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.
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 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
Page 476 U. S. 428
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,
Page 476 U. S. 429
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 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
Page 476 U. S. 430
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 letter of credit backed by a contingent
promissory note constituted a "deposit" under 12 U.S.C. §
1813(
l)(1) because that letter was one on which the bank
was primarily liable, and evidenced the receipt by the bank of
"money or its equivalent" in the form of a promissory note upon
which the person obtaining the credit was primarily or secondarily
liable. The FDIC does not here dispute that the bank was primarily
liable on the letter of credit. Brief for Petitioner 7, n. 7. Nor
does the FDIC contest the fact that the backup note executed by
Orion is, at least in some sense, a "promissory note."
See
Tr. of Oral Arg. 7 (remarks of Mr. Rothfeld, representing the FDIC)
("It was labeled a note. It can be termed a note"). The FDIC
argues, rather, that it has consistently interpreted §
1813(
l)(1) not to
Page 476 U. S. 431
include standby letters of credit backed only by a contingent
promissory note, because such a note represents no hard assets, and
thus does not constitute "money or its equivalent." Because the
alleged "deposit" consists only of a
contingent liability,
asserts the FDIC, a standby letter of credit backed by a contingent
promissory note does not give rise to a "deposit" that Congress
intended the FDIC to insure. Under this theory, while the note here
may have been labeled a promissory note on its face, and may have
been a promissory note under state law, it was not a promissory
note for purposes of the federal law set forth in 12 U.S.C. §
1813(
l)(1).
See D'Oench, Duhme & Co. v. FDIC,
315 U. S. 447,
315 U. S. 456
(1942) (holding that liability on a promissory note acquired by the
FDIC is a federal question);
First National Bank v.
Dickinson, 396 U. S. 122,
396 U. S.
133-134 (1969) (holding that federal law governs the
definition of branch banking under the McFadden Act).
The Court of Appeals quite properly looked first to the language
of the statute.
See Florida Power & Light Co. v.
Lorion, 470 U. S. 729,
470 U. S. 735
(1985);
United States v. Yermian, 468 U. S.
63,
468 U. S. 68
(1984). Finding the language of the proviso in §
1813(
l)(1) sufficiently plain, the Court of Appeals looked
no further. But as the FDIC points out, the terms "letter of
credit" and "promissory note," as used in the statute, have a
federal definition, and the FDIC has developed and interpreted
those definitions for many years within the framework of the
complex statutory scheme that the FDIC administers. The FDIC's
interpretation of whether a standby letter of credit backed by a
contingent promissory note constitutes a "deposit" is consistent
with Congress' desire to protect the hard earnings of individuals
by providing for federal deposit insurance. Since the creation of
the FDIC, Congress has expressed no dissatisfaction with the FDIC's
interpretation of "deposit"; indeed, Congress in 1960 adopted the
FDIC's regulatory definition as the statutory language. When we
weigh all these factors together, we are
Page 476 U. S. 432
constrained to conclude that the term "deposit" does not include
a standby letter of credit backed by a contingent promissory
note.
A
Justice Holmes stated that, as to discerning the
constitutionality of a federal estate tax, "a page of history is
worth a volume of logic."
New York Trust Co. v. Eisner,
256 U. S. 345,
256 U. S. 349
(1921). Although the genesis of the Federal Deposit Insurance Act
may not be quite so powerful a substitute for legal analysis, that
history is worthy of at least a page of recounting for the light it
sheds on Congress' purpose in passing the Act.
Cf. Watt v.
Alaska, 451 U. S. 259,
451 U. S. 266
(1981) ("The circumstances of the enactment of particular
legislation may persuade a court that Congress did not intend words
of common meaning to have their literal effect").
When Congress created the FDIC, the Nation was in the throes of
an extraordinary financial crisis.
See generally F. Allen,
Since Yesterday: The Nineteen-Thirties in America 98-121 (1940); A.
Schlesinger, The Crisis of the Old Order 474-482 (1957). More than
one-third of the banks in the United States open in 1929 had shut
their doors just four years later. Bureau of the Census, Historical
Statistics of the United States: Colonial Times to 1970, pt. 2, pp.
1019, 1038 (1976). In response to this financial crisis, President
Roosevelt declared a national banking holiday effective the first
business day after he took office. 48 Stat. 1689. Congress in turn
responded with extensive legislation on banking, including the laws
that gave the FDIC its existence.
