FDIC v. PHILADELPHIA GEAR

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Case Basics
Docket No. 
84-1972
Petitioner 
FDIC
Respondent 
Philadelphia Gear
Advocates
(Argued the cause for the petitioner)
(Argued the cause for the respondent)
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Facts of the Case 

Orion Manufacturing Corporation (Orion) was a customer of Philadelphia Gear Corporation (PG). To provide a guarantee of payment to PG, Orion obtained a letter of credit for the benefit of PG from Penn Square Bank, N.A. (Bank). If Orion failed to pay an invoice to PG for at least 15 days, PG could draw upon that line of credit, up to $145,200. This type of credit line, meant to guarantee payment to a seller, is referred to as a standby letter of credit. To back up that line of credit, Orion executed an unsecured promissory note in favor of the Bank. This note is referred to as a backup letter of credit. Nothing was due on the backup letter of credit unless PG presented drafts on the standby letter of credit. Thus the backup letter was a contingent promissory note. The Bank did not credit any account of Orion's in exchange for the note, and did not treat its own assets as increased by its acceptance of the note. In 1982, the Bank was declared insolvent and the Federal Deposit Insurance Corporation (FDIC) was appointed its receiver. PG presented drafts on the standby letter of credit for goods delivered before the Bank's insolvency, but the FDIC returned them unpaid. PG sued the FDIC, claiming that the standby letter of credit was an insured deposit under the definition of "deposit" set forth at 12 U.S.C. Section 1813(l)(1), and that PG was therefore entitled to $100,000 in deposit insurance.

Question 

Is a standby letter of credit backed by a contingent promissory note insured as a "deposit" under the federal deposit insurance program?

Conclusion 
Decision: 6 votes for FDIC, 3 vote(s) against
Legal provision: 12 U.S.C. 1813

No. In light of the longstanding interpretation of the FDIC, such a letter does not create a deposit. This interpretation is consistent with Congress' intent in creating the FDIC, namely ensuring that a deposit of "hard earnings" entrusted to a bank would not lead to a tangible loss in the event of a bank failure. In this case, the standby letter of credit backed by a contingent promissory note did not entrust any noncontingent assets to the Bank. Therefore, such a letter of credit does not give rise to an insured deposit.

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FDIC v. PHILADELPHIA GEAR. The Oyez Project at IIT Chicago-Kent College of Law. 20 October 2014. <http://www.oyez.org/cases/1980-1989/1985/1985_84_1972>.
FDIC v. PHILADELPHIA GEAR, The Oyez Project at IIT Chicago-Kent College of Law, http://www.oyez.org/cases/1980-1989/1985/1985_84_1972 (last visited October 20, 2014).
"FDIC v. PHILADELPHIA GEAR," The Oyez Project at IIT Chicago-Kent College of Law, accessed October 20, 2014, http://www.oyez.org/cases/1980-1989/1985/1985_84_1972.