Philadelphia Gear Corp. v. Federal Deposit Ins. Corp., s. 84-1901
Decision Date | 27 December 1984 |
Docket Number | Nos. 84-1901,84-2007,s. 84-1901 |
Citation | 751 F.2d 1131 |
Parties | 40 UCC Rep.Serv. 240 PHILADELPHIA GEAR CORPORATION, Plaintiff-Appellant Cross-Appellee, v. FEDERAL DEPOSIT INSURANCE CORPORATION, a national corporation, in its official capacity as Receiver of Penn Square Bank, N.A., and Federal Deposit Insurance Corporation, a national corporation, in its corporate capacity, Defendants-Appellees Cross-Appellants. |
Court | U.S. Court of Appeals — Tenth Circuit |
Gerald F. Slattery, Jr. of Gordon, Arata, McCollam, Stuart & Duplantis, New Orleans, La. (William B. Rogers and R. Steven Haught, Ames, Daugherty, Black, Ashabranner, Rogers & Fowler, Oklahoma City, Okl., of counsel), for plaintiff-appellant/cross-appellee.
Charles C. Baker of Gable & Gotwals, Tulsa, Okl. (James Vogt and Ross A. Plourde of Reynolds, Ridings & Hargis, Oklahoma City, Okl., and David L. Bryant of Gable & Gotwals, Tulsa, Okl. with him on briefs; Daniel W. Persinger, Deputy Gen. Counsel, and Lawrence F. Bates, Counsel, Federal Deposit Insurance Corporation Washington, D.C., of counsel), for defendants-appellees/cross-appellants.
Before DOYLE, McWILLIAMS and LOGAN, Circuit Judges.
This appeal is another arising out of the many suits resulting from the failure of the Penn Square Bank, N.A. in Oklahoma City, Oklahoma, in 1982. In this case, plaintiff Philadelphia Gear Corporation seeks to enforce, as beneficiary, a standby letter of credit issued by Penn Square before its insolvency. The parties dispute the amount covered by the document. Philadelphia Gear seeks judgment against the Federal Deposit Insurance Corporation (FDIC) in its capacity as insurer for $100,000.00 in deposit insurance proceeds and seeks judgment against the FDIC as receiver of Penn Square for $624,728.50, which it alleges to be the total uninsured outstanding balance of the letter of credit. Several legal issues are presented in this appeal.
The FDIC in its capacity as insurer argues that the district court, 587 F.Supp. 294, erred when it held: (1) that the standby letter of credit represented a "deposit" as defined in 12 U.S.C. Sec. 1813(l )(1) and thus was an insured deposit under 12 U.S.C. Sec. 1813(m); (2) that Philadelphia Gear was the insured depositor for purposes of the statute; and (3) that prejudgment interest should be assessed against the FDIC as insurer of the $100,000.00 deposit insurance proceeds. Philadelphia Gear, as cross-appellant, claims that the district court erred in concluding that the letter of credit is ambiguous and in construing its amount as $145,200.00 rather than the larger sum claimed by Philadelphia Gear.
Orion Manufacturing Corporation, a customer of Penn Square, produces pumping units for oil production in Oklahoma and Texas. Philadelphia Gear is a trade supplier who furnished some of the major elements of Orion's pumping jacks. On April 23, 1981, Penn Square issued an irrevocable standby letter of credit upon the application of Orion for the benefit of Philadelphia Gear. The letter was for $145,200.00 and expired August 1, 1982. The letter provided that drafts drawn upon it must be accompanied by:
"(1) Your [Philadelphia Gear's] signed statement that you have invoiced Orion Manufacturing Corporation and that said invoices have remained unpaid for at least fifteen (15) days
(2) Copy of all invoices
(3) All invoices will be verified for authenticity and payment with Orion Manufacturing Corporation.
(4) We hereby agree with drawers, endorsers and bona fide holders of all drafts, drawn under and in compliance with the terms of this credit, that such drafts will be duly honored upon presentation to the drawer."