Congress' purpose in creating the FDIC was clear. Faced with
virtual panic, Congress attempted to safeguard the hard earnings of
individuals against the possibility that bank failures would
deprive them of their savings. Congress passed the 1933
provisions
"[i]n order to provide against a repetition of the present
painful experience in which a vast sum of
assets and purchasing
power is 'tied up.'"
S.Rep. No. 77, 73d Cong., 1st Sess., 12 (1933) (emphasis added).
The
Page 476 U. S. 433
focus of Congress was therefore upon ensuring that a deposit of
"hard earnings" entrusted by individuals to a bank would not lead
to a tangible loss in the event of a bank failure. As the chairman
of the relevant Committee in the House of Representatives explained
on the floor:
"[T]he purpose of this legislation is to protect the people of
the United States in the right to have banks in which their
deposits will be safe. They have a right to expect of Congress the
establishment and maintenance of a system of banks in the United
States where citizens may place their hard earnings with reasonable
expectation of being able to get them out again upon demand. . .
."
"
* * * *"
"[The purpose of the bill is to ensure that] the community is
saved from the shock of a bank failure, and every citizen has been
given an opportunity to withdraw his deposits. . . ."
"
* * * *"
"The public . . . demand of you and me that we provide a banking
system worthy of this great Nation and banks in which citizens may
place the fruits of their toil and know that a deposit slip in
return for their hard earnings will be as safe as a Government
bond."
77 Cong.Rec. 3837, 3838, 3840 (1933) (remarks of Rep. Steagall).
See also id. at 3913 (remarks of Rep. Keller) ("[We must
make] it absolutely certain that . . . any and every man, woman, or
child who puts a dollar in any bank can absolutely know that he
will under no circumstances lose a single penny of it");
id. at 3924 (remarks of Rep. Green) ("It is time that we
pass a law so secure that, when a man puts his money in a bank he
will know for sure that, when he comes back, it will be there"). To
prevent bank failure that resulted in the tangible loss of hard
assets was therefore the focus of Congress' effort in creating
deposit insurance.
Despite the fact Congress revisited the deposit insurance
statute in 1935, 1950, and 1960, these comments remain the
Page 476 U. S. 434
best indication of Congress' underlying purpose in creating
deposit insurance. The Reports on the 1935 amendments presented the
definition of "deposit" without any specific comment.
See
H.R.Rep. No. 742, 74th Cong., 1st Sess., 2 (1935); S.Rep. No. 1007,
74th Cong., 1st Sess., 2-4 (1935); H.R.Conf.Rep. No. 1822, 74th
Cong., 1st Sess., 44 (1935). The floor debates centered around
changes in the Federal Reserve System made in the same bill, not on
deposit insurance.
See, e.g., 79 Cong.Rec. 6568-6577,
6651-6660 (1935). Indeed, in light of the fact that instruments
denominated "promissory notes" seem at the time to have been
considered exclusively uncontingent,
see, e.g., 16
Fed.Res.Bull. 520 (1930) (Regulation A) (defining promissory note
as an "
unconditional promise . . . to pay [a sum certain
in dollars] at a fixed or determinable future time") (emphasis
added);
Gilman v. Commissioner, 53 F.2d 47, 50 (CA8 1931)
("The form of these [contingent] instruments referred to as
promissory notes' is very unusual"), it is unlikely that
Congress would have had occasion to refer expressly to contingent
notes such as the one before us here even if Congress had turned
its attention to the definition of "deposit" when it first enacted
the provision treating "money or its equivalent."
The legislative history of the 1950 amendments is similarly
unhelpful, as one would expect, given that the relevant provisions
were reenacted but unchanged.
See S.Rep. No. 1269, 81st
Cong., 2d Sess., 2-3 (1950); H.R.Rep. No. 2564, 81st Cong., 2d
Sess., 5-6 (1950). The Committee Reports on the 1960 amendments
likewise give no indication that the amendments' phrasing was meant
to effect any fundamental changes in the definition of deposit;
those Reports state only that the changes are intended to bring
into harmony the definitions of "deposit" used for purposes of
deposit insurance with those used in reports of condition, and that
the FDIC's rules and regulations are to be incorporated into the
new definition.
See H.R.Rep. No. 1827, 86th Cong., 2d
Sess., 3, 5 (1960); S.Rep. No. 1821, 86th Cong., 2d Sess., 7, 10
(1960).
Page 476 U. S. 435
See also 106 Cong.Rec. 14794 (1960) (discussing
pre-1960 scheme).
