476 U.S. 426 (1986), 84-1972, Federal Deposit Insurance Corporation v. Philadelphia Gear Corp.

Docket Nº:No. 84-1972
Citation:476 U.S. 426, 106 S.Ct. 1931, 90 L.Ed.2d 428, 54 U.S.L.W. 4525
Party Name:Federal Deposit Insurance Corporation v. Philadelphia Gear Corp.
Case Date:May 27, 1986
Court:United States Supreme Court
 
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Page 426

476 U.S. 426 (1986)

106 S.Ct. 1931, 90 L.Ed.2d 428, 54 U.S.L.W. 4525

Federal Deposit Insurance Corporation

v.

Philadelphia Gear Corp.

No. 84-1972

United States Supreme Court

May 27, 1986

        Argued March 4, 1986

        CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR

        THE TENTH CIRCUIT

        Syllabus

        On the application of a customer of respondent, a bank issued a standby letter of credit for respondent's benefit in the amount of $145,200. The letter of credit provided that a draft drawn upon it would be honored by the bank only if accompanied by respondent's signed statement that the customer had failed to make payment for invoiced goods. On the same day that the letter of credit was issued, the customer executed an unsecured promissory note in the bank's favor. The customer and the bank understood the liability on the note to be contingent on respondent's presenting drafts on the letter of credit after the customer's nonpayment. Subsequently, the bank was declared insolvent, and petitioner Federal Deposit Insurance Corporation (FDIC) was appointed its receiver. Respondent then presented to the FDIC drafts on the letter of credit for payment of over $700,000 worth of goods delivered to the customer before the bank became insolvent. When the drafts were returned unpaid, respondent sued the FDIC in Federal District Court, alleging that the letter of credit backed by a promissory note was an insured deposit under the definition of "deposit" in 12 U.S.C. § 1813(1)(1) as an unpaid balance of "money or its equivalent" received or held by a bank that, inter alia, is evidenced by a letter of credit, and that therefore respondent was entitled to $100,000 in deposit insurance, this being the maximum amount insured by the FDIC. The District Court agreed, and the Court of Appeals affirmed.

        Held: A standby letter of credit backed by a contingent promissory note does not give rise to an insured deposit. This has been the FDIC's longstanding interpretation, and such interpretation is consistent with Congress' purpose in creating federal deposit insurance to protect the assets and "hard earnings" that businesses and individuals have entrusted to banks. This purpose would not be furthered by extending deposit insurance to cover a standby letter of credit backed by a contingent promissory note, which involves no such surrender of assets or hard earnings to the bank's custody. In this case, the bank was not in possession of

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any of respondent's or the customer's assets when it went into receivership. Pp. 430-440.

        751 F.2d 1131, reversed and remanded.

        O'CONNOR, J., delivered the opinion of the Court, in which BURGER, C.J., and BRENNAN, WHITE, POWELL, and STEVENS, JJ., joined. MARSHALL, J., filed a dissenting opinion, in which BLACKMUN and REHNQUIST, JJ., joined, post, p. 440.

        O'CONNOR, J., lead opinion

        JUSTICE O'CONNOR delivered the opinion of the Court.

       We granted certiorari to consider whether a standby letter of credit backed by a contingent promissory note is insured as a "deposit" under the federal deposit insurance program. We hold that, in light of the longstanding interpretation of petitioner Federal Deposit Insurance Corporation (FDIC) that such a letter does not create a deposit and, in light of the fact that such a letter does not entrust any noncontingent assets to the bank, a standby letter of [106 S.Ct. 1933] credit backed by a contingent promissory note does not give rise to an insured deposit.

        I

        Orion Manufacturing Corporation (Orion) was, at the time of the relevant transactions, a customer of respondent Philadelphia

