Federal Deposit Insurance Corporation v. Philadelphia Gear Corp.

In response to the financial crisis of the Great Depression, Congress enacted the Federal Deposit Insurance Act (the act) to restore public confidence in the banking system and to protect depositors’ hard assets that had been entrusted to a bank. The act created the Federal Deposit Insurance Corporation (FDIC) (defendant). Banks were required to purchase deposit insurance from the FDIC. If a bank failed, the FDIC insured each depositor up to $100,000 of total deposits. Philadelphia Gear Corporation (plaintiff) sold goods to Orion Manufacturing Corporation (Orion). Orion had Penn Square Bank (the bank) issue a standby letter of credit— a letter in which the issuing bank guarantees someone else’s payment—to Philadelphia Gear. Under this letter, the bank guaranteed that it would pay Philadelphia Gear up to $142,500 if Orion failed to pay its invoices. In exchange for the letter, Orion gave the bank a promissory note agreeing to reimburse any payments the bank ever had to make to Philadelphia Gear. The bank treated the letter as a contingent liability. Later, the bank became insolvent. At that point, Orion had $700,000 of unpaid invoices covered by the letter. Philadelphia Gear made an insurance claim to the FDIC for $100,000, contending that the standby letter of credit was a deposit at the bank and, therefore, insured by the FDIC. The FDIC rejected the claim, disagreeing that the letter qualified as an insured deposit. The FDIC had a long history of considering a letter of credit as a deposit only if the letter was backed by a customer’s account or cash and the bank treated it as a direct liability. If a letter of credit was backed by a contingent note and the bank treated it as a contingent liability, the FDIC did not consider the letter a deposit and did not charge the bank premiums to insure it. Philadelphia Gear sued. The district court ruled that despite the FDIC’s interpretation, this standby letter of credit met the clear statutory definition of a deposit and was insured. The Tenth Circuit affirmed the ruling. The United States Supreme Court granted certiorari.