Congress' focus in providing for a system of deposit insurance
-- a system that has been continued to the present without
modification to the basic definition of deposits that are "money or
its equivalent" -- was clearly a focus upon safeguarding the assets
and "hard earnings" that businesses and individuals have entrusted
to banks. Congress wanted to ensure that someone who put tangible
assets into a bank could always get those assets back. The purpose
behind the insurance of deposits in general, and especially in the
section defining deposits as "money or its equivalent," therefore,
is the protection of assets and hard earnings entrusted to a
bank.
This purpose is not 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 custody of the bank. Philadelphia Gear, which now seeks to
collect deposit insurance, surrendered absolutely nothing to the
bank. The letter of credit is for Philadelphia Gear's benefit, but
the bank relied upon Orion to meet the obligations of the letter of
credit, and made no demands upon Philadelphia Gear. Nor, more
importantly, did Orion surrender any assets unconditionally to the
bank. The bank did not credit any account of Orion's in exchange
for the promissory note, and did not treat its own assets as
increased by its acceptance of the note. The bank could not have
collected on the note from Orion unless Philadelphia Gear presented
the unpaid invoices and a draft on the letter of credit. In the
absence of a presentation by Philadelphia Gear of the unpaid
invoices, the promissory note was a wholly contingent promise, and,
when Penn Square went into receivership, neither Orion nor
Philadelphia Gear had lost anything except the ability to use Penn
Square to reduce Philadelphia Gear's risk that Philadelphia Gear
would go unpaid for a delivery of goods to Orion.
Page 476 U. S. 436
B
Congress' actions with respect to the particular definition of
"deposit" that it has chosen in order to effect its general purpose
likewise lead us to believe that a standby letter of credit backed
by a contingent promissory note is not an insurable "deposit." In
1933, Congress amended the Federal Reserve Act to authorize the
creation of the FDIC and charged it "to insure . . . the deposits
of all banks which are entitled to the benefits of [FDIC]
insurance." § 8, Banking Act of 1933, ch. 89, 48 Stat. 168.
Congress did not define the term "deposit," however, until the
Banking Act of 1935, in which it stated:
"The term 'deposit' means the unpaid balance of money or its
equivalent received by a bank in the usual course of business and
for which it has given or is obligated to give credit to a
commercial, checking, savings, time or thrift account, or which is
evidenced by its certificate of deposit, and trust funds held by
such bank whether retained or deposited in any department of such
bank or deposited in another bank, together with such other
obligations of a bank as the board of directors [of the FDIC] shall
find and shall prescribe by its regulations to be deposit
liabilities by general usage. . . ."
§ 101, Banking Act of 1935, ch. 614, 49 Stat. 684, 685-686. Less
than two months after this statute was enacted, the FDIC
promulgated a definition of "deposit," which provided in part
that
"letters of credit must be regarded as issued for the equivalent
of money when issued in exchange for . . . promissory notes upon
which the person procuring [such] instruments is primarily or
secondarily liable."
See 12 CFR § 301. 1(d) (1939) (codifying Regulation I,
rule 1, Oct. 1, 1935), revoked after incorporation into statutory
law, 12 CFR 234 (Supp.1962).
In 1950, Congress revisited the provisions specifically
governing the FDIC in order to remove them from the Federal
Page 476 U. S. 437
Reserve Act and place them into a separate Act.
See Act
of Sept. 21, 1950, ch. 967, 64 Stat. 874. The new provisions did
not modify the definition of "deposit." In 1960, Congress expanded
the statutory definition of "deposit" in several categories, and
also incorporated the regulatory definition that the FDIC had
employed since 1935 into the statute that remains in force today.
See supra at
476 U. S. 430
(quoting current version of statute).
At no point did Congress disown its initial, clear desire to
protect the hard assets of depositors.
See supra at
476 U. S.
432-435. At no point did Congress criticize the FDIC's
longstanding interpretation,
see infra at
476 U. S. 438,
that a standby letter of credit backed by a contingent promissory
note is not a "deposit." In fact, Congress had reenacted the 1935
provisions in 1950 without changing the definition of "deposit" at
all.
Compare 49 Stat. 685-686
with 64 Stat.
874-875. When the statute giving rise to the longstanding
interpretation has been reenacted without pertinent change, the
"congressional failure to revise or repeal the agency's
interpretation is persuasive evidence that the interpretation is
the one intended by Congress."
NLRB v. Bell Aerospace, 416 U.
