendants"), contend that the municipal insurance at issue is the functional equivalent of standby letters of credit, which have long been recognized as permissible forms of credit under the National Bank Act, and do not contravene the judicial prohibition on bank guarantees. They further argue that Federal Reserve Board regulations do not require the Comptroller to stay its approval of Citibank's activity pending the Board's own assessment of that activity under the BHCA. The parties have filed cross-motions for summary judgment. For the reasons set forth below, the Court finds that Citibank's municipal bond insurance is permissible activity under governing federal banking laws and that defendants therefore are entitled to summary judgment.


 Citibank, a national banking association subject to the regulatory and supervisory jurisdiction of the Comptroller, gave notice by letter dated January 29, 1985, that it planned to establish an operating subsidiary to engage in the municipal bond insurance business. Under Citibank's proposal, issuers, purchasers, or underwriters of municipal bonds will apply to the subsidiary for bond insurance in the form of standby credits. If the bonds are of a type which a national bank may purchase directly, the subsidiary will assess the creditworthiness of the issuer and determine an appropriate fee for the issuance of the credit. Administrative Record (AR) at 1. If the creditworthiness of the issuer satisfies the subsidiary, it will issue the standby credit, thereby committing to pay bondholders in the event of a default by the issuer. Id. Should the issuer fail to pay the interest and principal when due, the bondholder would draw on the standby credit by presenting the unpaid bond or by notifying the subsidiary that default has occurred. Upon such payment, the subsidiary would then become subrogated to the bondholder's primary right to payment from the issuer.

 By letter dated May 2, 1985, the Comptroller concurred in Citibank's proposal. It found that while the proposed product is considered insurance under state law, the standby credits are in substance letters of credit, the issuance of which is a traditional banking practice permissible under section 24 (Seventh) of the National Bank Act. Letter of Michael Patriarca, Deputy Comptroller for Multinational Banking, to Patrick J. Mulhern, Senior Vice-President and General Counsel of Citibank, N.A. (May 2, 1985) at 2; AR at 98. The standby credits meet the agency's guidelines for letters of credit in that they are for a definite term, are limited in amount, obligate the subsidiary to pay upon presentation of a document, and result in the customer's unqualified obligation to reimburse the subsidiary for any payments made to beneficiary bondholders. Id. The Comptroller determined that the subsidiary's proposed activities are consistent with safe and sound banking practices because the subsidiary will issue standby credits on the basis of an assessment of the bond issuer's financial strength, rather than on an actuarial computation of the likelihood that a particular issuer will default. The former analysis, the agency noted, is typical of bank lending and credit practices, while the latter is a hallmark of the insurance business. Patriarca Letter at 3-4; AR at 99-100. The Comptroller further found that because the subsidiary's proposed standby credits are independent contracts imposing a primary obligation on the subsidiary to pay bondholders, they are not impermissible guarantees. Guarantees, which are ancillary contracts conditioning the guarantor's obligation to make payment on the performance and satisfaction of the terms of the principal contract, require guarantors to gauge the likelihood of default or non-performance. The agency determined that here the primary obligation imposed by the standby credits requires the subsidiary to assume that default will occur, and to assess the bond issuer's ability to make repayment in that event. Id. at 3; AR at 99. Finally, the Comptroller concluded that the BHCA does not proscribe the municipal bond insurance at issue here. Id. at 4-5; AR at 100-01.

 Thereafter, Citibank established AMBAC Indemnity Corporation, the operating subsidiary offering the disputed municipal insurance. Plaintiff, along with the Alliance of American Insurers (AAI), filed suit challenging the Comptroller's decision, and Citibank intervened as a party defendant. Defendants moved to dismiss on the ground that plaintiff lacked standing, an argument the Court accepted with respect to AAI but rejected as to AIA. American Insurance Association v. Selby, 624 F. Supp. 267 (D.D.C. 1985). The pending cross-motions for summary judgment then followed.


 Plaintiff attacks the Comptroller's decision on three grounds. First, it argues that the activity at issue here is not included among the express powers enumerated by section 24 (Seventh) of the National Bank Act, and does not fall within the reach of the "incidental powers" clause of the Act as that clause has been construed by the courts. Accordingly, plaintiff contends, municipal bond insurance is an activity that exceeds the authority of a national bank. Second, plaintiff argues that Citibank's standby credit is at bottom a promise to answer for the payment of the debt of another, if the person liable in the first instance fails to make payment, and as such is an impermissible guarantee under the National Bank Act. Finally, plaintiff claims that Citibank's proposal raises a substantial question as to whether or not the bank's holding company, Citicorp, is in violation of the BHCA by virtue of the subsidiary's insurance activity. Plaintiff contends that the Comptroller should have conditioned its concurrence on the Federal Reserve Board's resolution of that question and that, in view of the Comptroller's failure to do so, this Court should enjoin Citibank's insurance activity in order to preserve the Board's jurisdiction over the matter. The Court addresses each of these contentions in turn.