Pl. Ex. 1. That same day Orion executed an unsecured note in the amount of $145,200.00 in favor of Penn Square as security for the letter of credit. The maturity date of the note was August 1, 1982, the same day the letter of credit expired.
A few days later, Penn Square, at the request of Philadelphia Gear, amended the letter of credit by deleting paragraph (3), quoted above, which required invoices to be verified for authenticity, and added the following language requested by Philadelphia Gear:
On July 5, 1982, the Comptroller of the Currency declared Penn Square insolvent and appointed the FDIC as its receiver. Two days later Philadelphia Gear, through a remitting bank, presented to the receiver for payment three drafts on the letter of credit totalling $242,370.00. On July 22, 1982, Philadelphia Gear, in the same manner presented to the receiver for payment five additional drafts on the letter of credit totalling $482,358.50. A few days later Philadelphia Gear received a letter dated July 21, 1982, from Penn Square's liquidator formally giving notice that the receiver disaffirmed "any and all" obligations under the letter of credit in question and stating that it would not honor any drafts thereon. During the next week, the liquidator returned unpaid all eight drafts that had been presented under the letter of credit. This litigation ensued. After the district court ruled in favor of Philadelphia Gear on all of the issues dealing with deposit insurance and in favor of the FDIC as receiver on the question of the total value of the letter of credit, both sides appealed.
The first issue we consider is whether the standby letter of credit is a "deposit" within the meaning of 12 U.S.C. Sec. 1813(l )(1). That section defines a "deposit" as:
"the unpaid balance of money or its equivalent received or held by a bank in the usual course of business and ... which is evidenced by ... a letter of credit ... 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 ... a promissory note upon which the person obtaining any such credit or instrument is primarily or secondarily liable ...."
The district court, after examining the section's legislative history, concluded that the letter of credit satisfied Sec. 1813(l )(1)'s definition of a deposit:
R. III, 755.
The FDIC argues that the "money or its equivalent received" element of the section's definition is unsatisfied because there was no advance made on the promissory note executed by Orion in favor of Penn Square before the bank became insolvent. Both Orion and Penn Square understood that nothing would be considered due on this note nor would interest be charged unless and until Philadelphia Gear presented to Penn Square the requisite documents detailed in the letter of credit, which it had not done at the time of the bank's insolvency. The Uniform Commercial Code requires that negotiable instruments contain an unconditional promise to pay on the part of the maker or drawer. See U.C.C. Sec. 3-104(1)(b), Okla.Stat.Ann. tit. 12A Sec. 3-104(1)(b). Consequently, the FDIC argues that Orion's note was nonnegotiable because it represented only a contingent obligation. We do not agree.
Whatever contingencies may have been orally agreed to between Orion and Penn Square, none are expressed in the note itself. The negotiability of an instrument must be determined from the face of the instrument, without regard to extraneous agreements. See U.C.C. Sec. 3-105(2)(a) and Official Comment. Orion's promissory note to Penn Square is a form note with standard terms. The note states that the purpose of the loan was "Back up Letter of Credit # 1042," but it does not contain any expression that no money has been advanced. The note's negotiability is not predicated on the presentation of documents under the letter of credit. See id. Sec. 3-105(1)(d) ( ).
Even if we ignore the note's appearance as an unconditionally negotiable instrument, what is important here is that the bank agreed to make funds available for the benefit of its customer, Orion, and by the promissory note it secured Orion's obligation to pay the bank for any advances it made. A commercial transaction occurred that set in motion other commercial activity in reliance thereon; the bank issued a document upon which its customer's supplier could draw in lieu of relying upon the customer's own ability to pay. The bank's customer had signed a promissory note obligating it to repay advances made by the bank, with interest. Therefore, we hold that the transaction qualifies as one in which "money or its equivalent" was issued in exchange for a promissory note.
The FDIC also argues that this is not a letter of credit on which the bank is "primarily" liable. To properly analyze this issue requires an understanding of the two types of letters of credit: the commercial letter, which is used to facilitate the documentary sale of goods, and the standby letter, which is used to protect a third party against the customer's default on an underlying obligation. Professor Clark describes the similarities and differences of these two documents:
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