FEDERAL DEPOSIT INSURANCE CORPORATION, PETITIONER V. PHILADELPHIA GEAR CORPORATION In the Supreme Court of the United States No. 84-1972 October Term, 1985 On Writ of Certiorari to the United States Court of Appeals for the Tenth Circuit Brief for the Petitioner TABLE OF CONTENTS Question Presented Opinions below Jurisdiction Statute involved Statement Summary of argument Argument: An unfunded standby letter of credit does not evidence a deposit that is covered by federal insurance A. A deposit comes into existence only when something of value is entrusted to a bank B. The court of appeals failed to accord proper deference to the FDIC's interpretation of 12 U.S.C. 1813(l)(1) C. Both Congress and the banking industry have relied on the FDIC's reading of 12 U.S.C 1813(l)(1) Conclusion OPINIONS BELOW The opinion of the court of appeals (Pet. App. 1a-19a) is reported at 751 F.2d 1131. The February 9, 1984 order of the district court (Pet. App. 20a-45a) is unreported. JURISDICTION The judgment of the court appeals was entered on December 27, 1984. A petition for rehearing was denied on February 19, 1985 (Pet. App. 46a). On May 10, 1985, Justice White extended the time within which to file a petition for a writ of certiorari to and including June 19, 1985. The petition was filed on that date and was granted on October 21, 1985. The jurisdiction of this Court is invoked under 28 U.S.C. 1254(1). STATUTE INVOLVED 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, checking, savings, time, or thrift account, or which is evidenced by its certificate of deposit, thrift certificate, investment certificate, certificate of indebtedness, or other similar name, or a check or draft drawn against a deposit account and certified by the bank, or 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 promissary note upon which the person obtaining any such credit or instrument is primarily or secondarily liable, or for a charge against a deposit account, or in settlement of checks, drafts, or other instruments forwarded to such banks for collection. QUESTION PRESENTED Whether an unfunded standby letter of credit is a deposit within the meaning of 12 U.S.C. 1813(l)(1) for purposes of the federal deposit insurance program. STATEMENT 1. The Orion Manufacturing Corporation (Orion) produced drilling equipment. One of its suppliers was respondent, the Philadelphia Gear Corporation. Pet. App. 2a. On April 23, 1981, on Orion's application, Penn Square Bank, N.A. (Penn Square), a national banking association doing business in Oklahoma City, Oklahoma, issued a so-called unfunded standby letter of credit for the benefit of respondent in the amount of $145,200. /1/ The letter was intended to guarantee that respondent would receive payment for its equipment in the event of a default by Orion (Pet. App. 5a). To this end, the letter obligated Penn Square to pay respondent upon receipt of the latter's "signed statement that (it) ha(d) invoiced Orion, * * * and said invoices ha(d) remained unpaid" (id. at 3a). /2/ As security for this undertaking, Orion executed a contingent, unsecured "backup" note in the amount of $145,200 in favor of Penn Square, which the bank would draw upon for reimbursement if it was forced to pay respondent under the letter of credit (id. at 3a, 5a-6a, 23a). Although this condition was not expressed in the note, both Orion and Penn Square "understood that nothing would be considered due on this note nor would interest be charged unless and until (respondent) presented to Penn Square the requisite documents detailed in the letter of credit" (id. at 5a). On July 5, 1982, the Comptroller of the Currency declared Penn Square insolvent, and appointed the Federal Deposit Insurance Corporation (FDIC or Corporation) as its receiver pursuant to 12 U.S.C. 1821(c). Over the next several weeks respondent sought payment under the letter of credit from the FDIC in its capacity as receiver, /3/ citing defaults by Orion that had occurred prior to the bank's failure but that had not been presented to the bank at that time. The FDIC, however, declined to honor drafts on the letter of credit. Pet. App. 4a. Respondent then brought this suit against the FDIC in its capacity both as receiver and as insurer of deposits, claiming, among other things, that the letter was a "deposit" insured by the FDIC under 12 U.S.C. 1813(l)(1). That provision, in relevant part, defines a deposit as (T)he unpaid balance of money or its equivalent received or held by a bank in the usual course of business and * * * which is evidenced by * * * a letter of credit * * * 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 as evidencing the receipt of the equivalent of money when credited or issued in exchange for * * * a promissory note upon which the person obtaining any such credit or instrument is primarily or secondarily liable. As the beneficiary of the letter, respondent maintained that it was a depositor entitled to the statutory maximum of $100,000 in insurance proceeds as compensation for the loss of the "deposit" that had been evidenced by the letter of credit" (Pet. Ap-. 