## Facts

- Orion Manufacturing Corp. obtained from Penn Square Bank, N.A. a standby letter of credit in favor of Philadelphia Gear Corp. for $145,200.
- The bank would honor drafts only if Philadelphia Gear submitted a signed statement that Orion failed to pay for invoiced goods after a specified period.
- The same day, Orion executed an unsecured promissory note to the bank; both parties understood Orion’s duty to pay on the note was contingent on Philadelphia Gear’s later draw under the letter of credit.
- The bank did not credit Orion’s deposit account or treat its assets as increased; it carried the standby letter as a contingent liability.
- After Penn Square was declared insolvent, Philadelphia Gear presented drafts under the letter of credit for goods delivered before insolvency; the FDIC, as receiver, returned the drafts unpaid.
- Philadelphia Gear sought the then-maximum $100,000 in FDIC insurance, asserting the standby letter of credit and the contingent note constituted an “insured deposit” under 12 U.S.C. § 1813(l)(1).
- The district court and the Tenth Circuit held the obligation was an insured deposit; the Supreme Court granted review.

## Issues

1. Whether a standby letter of credit backed solely by a customer’s contingent promissory note constitutes an FDIC-insured “deposit” within 12 U.S.C. § 1813(l)(1).

## Decision

- The Supreme Court reversed and remanded.
- A standby letter of credit backed only by a contingent promissory note does not create an FDIC-insured deposit under § 1813(l)(1).
- The Court gave considerable weight to the FDIC’s longstanding interpretation: standby letters are treated as insured deposits only when backed by cash or an existing deposit account recorded as a direct liability, not when backed solely by a contingent note.
- The Court reasoned that deposit insurance protects funds actually entrusted to a bank; here, at receivership the bank held neither the customer’s nor the beneficiary’s assets.
- Extending insurance would effectively provide coverage without corresponding premium assessments historically tied to deposits.

## Legal Principles

- “Deposit” under § 1813(l)(1) requires that “money or its equivalent” be received or held by the bank; a mere contingent reimbursement promise is not such a received or held fund.
- A bank’s standby letter of credit obligation, when backed only by a contingent promissory note and not by cash or a credited deposit, is a contingent liability outside FDIC deposit insurance coverage.
- Longstanding, consistent agency interpretations of ambiguous statutory terms may be afforded substantial weight, particularly where linked to the program’s premium and coverage structure.

## Conclusion

The Court held that FDIC deposit insurance does not cover a standby letter of credit supported solely by a contingent promissory note because no money or equivalent was placed in the bank’s custody, and treating it as insured would conflict with the deposit insurance scheme’s premium-based design.


Fed. Deposit Ins. Corp. v. Phila. Gear Corp., 476 U.S. 426 (1986)