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Banking Interpretations

NYSBL Sections 30 and 606(4)

REPLY LETTER

June 18, 1990

Paul L. Lee, Esq.
Shearman & Sterling
599 Lexington Avenue
New York , NY 10022

Dear Mr. Lee,

This is in response to your May 29, 1990 letter seeking the Banking Department's concurrence in your opinion that the contractual obligation of a licensed foreign bank to continue to pay interest on certain subordinated deposits (notwithstanding the Superintendent's taking of possession of its New York branch) would not contravene the Banking Law or any public policy expressed therein. The interpretation you seek relates to the subordinated certificates which were the subject of an exchange of letters dated March 28, 1990 and April 6, 1990 between Patricia Skigen, Esq. and the Department.

Generally speaking, holders of the certificates would be contractually entitled to receive interest as it becomes due notwithstanding the fact that the New York branch may have been seized by the Superintendent (for reasons not related to the insolvency or winding up of the foreign bank outside New York). The Department is of the opinion that the foreign bank may so obligate itself to pay such interest and, in effect, waive the provision in Banking Law 30(4) which absolves the foreign bank from any liability on unclaimed or unpaid amounts in the Superintendent's possession (or interest thereon) subsequent to the issuance of a turn-over order. In doing so, the bank would not contravene either the Banking Law or any public policy expressed or implied therein.

I trust this is helpful.

Very truly yours,

Arthur A. Gelman
First Assistant Counsel


REQUEST LETTER

May 29, 1990

State of New York Banking Department
Two Rector Street
New York , New York 10006

Attention: Arthur A. Gelman
First Assistant Counsel

Dear Sirs:

Reference is made to the letter dated March 28, 1990, of Patricia Skigen, Esq., of Wilkie Farr & Gallagher, in which the Banking Department was asked to concur with her opinion that a New York state-licensed branch of a foreign bank may issue subordinated certificates and that the issuance of such certificates and the implementation of their subordination provisions would not contravene the NYBL or any public policy thereof. By reply letter dated April 6, 1990, the Banking Department concurred with such opinion. Further to those letters, we are writing to request the opinion of the New York State Banking Department (the "Banking Department") with respect to the application of 's 606(4)(b) and 30(4) of the New York Banking Law (the "NYBL") to subordinated certificates of deposit (the "Subordinated Certificates of Deposit") which the New York state-licensed branch (the "New York Branch") of a foreign bank (the "Foreign Bank") proposes to issue.

The Subordinated Certificates of Deposit, which are expected to have a maturity of fifteen years, will state that they are governed by New York law and will constitute subordinated unsecured obligations of both the New York Branch and the Foreign Bank. The Subordinated Certificates of Deposit will be issued in minimum denominations of $100,000 and are expected to qualify as Tier II capital of the Foreign Bank under the risk-based capital guidelines proposed by the central bank of the Foreign Bank's home country (the "Central Bank") in furtherance of the July 1988 Basle Accord. To qualify as Tier II capital of the Foreign Bank under the risk-based capital guidelines proposed by the Central Bank, the Subordinated Certificates of Deposit may not be redeemed or repaid prior to maturity without the prior consent of the Central Bank (with the possible exception of pre-approved payments from a sinking fund).

Continuing Obligation to Pay Interest Despite the Taking of Possession of the New York Branch by the Superintendent of Banks

By acquiring a Subordinated Certificate of Deposit, the holder thereof would agree that if the Superintendent of Banks takes possession of the business and property of the New York Branch at any time when there is no continuing event of default (all of which relate to the insolvency or winding-up of the Foreign Bank), the Superintendent of Banks will pay in full all deposit and other liabilities of the New York Branch which by their terms rank senior in right of payment to the Subordinated Certificates of Deposit, prior to making any payment on the Subordinated Certificates of Deposit. The holders of the Subordinated Certificates of Deposit would be entitled to payment of the Subordinated Certificates of Deposit thereafter upon the earIier of (i) the date upon which payment of the Subordinated Certificates of Deposit is approved by the Central Bank and (ii) the maturity of the Subordinated Certificates of Deposit. Prior to the making of such payment the Superintendent of Banks would retain the funds for such payment. By the express terms of the Subordinated Certificates of Deposit the Foreign Bank would continue to be obligated to make interest payments as they become due on the Subordinated Certificates of Deposit irrespective of the discontinuance of the operations of the New York Branch (unless due provision is made by the Superintendent of Banks or otherwise for the payment of such amounts).

