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Opinion  Summary of Selected Opinion 98-204

Date: 10/01/1998
Organization: Division of Banks
Docket Number: 98-204

This opinion was issued in the fourth quarter of 1998.

Table of Contents

Recognizing the validity of a commercial loan transfer from a foreign bank to a trust organizaed by the bank so that the trust may consolidate the commercial loans and issue notes secured by the collateral of said loans

A foreign bank wishes to organize a Trust to which the Bank and its various state-licensed agencies intend to sell 100% participation interests in commercial loans held on their respective books. In exchange for a purchase price amounting to the total outstanding principal balance of the loans plus any accrued and unpaid interest thereon, the Trust will obtain the right to receive all principal and interest payments made by the borrowers. The Trust will retain the right to any collateral or security, which the Bank or its agencies hold or receive in regard to said loans, as well as the right, with the Bank's prior written consent, to subparticipate, sell, pledge, assign, or otherwise transfer the participations it buys from the Bank and its agencies. The Trust will issue Notes of several classes secured by the participation interest to third-party investors; said notes will be repaid with the payments receives, through the Bank as servicer, from the borrowers. Prior to issuing these notes, Standard & Poor's Ratings Services and Moody's Investors Service, Inc. require written confirmation from the Division of Banks whether, in the event that the Commissioner of Banks (the "Commissioner") takes possession of the property and business of the Bank, the transfer of the participation interests from the Bank to the Trust would be recognized by the Commissioner (or another receiver) as a true sale.

Mass. Gen. Laws chapter 167, section 42 permits the Commissioner to seek an injunction restraining a foreign Bank from further proceeding with its business. Section 22 of said chapter 167 authorizes the Commissioner, in certain circumstances, to take possession of the property and business of any bank until it can resume business or until its affairs are liquidated fully. Based upon a review of applicable Massachusetts law, the Division is of the opinion that, in the event the Commissioner took possession of the business and property of the Bank, the Commissioner would recognize the transfer of the participation interests from the Bank to the Trust as a true sale. The Commissioner, therefore, would not have the authority to treat the participation interests as part of the property and business of the Bank in order to satisfy claims against the Bank.

The participation interests would not be subject to the provisions regarding asset collection set forth in Mass. Gen. Laws chapter 167, section 24, nor would they be subject to collection by a receive appointed pursuant to M.G.L. c. 167 § 42. Massachusetts law does not give the Commissioner powers analogous to the "automatic stay" under federal bankruptcy law with respect to foreign banks. Additionally, Massachusetts law does not allow the Commissioner to consolidate substantively the assets of the Trust with the assets of the Bank.

The Division's position is based on the assumption that: (1) all the necessary documentation for the proposed transaction is duly executed; (2) the transaction is treated appropriately for accounting purposes; and (3) the transaction is not otherwise prohibited by state or federal laws or regulations.

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