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Hoping to do business with the RTC? Mountains of red tape stand between RTC's giant warehouse of seized assets, and those seeking to do business with this billion dollar asset caretaker.

Hoping to Do Business with the RTC?

The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) created the Resolution Trust Corporation (RTC). This entity was set up to manage and resolve all cases involving depository institutions previously insured by the Federal Savings and Loan Insurance Corporation (FSLIC) for which a conservator or receivers were appointed from January 1, 1989 through August 8, 1992.

FIRREA authorized RTC to utilize the services of private persons, including asset managers, property managers, appraisers, auctioneers and brokers. In this regard, Congress required these independent contractors to act for the public good and meet minimum standards of competence, integrity, fitness and experience.

These minimum standards are set forth in both FIRREA and in recent regulations proposed by both RTC and the entity that oversees RTC, the so-called "oversight board." The statute and the proposed regulations contain some sweeping rules governing conflicts of interest, ethical responsibilities and the use of confidential information. The bottom line is these rules will preclude many independent contractors from doing business with RTC. This article will explain these rules for those interested in doing business with RTC.

These sticky new rules for contractors do not apply tothose strictly interested in purchasing RTC assets, such as servicing rights.

FIRREA, as interpreted by the proposed regulations, specifies that certain classes of persons may not do business with the RTC. These persons are those who have: * been convicted of a felony; * been removed from, or prohibited

from participating in the affairs of,

any insured depository institution

pursuant to final enforcement action

by any federal banking agency; * demonstrated a pattern or practice

of defalcation (i.e., where an institution

does not receive interest

and/or principal that it is entitled to,

and thereby has a continuing legal

claim) regarding obligations to

insured depository institutions; or * caused a substantial loss to the federal

deposit insurance funds.

With respect to demonstrating a pattern or practice of defalcation, someone demonstrates such a pattern under the regulations if they are subject to continuing legal claims arising from two or more uncured defaults alleged to have resulted in losses aggregating more than $50,000 to one or more financial institutions.

For a person to be subject to this restriction, both elements - more than one uncured default and losses of more than $50,000 - must have occurred. If defaults have been cured, for example, by a nonrecourse borrower tendering deeds in lieu of foreclosure, one of the necessary elements for defalcation is missing. If, on the other hand, a recourse borrower tenders deeds in lieu of foreclosure and the institutions suffer a loss in excess of $50,000, then both of the necessary elements for defalcation are present if the institutions do not treat the receipt of the deed as curing the defaults.

With respect to the prohibition on causing a substantial loss to the federal deposit insurance funds, a person is deemed to have caused such a loss if the loss is $50,000 or more, and is caused in one of three ways: * there is an outstanding final judgement

obtained by the Federal

Deposit Insurance Corporation

(FDIC), FSLIC and its successors,

or the RTC arising from a note or

other obligation or from legal action

on any theory including fraud, negligence

or breach of fiduciary duty; * there is an outstanding final judgement

obtained in favor of an insured

depository institution that is now

held by the FDIC, the FSLIC or its

successors, or the RTC; or * the insurer, having a continuing

legal claim, suffers a substantial

loss as a result of the disposition of

an asset.

Not all losses sustained by the insurance funds are deemed to have been "caused" by a borrower. A nonrecourse borrower on a loan involving a loss to a federal deposit insurance fund, for example, would not per se be regarded as causing a substantial loss to such fund. Thus, a limited partner in a real estate tax shelter that caused a loss to a failed institution would generally not be covered by this restriction. On the other hand, a participant in an unsafe and unsound banking practice that resulted in a substantial loss would not meet minimum standards.

Thus, for example, a general partner in a real estate tax shelter that used a grossly exagerated appraisal in order to obtain an aggressive loan that caused a substantial loss to a failed institution may be prohibited from doing business with the RTC. But, if that general partner on a recourse loan did not use a grossly exagerated appraisal and the loan went into default because of bad local economic conditions, it is unclear whether or not that partner would be prohibited from doing business with RTC. In such a case, the general partner could attempt to justify to the RTC that the substantial losses suffered by the institution (s) were not "caused" by the general partner because the loans went into default only because of bad local economic conditions or some other external factor.

Prospective independent contractors who have caused a substantial loss to one or more financial institutions are not covered by the foregoing prohibition if the said financial institutions are financially sound. That is, if the judgement, legal claim or loss is held by a sound financial institution and not by FDIC, FSLIC and its successors, or RTC, then the prohibition in doing business with RTC wouldn't apply.

In addition to the rules regarding a contractor's background with respect to defaulted loans, the proposed regulations contain procedures for determining contractor fitness and integrity and avoiding conflicts of interest. The proposed regulations also contain prohibitions designed to protect nonpublic information and the integrity of the contracting process.