S. 267,
416 U. S. 275
(1974).
See Zenith Radio Corp. v. United States,
437 U. S. 443,
437 U. S. 457
(1978). Indeed, the current statutory definition of "deposit,"
added by Congress in 1960, was expressly designed to incorporate
the FDIC's rules and regulations on "deposits." As Committees of
both Houses of Congress explained the amendments:
"The amended definition would include the present statutory
definition of deposits,
and the definition of deposits in the
rules and regulations of the Federal Deposit Insurance
Corporation, [along] with . . . changes [in sections other
than what is now § 1813(
l)(1)]."
H.R.Rep. No. 1827, 86th Cong., 2d Sess., 5 (1960) (emphasis
added); S.Rep. No. 1821, 86th Cong., 2d Sess., 10 (1960) (same).
Congress, therefore, has expressly incorporated into the statutory
scheme the regulations that the FDIC devised to assist it in
determining what constitutes a "deposit"
Page 476 U. S. 438
within the statutory scheme. Under these circumstances, we must
obviously give a great deal of deference to the FDIC's
interpretation of what these regulations do and do not include
within their definition of "deposit."
Although the FDIC does not argue that it has an express
regulation excluding a standby letter of credit backed by a
contingent promissory note from the definition of "deposit" in 12
U.S.C. § 1813(
l)(1), that exclusion by the FDIC is
nonetheless longstanding and consistent. At a meeting of FDIC and
bank officials shortly after the FDIC's creation, a bank official
asked whether a letter of credit issued by a charge against a
customer's account was a deposit. The FDIC official replied:
"'If your letter of credit is issued by a charge against a
depositor's account or for cash and the letter of credit is
reflected on your books as a liability, you do have a deposit
liability. If, on the other hand, you merely extend a line of
credit to your customer, you will only show a contingent liability
on your books. In that event, no deposit liability has been
created.'"
Transcript as quoted in
FDIC v. Irving Trust
Co., 137 F.
Supp. 145, 161 (SDNY 1955). Because Penn Square apparently
never reflected the letter of credit here as a noncontingent
liability, and because the interwoven financial instruments at
issue here can be viewed most accurately as the extension of a line
of credit by Penn Square to Orion, this transcript lends support to
the FDIC's contention that its longstanding policy has been to
exclude standby letters of credit backed by contingent promissory
notes from 12 U.S.C. § 1813(
l)(1)'s definition of
"deposit."
The FDIC's contemporaneous understanding that standby letters of
credit backed by contingent promissory notes do not generate a
"deposit" for purposes of 12 U.S.C. § 1813(
l)(1) has been
fortified by its behavior over the following
Page 476 U. S. 439
decades. The FDIC has asserted repeatedly that it has never
charged deposit insurance premiums on standby letters of credit
backed by contingent promissory notes, and Philadelphia Gear does
not contest that assertion.
See Tr. of Oral Arg. 42.
Congress requires the FDIC to assess contributions to its insurance
fund at a fixed percentage of a bank's "deposits" under 12 U.S.C. §
1813(
l)(1).
See 12 U.S.C. §§ 1817(a)(4), (b)(1),
(b)(4)(A). By the time that this suit -- the first challenge to the
FDIC's treatment of standby letters of credit backed by contingent
promissory notes -- was brought, almost $100 billion in standby
letters of credit was outstanding.
See Board of Governors
of the Federal Reserve System, Annual Statistical Digest 71 (1983);
FDIC, 1983 Statistics on Banking (Table 110F). The FDIC's failure
to levy premiums on standby letters of credit backed by contingent
promissory notes therefore clearly demonstrates that the FDIC has
never considered such letters to reflect deposits.
Although the FDIC's interpretation of the relevant statute has
not been reduced to a specific regulation, we conclude nevertheless
that the FDIC's practice and belief that a standby letter of credit
backed by a contingent promissory note does not create a "deposit"
within the meaning of 12 U.S.C. § 1813(
l)(1) are entitled
in the circumstances of this case to the
"considerable weight [that] should be accorded to an executive
department's construction of a statutory scheme it is entrusted to
administer."
Chevron U.S.A. Inc. v.
Natural Resources Defense Council, Inc.,
467 U. S. 837,
467 U. S. 844
(1984). As we have stated above, the FDIC's interpretation here of
a statutory definition adopted wholesale from the FDIC's own
regulation is consistent with congressional purpose, and may
certainly stand.