2a, 4a). See 12 U.S.C. 1813(m). 2. The United States District Court for the Western District of Oklahoma ruled for respondent. The court did not dispute the FDIC's contention that the backup note "was merely a conditional debt, contingent on the letter's being called," "that it was not a liability of Orion until that time," and that "Penn Square Bank never considered (the note) an asset" (Pet. App. 40a). But the court reasoned that, under Section 1813(l)(1), an instrument "'must be regarded as evidencing the receipt of the equivalent of money when credited or issued in exchange for . . . a promissory note'" (Pet. App. 40a; emphasis added by the court). It therefore held that, "although the letter of credit was not issued in exchange for legal tender, it must be considered as having been issued in exchange for 'money or its equivalent' because it was issued in exchange for Orion's promissory note" (ibid.; emphasis in original). The court accordingly ordered the FDIC in its capacity as insurer to pay respondent $100,000 in insurance proceeds. /4/ In relevant part, the court of appeals affirmed (Pet. App. 1a-19a). /5/ The court premised its opinion on the understanding that Congress had not "explicitly delegated to the FDIC authority to refine the definition of a deposit contained in Section 1813," and that the Corporation had not in any event promulgated regulations "pinpointing Section 1813's precise meaning" (Pet. App. 8a). In these circumstances, the court concluded that the FDIC's views on the meaning of the statute were due no special deference (ibid.). /6/ With this understanding of the weight that should be given the FDIC's views, the court began its opinion by holding that Penn Square had received "money or its equivalent" in connection with the letter -- that is, Orion's contingent back-up note. While the court acknowledged that both Orion and Penn Square understood that "nothing would be considered due on this note" unless Orion defaulted and respondent made a proper demand (Pet. App. 5a), it nonetheless found that the note was negotiable on its face (id. at 6a) and thus, evidently, was by its nature the equivalent of money (ibid.). And even apart from the negotiability of the note, the court found the "money or its equivalent" aspect of Section 1813(l)(1)'s definition satisfied simply because "(t)he bank's customer had signed a promissory note obligating it to repay advances made by the bank" (Pet. App. 6a). The court also offered several further considerations in support of its conclusion. Because it found that a bank's liability under a standby letter of credit is nearly absolute, it reasoned that the FDIC will not have difficulty in determining the amount of a bank's obligation for assessments to the Corporation's insurance fund (which are based on total deposits, see 12 U.S.C. 1817). Pet. App. 12a. And it noted that Section 1813(l)(1) on its face refers to letters of credit generally without distinguishing between the different types; because Congress nowhere stated that standby or unfunded letters should be excluded from the definition, "the plain language of Section 1813 dictates the conclusion that these instruments are within the statutory definition of a 'deposit.'" Pet. App. 13a. /7/ SUMMARY OF ARGUMENT A. The FDIC and the federal deposit insurance program were created as a response to the banking crisis that followed on the Depression. The purpose of that program was plain from the beginning: it was to safeguard the "hard earnings" of the public, and in that way to restore confidence in the banking system. 77 Cong. Rec. 3837 (1933) (remarks of Rep. Steagall). The protections of federal deposit insurance thus come into play only when necessary "to prevent the destruction of deposits because of bank failure and to protect depositors against loss." S. Rep. 1821, 86th Cong., 2d Sess. 2 (1960). And because it is only a customer who delivers his own funds to a bank who risks loss if the bank suspends operations, Congress provided that insured deposits basically are defined as "money or its equivalent received or held by a bank." 12 U.S.C. 1813(l)(1); see 12 U.S.C. 1813(l)(2)-(5). When the bank's customer has not entrusted the bank with anything of value, then, there is no deposit in existence that warrants the protection of federal deposit insurance. The court of