Conflicts of Interest

Under the proposed regulations, the definition of when a contractor has a conflict of interest that precludes doing business with RTC is board. This is especially true with respect to large organizations that have many employees. The regulations require contractors to provide information and certifications concerning two types of conflicts of interest: * organizational conflicts arising from

the structure and relationships of

the contractor and its related entities,

and * personal conflicts of interest of those

performing work on the contract.

Organizational conflicts are present if 1) performance of the contract may provide a contractor with an unintended advantage that can be used for the benefit of the contractor or any related entity or affiliate, or 2) a private interest or relationship exists within the contractor's organization that could impair the contractor's or a related entity's ability to objectively perform the contract work.

In order to determine if organizational conflicts exist, each contractor is required to provide information on a so-called "certification" about its relationships as controlling shareholder, officer or director of any insured depository institution and descriptions of business organizationally related to the contractor. The contractor is also required to obtain similar information from its "related entities" and to defined in the proposed regulations is quite broad and thus potentially onerous to a large contractor seeking to do business with RTC. "Related entities" is defined as: * the contractor's management officials

who have significant

decisionmaking or policymaking

responsibilities with regard to formulation

or negotiation of,

performance under, and/or monitoring

for compliance with the

contract; * persons controlled by or which control

the contractor (i.e., persons or

entities that directly or indirectly, or

in concert with one or more persons

or subsidiaries, own or control

25 percent or more of the equity, or

otherwise control the management

or policies of the contractor); * organizations related to the contractor

that will perform contract work;

and * assigns of the contractor.

Each contractor is responsible for ensuring that its management officials and other employees who participate personally and substantially on the contract work have no personal, business or financial interests that conflict with the contractor's responsibilities to the RTC. In this regard, contractors are required to obtain certain information from these individuals prior to allowing them to perform contract work. This information primarily concerns the relationships of these officials and employees, and those of their spouses and minor children, with the depository institution whose assets are the subject of the contract and the relationships with persons having an interest in the assets that are subject of the particular contract. Contractors are also required to establish procedures to ensure that they are advised of subsequent conflicts of interest that may arise.

Contractors and their related entities are required to adhere to certain broad requirements during the term of a contract with RTC. The contractor and its related entities are generally prohibited from: * continuing to perform work for the

RTC if a conflict of interest is discovered

that has not been

previously disclosed; * improperly using property controlled

by reason of the contract for

the personal benefit of the

contractor or any other person or

entity; and * making unauthorized promises or

commitments on behalf of the RTC.

The certifications that a contractor must submit to RTC should contain information about: * relevant business experience, financial

stability and licenses necessary

to perform the contract work; * relationships with insured depository

institutions, actions or investigations

by governmental authorities,

present or potential liabilities to

federal banking authorities, and liabilities

to clients for fraulent

activities; and * any persons to participate personally

and substantially in performing

work on the contract whether

through decision, approval, disapproval,

recommendation or the

rendering of advice; or * any subcontractor (other than sub-contractors

providing day-to-day

services for RTC or subcontractors

providing routine maintenance and

supplies for an asset) to perform

contract work, who is a member of

one of the classes deemed ineligible

to perform contract work.

From the information provided on a certification, the RTC will determine whether each contractor meets minimum standards of fitness and integrity. In certain situations, even though a contractor is not barred by FIRREA or the proposed regulations from performing contract work, the RTC may determine that the contractor does not meet the requisite minimum standards of fitness and integrity. In such event, the contractor will be notified within 30 days of such determination.

If the certification discloses that the contractor or a related entity is in one of the classes of persons ineligible to contract with RTC under FIRREA (e.g., an employee with significant policy decisions on an RTC contract had caused a loss of at least $50,000 to a savings and loan association that had been taken over by FSLIC), then the contractor is automatically ineligible to contract with RTC.

If the certification discloses that the contractor or a related entity has an organizational conflict of interest with regard to an RTC contract, then the contractor need not be ineligible necessarily to contract with RTC. Instead, the so-called "Contractors' Conflicts Committee" (or for law firms seeking to do business with RTC, the "Outside Counsel Conflicts Committee of the FDIC"), comprised of officials from RTC and the FDIC, may decide to allow the contractor to do business with RTC notwithstanding the existence of an organizational conflict of interest.

If the conflict is "significant," then the committee is required to refer the matter to the board of directors of RTC for them to determine if the contractor has especial expertise not otherwise available or that engagement of the contractor is in the best interest of the government.

If the certification discloses that the contractor (including management officials and other persons who exercise discretion with regard to work performed pursuant to an RTC contract) has a personal conflict of interest, then a waiver may be requested from the conflicts committee. Thus, for example, if a contractor's management official, or his wife or minor child, was or is an officer, director, controlling shareholder or employee of any insured depository institution in the United States, this information must be disclosed to the contractor and the contractor must decide if such person has a personal conflict of interest. If the contractor believes that such conflict may exist, then the contractor could request a waiver from the committee.