III
Philadelphia Gear essentially seeks to have the FDIC guarantee
the contingent credit extended to Orion, not assets entrusted
Page 476 U. S. 440
to the bank by Philadelphia Gear or by Orion on Philadelphia
Gear's behalf. With a standard "commercial" letter of credit, Orion
would typically have unconditionally entrusted Penn Square with
funds before Penn Square would have written the letter of credit,
and thus Orion would have lost something if Penn Square became
unable to honor its obligations. As the FDIC concedes, deposit
insurance extends to such a letter of credit backed by an
uncontingent promissory note.
See Tr. of Oral Arg. 8
(statement of Mr. Rothfeld, representing the FDIC) ("If this note
were a fully uncontingent negotiable note that were not limited by
any side agreements, it would be a note backing a letter of credit
within the meaning of the statute").
See also id. at
17-18. But here, with a standby letter of credit backed by a
contingent promissory note, Penn Square was not in possession of
any of Orion's or Philadelphia Gear's assets when it went into
receivership. Nothing was ventured, and therefore no insurable
deposit was lost. We believe that, whatever the relevant State's
definition of "letter of credit" or "promissory note," Congress did
not, by using those phrases in 12 U.S.C. § 1813(
l)(1),
intend to protect with deposit insurance a standby letter of credit
backed only by a contingent promissory note. We thus hold that such
an arrangement does not give rise to a "deposit" under 12 U.S.C. §
1813(
l)(1).
Accordingly, the judgment of the court below is reversed, and
the case is remanded for further proceedings consistent with this
opinion.
Reversed and remanded.
JUSTICE MARSHALL, with whom JUSTICE BLACKMUN and JUSTICE
REHNQUIST join, dissenting.
There is considerable common sense backing the Court's opinion.
The standby letter of credit in this case differs considerably from
the savings and checking accounts that come most readily to mind
when one speaks of an insured deposit. Nevertheless, to reach this
common-sense result, the Court must read qualifications into the
statute that do not appear
Page 476 U. S. 441
there. We recently recognized that even when the ingenuity of
businessmen creates transactions and corporate forms that were
perhaps not contemplated by Congress, the courts must enforce the
statutes that Congress has enacted.
See Board of Governors, FRS
v. Dimension Financial Corp., 474 U.
S. 361,
474 U. S.
373-375 (1986). Congress unmistakably provided that
letters of credit backed by promissory notes constitute "deposits"
for purposes of the federal deposit insurance program, and the
Court's attempt to draw distinctions between different types of
letter of credit transactions forces it to ignore both the statute
and some settled principles of commercial law. Here, as in
Dimension, the inflexibility of the statute as applied to
modern financial transactions is a matter for Congress, not the
FDIC or this Court, to remedy.
It cannot be doubted that the standby letter of credit in this
case meets the literal definition of a "deposit" contained in 12
U.S.C. § 1813(
l)(1). It is
"a letter of credit . . . on which the bank is primarily liable
. . . issued in exchange for . . . a promissory note upon which
[Orion] is primarily or secondarily liable."
The Court, however, holds that the note in this case, whether or
not it is a promissory note under the Uniform Commercial Code (UCC)
and Oklahoma law, is not a promissory note for purposes of the
Federal Deposit Insurance Act. We should assume, absent convincing
evidence to the contrary, that Congress intended for the term
"promissory note" to derive its meaning from the ordinary sources
of commercial law. I believe that there is no such evidence in this
case.
The Court justifies its restrictive reading of the term
"promissory note" in large part by arguing that Congress would not
have wanted to include in that term any obligation that was not the
present equivalent of money. The keystone of the FDIC's arguments,
and of the Court's decision, is that Orion did not entrust "money
or its equivalent" to the bank. The note in this case, however, was
the equivalent of money,
Page 476 U. S. 442
and the Court's reading of Congress' intent is therefore largely
irrelevant.
FDIC concedes, as it must, that Congress has determined that a
promissory note generally constitutes money or its equivalent.
Moreover, that statutory definition comports with economic reality.
Promissory notes typically are negotiable instruments, and
therefore readily convertible into cash. The FDIC argues, and the
Court holds, that the promissory note in this case is "contingent,"
and therefore not the equivalent of money. However, while the FDIC
argues strenuously that Orion's note is not a promissory note in
the usual sense of the word, one could more plausibly state that it
is not a "contingent" obligation in the usual sense of that word.
