The FDIC as Holder in Due Course: Some Law and Economics
58 Pages Posted: 10 Mar 2016
Date Written: 1992
When a federally insured bank fails, the Federal Deposit Insurance Corporation (the "FDIC") typically intervenes to protect depositors. As part of the bailout, the FDIC undertakes the role of liquidator of the bank's assets, both physical and intangible. A bank's tangible assets consist primarily on its loan portfolio, that is, its rights to receive repayment from borrowers. A failed bank's loan portfolio is packaged with "troubled" loans, which are of doubtful collectibility for a variety of reasons. In most cases, the borrower is insolvent and simply cannot repay the loan. In other cases, the bank's right to repayment is subject to offset or reduction because the borrower has a valid defense against the bank. For example, a borrower may contend that he is relieved from his obligation to repay his loan on grounds that he lacked mental capacity to contract, or that the bank defrauded him. When the FDIC acquires a loan following a bank's failure, a borrower will assert this defense against the FDIC. This Article analyzes the governing rules under which the FDIC can acquire the power to collect the loan free of the borrower's defenses.
Part II of this Article describes the FDIC's role in bank failure resolution. Part III examines the law governing the FDIC's immunity from obligors' claims and defenses. Part IV then proposes an economic framework for evaluating an immunity rule's efficiency as a loss allocation device. Part V evaluates the holder in due course rule, a familiar and analogous loss allocation rule, concluding that it is efficient. Part VI of this Article proposes a rule of immunity for the FDIC that efficiently allocates loss between borrowers and the FDIC.
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