Unfair advantage

The proposed regulations describe three situations in which a contractor may have an undue advantage over competitors because of prior or current work done for the RTC. In those circumstances, restrictions (subject to a waiver issue by the Contractors' Conflicts Committee) are imposed on the contractor from benefitting from such undue advantage.

Under the proposed regulations, a contractor engaged by the RTC to develop a plan of action for a specific insured institution cannot, without a waiver, enter into subsequent contracts with the RTC to implement its recommendations or assist others in a contract that would implement its recommendations. Similarly, when a contractor is hired to manage, lease, value or establish a sales price for an asset or group of assets, the contractor cannot enter into a subsequent contract with the RTC to purchase such asset or assets or assist someone else in purchasing such asset or assets from the RTC. Finally, a contractor is prohibited from acting for the RTC in the same particular matter in which it has a business or financial interest. The contractor is similarly prohibited if a related entity has a business or financial interest unless the entity is screened in a manner satisfactory to the RTC.

A waiver granted by RTC would allow a consultant to do business with an institution or asset which the consultant has acted upon under a contract with RTC. Unfortunately the proposed regulations do not specify the exact requirements that must be satisfied in order to obtain a waiver. A footnote to the proposed regulations does state that "(a)n open and competitive bidding procedure or evidence that sufficient screening mechanisms are in place may be sufficient to permit the granting of a waiver of the restrictions on concurrent and subsequent activities of a contractor."

A contractor, during the course of any procurement, is barred from offering any business opportunity or future employment to any RTC employee who has personal or direct responsibility for that procurement. Contractors are prohibited from giving or offering anything of value to RTC employees, and from soliciting from RTC employees any proprietary or source selection information concerning the procurement. Prior to the award of a contract, each contractor is required to provide a certification that its employees who prepared the bid, offer or proposal were aware of the foregoing restrictions and the contractor knows of no violations or possible violations of the provisions.


The RTC will instruct each contractor as to the information it deems to be confidential with regard to a particular contract. The contractor and its related entities are then prohibited from disclosing this information, except as necessary to perform contract work and from using or allowing the use of such confidential information to further a private interest or other than as contemplated by the contract. The contractor is responsible for taking appropriate measures to ensure the confidentiality is maintained and that the information is not used inappropriately.

The proposed regulations describe minimum measures that contractors must take to ensure the confidentiality of information, including notifying employees, related entities and subcontractors of the need to not disclose nonpublic information and requiring recipients of nonpublic information to provide a certication that "such person understands the limitations on disclosure and use and will maintain the confidentiality of the information and not use it other than as contemplated by the contract.


Contractors are allowed to obtain the services of consultants or advisors to assist them in obtaining contracts. However, contractors may not engage consultants on a contingent fee basis. In addition, contractors are required to include with any bid, offer or proposal made to the RTC, information concerning consulting contracts and payments made to consultants to obtain contracts with the RTC.

The proposed regulations provide that the RTC may rescind a contract if: * the contractor fails to disclose a

material fact to the RTC; * there are many material changes in

the representations or certifications

made by the contractor; * a personal or organizational conflict

arises that is not waived; * the contractor is subsequently determined

to be ineligible to contract

with the RTC; * the contractor has been subject to a

final enforcement action by any

bank regulatory agency; or * the contractor violates any provision

of these regulations.

If the RTC decides to rescind a contract, the contractor will be ineligible to enter into further contracts with the RTC. This disqualification will also apply to related entities to the contractor, unless determined otherwise by the Contractors' Conflicts Committee. The RTC may seek damages from any contractor or subcontractor whose actions prompted the rescission.

FIRREA and the proposed regulations thereunder delineate a myriad of rules concerning ethical considerations and related conflicts of interest. Contractors will generally be precluded from doing business with RTC if they fall into one of the prohibited classes specified by FIRREA (e.g., caused a substantial loss to FSLIC) or if a conflict of interest exists that is not waived.

The rules concerning "related entities" place burdens on contractors to find out if employees and other parties create a problem for qualifying to do business with RTC. The certification requirements are detailed and need to be addressed carefully. In obtaining RTC business, contractors should be careful not to appear to have an undue advantage over competitors in the absence of a waiver. Contractors may retain consultants if the consultants are not compensated on a contingent fee basis.

In summary, doing business with the RTC will offer significant financial opportunities for contractors, but the business will carry the burden of addressing the many ethical considerations prescribed by both Congress and the RTC.

Gary Silversmith is an attorney with a J.D. and masters of law in tax from Georgetown University. He is a principal with Washington, D.C.-based Silversmith Financial Corporation and of counsel to Barrett & Schuler.
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Title Annotation:Resolution Trust Corp.
Author:Silversmith, Gary
Publication:Mortgage Banking
Date:Feb 1, 1990
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