On its face, the note is an unconditional obligation of Orion to
pay the holder $145,200 plus accrued interest on August 1, 1982. It
sets out no conditions that would affect the negotiability of the
note, and therefore is fully negotiable for purposes of the UCC,
U.C.C. § 3-104(1) (1977); Okla.Stat., Tit. 12A, § 3-104(1)
(1981).
The Court therefore misses the point when it states that, at the
time of the original banking Acts, the term "promissory note" was
not understood to include a contingent obligation.
Ante at
476 U. S. 434.
The note at issue in this case is an unconditional promise to pay,
and satisfies all the requisites of a negotiable promissory note,
either under the UCC or the common law as it existed in the 1930's.
The only contingencies attached to Orion's obligation arise out of
a separate contract. As to such contingencies, the law was well
settled long before 1930:
"[I]n order to make a note invalid as a promissory note, the
contingency to avoid it must be apparent, either upon the face of
the note, or upon some contemporaneous written memorandum on the
same paper; for, if the memorandum is not contemporaneous, or if it
be merely verbal in each case, whatever may be its effect as a
matter of defence between the original parties, it is not deemed to
be a part of the instrument, and does not affect,
Page 476 U. S. 443
much less invalidate, its original character."
J. Thorndike, Story on Promissory Notes 34 (7th ed. 1878)
(footnotes omitted). [
Footnote
1]
It is far from a matter of semantics to state that, while Orion
and the bank may have an oral understanding concerning the bank's
treatment of Orion's note, that note itself is unconditional, and
equivalent to money. The Court correctly observes that the bank
would have breached its oral contract had it attempted to sue on
the note; nevertheless, Orion would have had separately to plead
and prove a breach of contract in that case, because parol evidence
that the contract between the parties differed from the written
instrument would have been inadmissible in the bank's action to
collect the debt.
See American Perforating Co. v. Oklahoma
State Bank, 463 P.2d 958, 962-963 (Okla.1970). Similarly,
should the note have found its way into the hands of a third party,
Orion would have had no choice but to honor it, again being left
with only the right to sue the bank for breach of the oral
contract. Orion's entrustment of the note to the bank was not,
therefore, completely risk-free.
The risk taken on by Orion may not differ substantially from the
risk assumed by one who hands over money to the bank to guarantee
repayment of funds paid out on a letter of credit. The bank
typically undertakes to put such cash collateral into a special
account, where it never enters into the general assets of the bank.
See U.C.C. § 5-117, comment (1977). Should the bank cease
operations, the customer will enjoy a preference in bankruptcy,
entitling it to receive its money back before general unsecured
creditors of the bank
Page 476 U. S. 444
are paid. U.C.C. § 5-117; Okla.Stat., Tit. 12A, § 5-117 (1981).
Like Orion, then, that hypothetical customer has little to fear
absent misconduct by the bank or a third party. If the federal
deposit insurance program should not protect Philadelphia Gear,
therefore, it probably should not protect
any holder of a
letter of credit, whether commercial, standby, funded, or unfunded.
[
Footnote 2] That, however, is
clearly a matter for Congress to determine.
While the Court purports to examine what Congress meant when it
said "promissory note," in fact, the Court's opinion does not rest
on any special attributes of Orion's note. Rather, the Court rules
that, when an individual entrusts a negotiable instrument to a
bank, that instrument is not "money or its equivalent" for purposes
of § 1813(
l)(1) so long as the bank promises not to
negotiate it or collect on it until certain conditions are met.
That is a proviso that Congress might have been well advised to
include in the Act, but did not. I therefore dissent.
[
Footnote 1]
We would have a very different case if the conditions put upon
Orion's obligation to the bank were reflected on the face of the
note, as they were in
Allen v. FDIC, 599 F.
Supp. 104 (ED Tenn. 1984),
appeal pending, No. 85-5003
(CA6), a case raising the same issue as the present one. Because
such a note is not negotiable, it is much more plausible to argue
that Congress would not have considered it "money or its
equivalent." The note in this case, however, is in no sense a
contingent note.
[
Footnote 2]
It seems odd that Philadelphia Gear's status as an insured
depositor should depend on the terms of the repayment agreement
between Orion and the bank. Ordinarily, Philadelphia Gear would be
indifferent to the agreement between Orion and the bank, and might
not even be aware of the terms of that agreement. The Court,
therefore, is not necessarily bringing greater rationality to this
area of the law by creating distinctions between types of letters
of credit for purposes of federal deposit insurance coverage.