A question has been raised as to whether § 30 of the NYBL might operate to relieve the Foreign Bank of its obligation to pay interest on the Subordinated Certificates of Deposit subsequent to the Superintendent taking possession of the New York Branch at a time when there is no continuing event of default. Such an interpretation would depend upon reading § 606(4)(b) of the NYBL as suggesting that the funds held by the Superintendent of Banks pending the earlier of (i) maturity of the Subordinated Certificates of Deposit and (ii) the consent to the payment thereof by the Central Bank, be considered "amounts remaining unclaimed or unpaid" for purposes of the second sentence of § 606(4)(b). In the event that such funds held by the Superintendent are considered "amounts remaining unclaimed or unpaid" for purposes of the second sentence of § 606(4)(b) and in the event that the Superintendent of Banks has turned over the remaining assets of the Foreign Bank to the principal office of the Foreign Bank pursuant to court order, then the second sentence of § 606(4)(b) provides that the amounts remaining "unclaimed or unpaid" in the Superintendent's hands six months after the turn-over referred to above shall be deposited by the Superintendent as provided in article two of the NYBL.

Section 30(4) of article two of the NYBL provides, in relevant part, that upon receipt by the Superintendent of Banks of unclaimed amounts as trustee for the owners of claims against a foreign banking corporation after completion of the liquidation of its business and property, the banking organization or foreign banking corporation with respect to which the Superintendent has received unclaimed amounts shall be relieved and held harmless from any and all liability for any claim with respect to such unclaimed amounts which exists at the time of receipt by the Superintendent or which may thereafter come into existence on account of such unclaimed amounts. Section 30(4) prevents actions for the recovery of any such unclaimed amount or for interest thereon subsequent to the date of receipt by the superintendent.

Although there is no statutory provision or case law directly on point, we believe that § 30(4) should not be read to relieve the Foreign Bank of its obligation to pay interest in the case of the circumstances described above, notwithstanding the indirect reference to § 30 in the second sentence of § 606(b)(4). The protections contained in § 30 are structured to operate to the benefit of the Foreign Bank to protect it against continuing liability with respect to amounts remaining unclaimed or unpaid in the Superintendent's hands after the turn-over referred to above. The provision of the Subordinated Certificate of Deposit described above does not involve any of the policies involved in the case of unclaimed amounts. Instead, this is a clear contract provision providing for an agreed upon approach to payment between the Foreign Bank and the holder in the event of certain described circumstances. The purpose of the provision in § 30(4)-- relieving a foreign bank of any obligation with respect to unclaimed amounts that have been deposited with the Superintendent of Banks--is not implicated in any way in this contract provision. This contract provision has been included in the Subordinated Certificate of Deposit to assure that the Foreign Bank will continue to be obligated to pay interest on a timely basis pending the determination of the Central Bank that the principal amount of the Subordinated Certificate of Deposit may be paid in advance of its stated maturity date. This condition relating to Central Bank approval has in turn been included to assure that the Foreign Bank obtains the intended benefit of qualifying the Subordinated Certificate of Deposit as Tier II capital. Thus, the interest provision is an explicitly negotiated term of the agreement between the Foreign Bank and the holder of the Subordinated Certificate of Deposit, designed to facilitate the purposes of the Foreign Bank in issuing the Subordinated Certificates of Deposit.

We believe that this contract provision does not implicate the policy underlying § 30(4). In any event, we believe that the protective provisions of § 30(4) can be waived by the Foreign Bank through an express contract provision to accommodate the business purposes of a transaction otherwise determined to be in the best interests of such bank. Such a conclusion is consistent with the New York state policy which appears to be to permit the parties to the debtor-creditor relationship to determine the terms of that relationship as a matter of contract. Gaita v. Windsor Bank , 251 N.Y. 152, 154-155, 167 N.E. 203, 204 (1929); David v. Manufacturers Hanover Trust Co. , 59 Misc. 2d 248, 249, 298 N.Y.S. 2d 847, 848 (1969). There appears to be no public policy that would be contravened by an express contractual obligation on the part of the Foreign Bank to continue to pay interest on the Subordinated Certificates of Deposit subsequent to the taking of possession of the New York Branch by the Superintendent of Banks.

We would very much appreciate your confirming, in writing, that the Banking Department concurs in our opinion that the obligation of the Foreign Bank to continue to pay interest on the Subordinated Certificates of Deposit notwithstanding the taking of possession of the New York Branch by the Superintendent of Banks would not contravene the NYBL or any public policy expressed therein.

Very truly yours,

Paul L. Lee
cc: Patricia Skigen

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