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Gear Corporation (Philadelphia Gear). On Orion's application, the Penn Square Bank, N.A. (Penn Square) issued a letter of credit for the benefit of Philadelphia Gear in the amount of $145,200. The letter of credit provided that a draft drawn upon the letter of credit would be honored by Penn Square only if accompanied by Philadelphia Gear's "signed statement that [it had] invoiced Orion Manufacturing Corporation and that said invoices have remained unpaid for at least fifteen (15) days." App. 25. Because the letter of credit was intended to provide payment to the seller only if the buyer of the invoiced goods failed to make payment, the letter of credit was what is commonly referred to as a "standby" or "guaranty" letter of credit. See, e.g., 12 CFR § 337.2(a), and n. 1 (1985) (defining standby letters of credit and mentioning that they may "`guaranty' payment of a money obligation"). A conventional "commercial" letter of credit, in contrast, is one in which the seller obtains payment from the issuing bank without looking to the buyer for payment even in the first instance. See ibid. (distinguishing standby letters of credit from commercial letters of credit). See also Verkuil, Bank Solvency and Guaranty Letters of Credit, 25 Stan.L.Rev. 716, 717-724 (1973); Arnold & Bransilver, The Standby Letter of Credit -- The Controversy Continues, 10 U.C.C.L.J. 272, 277-279 (Spring 1978).

        On the same day that Penn Square issued the standby letter of credit, Orion executed an unsecured promissory note for $145,200 in favor of Penn Square. App. 27. The purpose of the note was listed as "Back up Letter of Credit." Ibid. Although the face of the note did not so indicate, both Orion and Penn Square understood that nothing would be considered due on the note, and no interest charged by Penn Square, unless Philadelphia Gear presented drafts on the standby letter of credit after nonpayment by Orion. 751 F.2d 1131, 1134 (CA10 1984). See also Tr. of Oral Arg. 32.

        On July 5, 1982, Penn Square was declared insolvent. Petitioner FDIC was appointed its receiver. Shortly thereafter,

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Philadelphia Gear presented drafts on the standby letter of credit for payment of over $700,000 for goods delivered before Penn Square's insolvency. The FDIC returned the drafts unpaid. 751 F.2d at 1133-1134.

        Philadelphia Gear sued the FDIC in the Western District of Oklahoma. Philadelphia Gear alleged that the standby letter of credit was an insured deposit under the definition of "deposit" set forth at 12 U.S.C. § 1813(l)(1), and that Philadelphia Gear was therefore entitled to $100,000 in deposit insurance from the FDIC. See 12 U.S.C. § 1821(a)(1) (setting forth $100,000 as the maximum amount generally insured by the FDIC for any single depositor at a given bank). In apparent hopes of obtaining additional funds from the FDIC in the latter's capacity as receiver, rather than as insurer, respondent also alleged that terms of the standby letter of credit allowing repeated reinstatements of the credit made the letter's total value more than $145,200.

       The District Court held that the total value of the standby letter of credit was $145,200, App. B to Pet. for Cert. 20a, 28a-30a; that the letter was an insured deposit on which the FDIC was liable for $100,000 in deposit insurance, id. at 37a-43a; and that Philadelphia Gear was entitled to prejudgment interest on that $100,000, id. at 43a. The FDIC appealed from the District Court's ruling that the standby letter of credit backed by a contingent promissory note constituted a "deposit" for purposes of 12 U.S.C. § 1813(l)(1) and its ruling that Philadelphia Gear was entitled to an award of prejudgment interest. Philadelphia Gear cross-appealed from the District [106 S.Ct. 1934] Court's ruling on the total value of the letter of credit.

        The Court of Appeals for the Tenth Circuit reversed the District Court's award of prejudgment interest, 751 F.2d at 1138-1139, but otherwise affirmed the District Court's decision. As to the definition of "deposit," the Court of Appeals held that a standby letter of credit backed by a promissory note fell within the terms of 12 U.S.C. § 1813(l)(1)'s definition

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of "deposit," and was therefore insured. Id. at 1134-1138. We granted the FDIC's petition for certiorari on this aspect of the Court of Appeals' ruling. 474 U.S. 918 (1985). We now reverse.

        II

        Title 12 U.S.C. § 1813(l)(1) provides:

The term "deposit" means --

(1) the unpaid balance of money or its equivalent received or held by a bank in the usual course of business and for which it has given or is obligated to give credit, either conditionally or unconditionally, to a commercial . . . account, or which is evidenced by . . . a letter of credit or a traveler's check on which the bank is primarily liable: Provided, That, without limiting the generality of the term "money or its equivalent," any such account or instrument must be regarded as evidencing the receipt of the equivalent of money when credited or issued in exchange for checks or drafts or for a promissory note upon which the person obtaining any such credit or instrument is primarily or secondarily liable. . . .

        Philadelphia Gear successfully argued before the Court of Appeals that the standby...

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