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U.S. Supreme Court

FDIC v. Philadelphia Gear Corp., 476 U.S. 426 (1986)

Federal Deposit Insurance Corporation v. Philadelphia Gear Corp.

No. 84-1972

Argued March 4, 1986

Decided May 27, 1986

476 U.S. 426


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

Page 476 U. S. 427

any of respondent's or the customer's assets when it went into receivership. Pp. 476 U. S. 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. 476 U. S. 440.

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