Collateralization of public deposits.

• Author: Dotson, Betsy

Growing concern over a federal court decision handed down more than a year ago has prompted the Government Finance Officers Association (GFOA) to take the lead in advising state and local government depositors to follow the procedures necessary to ensure compliance with the federal statute governing collateralized security interests and to call for federal statutory changes. At its recent annual conference, the association passed a policy statement reminding those responsible for public unit deposits about the importance of complying with the requirements of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). FIRREA mandates that certain steps be taken to maintain an enforceable security interest in collateral pledged to secure deposits against the receiver of a failed financial institution. Also recommended by GFOA are changes in the FIRREA statute itself as it relates to these requirements.

North Arkansas v. Barrett

In April 1992, the U.S. Court of Appeals for the Eighth Circuit handed down its decision in North Arkansas Medical Center v. Barrett, 962 F.2d 780 (8th Cir. 1992). While the facts in the case are somewhat unclear, the essential elements are as follows: the North Arkansas Medical Center (NAMC) had, over a period of time, placed almost $1 million in deposits with Guaranty Savings and Loan Association (Guaranty). Because this amount exceeded the $100,000 coverage provided under federal deposit insurance, collateral was pledged by Guaranty to secure the uninsured funds. Guaranty subsequently sold the collateral without the knowledge of NAMC. NAMC's release of the collateral was obtained later, and substitute collateral was designated by Guaranty. The collateral was held by a third-party custodian.

Soon thereafter, Guaranty was placed in receivership and the Federal Deposit Insurance Corporation (FDIC) ultimately became the receiver. NAMC brought an action to recover its funds based on its collateralized security interest. The district court dismissed NAMC's complaint, and the Eighth Circuit affirmed that decision.

The court's decision focused on the provisions in FIRREA, particularly Section 1823(e) of Title 12 of the U.S. Code, specifying the requirements that must be satisfied if an asset acquired by the receiver of a failed institution is to be subject to the claims of a depositor based on a security interest. By the terms of the statute, a valid security agreement 1) is in writing, 2) was executed by the depository institution and the entity making the claim contemporaneously with the acquisition of the asset, 3) was approved by the board of directors or loan committee of the institution and reflected in the minutes of that group, and 4) has been an official record of...