 A. The Business of Banking

 Plaintiff correctly notes that Citibank's subsidiary, like Citibank itself, may exercise only those powers either expressly conferred by the National Bank Act, *fn1" or those "incidental powers . . . necessary to carry on the business of banking." 12 U.S.C. § 24 (Seventh). Plaintiff argues that the Act itself contains no provision authorizing banks to engage in general insurance underwriting activities, much less municipal bond insurance, thus the subsidiary's activity is permissible only if it fits within the "incidental powers" clause. That clause has been defined as encompassing those activities "directly related to" and "convenient or useful" to the performance of customary and expressly authorized banking services. M&M Leasing Corp. v. Seattle First National Bank, 563 F.2d 1377, 1382 (9th Cir. 1977), cert. denied, 436 U.S. 956, 57 L. Ed. 2d 1121, 98 S. Ct. 3069 (1978); Arnold Tours, Inc. v. Camp, 472 F.2d 427, 431-32 (1st Cir. 1972). The only expressly authorized banking services that municipal bond insurance could conceivably be related to, plaintiff contends, are the power to "loan money on personal security" and to purchase municipal debt securities for the bank's own account. 12 U.S.C. § 24 (Seventh). According to plaintiff, however, the subsidiary's activity is neither directly related nor convenient to a bank's lending function, but is instead a radical departure from that customary activity which places Citibank squarely in the business of insuring rather than lending. Plaintiff argues that as a lender, a bank grants a borrower, such as a municipality, the temporary use of its funds in exchange for a payment of interest. In so doing, of course, the bank assumes a risk of nonpayment. To safeguard against this risk, the bank not only assesses the creditworthiness of the borrower, but because such assessments are not infallible, the bank also fixes its interest rates at levels calculated to permit a reasonable profit even if some defaults occur. Nonetheless, the bank's principal compensation is the payment of interest, which reflects the market price for the use of its funds, not a risk premium. Here, plaintiff insists, the fee Citibank's subsidiary will receive for its insurance is unmistakably a risk premium. Under the proposal, the subsidiary is not a lender since it advances no funds to the municipality; instead, it is in the position of a borrower obliged to repay the true lenders -- the municipal bondholders -- in the event of a default. The mere fact that the subsidiary undertakes a credit analysis is, in plaintiff's view, irrelevant. Such an undertaking is customary in property and casualty insurance, and in no way alters the fact that the subsidiary's compensation is an insurance premium, calculated on the basis of the bank's underwriting judgment concerning the likelihood of default.

 Plaintiff's argument proceeds from a narrow and artificially rigid view of both the business of banking and the statute that governs that business, a view that the Comptroller, and this Court, reject. Whether or not the five enumerated powers set out in the National Bank Act are an exhaustive list or, as some commentators have argued, merely illustrative, see, e.g., Symons, The "Business of Banking" in Historical Perspective, 57 Geo. Wash. L. Rev. 67 (1983), the Court cannot accept plaintiff's cramped and simplistically literal interpretation of the banking industry's lending power. At bottom, "the business of banking reduces to the provision of financial support for the transactions of others." Letter from James E. Smith, Comptroller of the Currency, [1973-78 Transfer Binder] Fed. Bank. L. Rep. (CCH) P96,301 at 81,417. Banks can and do provide such support by means other than direct loans of their own funds. As then Judge Cardozo explained over fifty years ago, the business of banking involves the substitution of the "[bank's] own credit, which has general acceptance in the business community, for the individual's credit, which has only limited acceptability . . . . It is the end for which a bank exists." Block v. Pennsylvania Exchange Bank, 253 N.Y. 227, 170 N.E. 900, 901 (N.Y. 1930). Indeed, the extension of credit on both a secured and unsecured basis is such a long-standing practice under the National Bank Act, see e.g., The Third National Bank v. Blake, 73 N.Y. 260, 263 (Ct. App. 1878); National Bank v. Case, 99 U.S. 628, 633, 25 L. Ed. 448 (1878), that credit is today viewed as one of "the principal banking 'products.'" United States v. Philadelphia National Bank, 374 U.S. 321, 326 n.5, 83 S. Ct. 1715, 10 L. Ed. 2d 915 (1963). Banks provide this "product" in a variety of forms not specifically enumerated in the Act: they offer irrevocable lines of credit, standby and mercantile letters of credit, and check guaranty and credit card programs. See e.g., 12 C.F.R. §§ 7.7017, 7.7016, 7.378, 32.3 (1985).

 The question then is not, as plaintiff couches it, whether the National Bank Act expressly authorizes banks to engage in the municipal bond insurance business, or whether that business is directly related and useful to what plaintiff narrowly conceives as the lending function -- i.e. the direct advance of funds to a borrower. Rather, the question is whether the Comptroller correctly found that the issuance of standby credits in the form of municipal bond insurance is a basic credit transaction permissible under the Act. Applying its particular financial expertise, the Comptroller determined that, notwithstanding their name, the standby credits at issue here are the functional equivalent of standby letters of credit, and are thus a permissible extension of credit in the form of an advance commitment to honor a customer's obligations in the event the customer defaults. As that determination is neither erroneous nor arbitrary and capricious, the Court will not disturb it.

 While plaintiff and amici expend considerable effort demonstrating that national banks are not permitted, with certain exceptions, to sell or underwrite insurance, there can be no serious quarrel with the Comptroller's assertion that it is entitled to look beyond the label given a certain activity to determine whether or not it is permissible. "The validity of the commitments undertaken in a particular [financial] instrument . . . cannot rationally be ascertained or tested by mere examination of the label that the instrument bears." H. Harfield, Bank Credit and Acceptances (5th ed. 1974) (hereinafter "Harfield") at 164-65. Indeed, in M&M Leasing Corp. v. Seattle First National Bank, 563 F.2d 1377 (9th Cir. 1977), the Ninth Circuit determined that national banks were permitted to lease motor vehicles and other personal property because the leases at issue were "functionally interchangeable" with secured loans. Id. at 1383. The court stressed that this "functional interchangeability" was the "touchstone" of its decision, and noted that "whether third parties in other contexts should treat leases that are equivalent to loans as ...

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