appeals, however, did not attempt to determine whether Orion or respondent had in fact entrusted the bank with anything of value. Instead, the court noted that 12 U.S.C. 1813(l)(1) provides that an instrument must be regarded "as evidencing the receipt of the equivalent of money" -- and thus of the "hard earnings" that Congress sought to protect -- when a bank issues it in exchange for a "promissory note." Because Orion here signed a document labeled "promissory note," the court held that the Penn Square letter must be considered as evidencing the receipt of money. In reaching this conclusion, the court below disregarded both the purposes of the statute and economic reality. In fact, the standby letter of credit functioned as a line of credit that Penn Square offered to its customer, Orion. Orion's backup note served simply to evidence this undertaking. The note created no present indebtedness and bore no interest; Penn Square could not obtain value for it, offset it against any obligation that the bank had to Orion or accelerate Orion's obligation. Thus, Penn Square at no point during the transaction functioned as a depository, and Orion at no point had its funds at risk. In these circumstances, treating the letter of credit secured by Orion's backup note as an insured deposit would be contrary to the purposes of the federal deposit program and provide respondent with a windfall, because nothing of value ever was deposited with Penn Square. The court of appeals' error thus lay in its assumption that Section 1813(l)(1) was intended to provide insurance protection to all instruments backed by documents termed "promissory notes," regardless of whether the promissory notes actually are the equivalent of money. Congress plainly would not have wanted a standby letter of credit backed by a contingent note to be regarded as evidencing an insured deposit: such an application of the statute serves neither to protect "hard earnings" nor to bolster depositor confidence in the integrity of banking institutions. Indeed, the other instruments described in Section 1813(l)(1) as the equivalent of money all represent unconditional obligations -- and it appears that the drafters of the current "deposit" definition would not have understood a contingent note to be a "promissory note" within the ordinary meaning of that term. That the note may have been negotiable (because the conditions attached to Orion's liability were spelled out in a separate document) should not change this conclusion, since the agreement between the parties meant that Penn Square could not have negotiated the note unless the bank actually had advanced funds to respondent. B. The court of appeals compounded its error by failing to accord any deference to the FDIC's interpretation of Section 1813(l)(1). The FDIC has been entrusted with the administration of the statute for 50 years, and Congress plainly has indicated that the Corporation's interpretation of Section 1813 must be accorded the greatest deference. See 12 U.S.C. 1813(l)(5) and 1819 Tenth. The Corporation's views therefore must be given controlling weight unless they are manifestly improper. See, e.g., Chevron U.S.A. Inc. v. Natural Resources Defense Council, In., No. 82-1005 (June 25, 1984), slip op. 5-7. Even beyond that, however, on the particular question in this case, the legislative history indicates that the FDIC's construction of the statute should be dispositive. The definition of deposit that now appears in Section 1813(l)(1) was first used in Regulation I, issued by the FDIC in 1935. From the moment of the Regulation's promulgation, the FDIC informally but consistently declined to treat unfunded standby letters of credit as deposits. The FDIC accordingly never has assessed insurance premiums on letters of credit of the sort at issue here -- and never has paid out on insurance claims relating to such letters -- because it has not treated them as deposits. And Congress, far from disapproving the FDIC's longstanding interpretation, actually incorporated Regulation I's language concerning letters of credit and promissory notes directly into what is now Section 1813(l)(1). These circumstances present the clearest imaginable case for deference to the FDIC. See United States v. Rutherford, 442 U.S. 544, 554 n.10 (1979); Lorillard v. Pons, 434 U.S. 575, 580-581 (1978). C. The court of appeals also disregarded the reliance on the FDIC's view that has been demonstrated both by the banking industry and by Congress itself. Treating unfunded standby letters of credit as deposits would increase insured bank deposits by some 8%, while proportionately reducing the ratio of the FDIC's insurance fund to deposits outstanding. Premium adjustments designed to ameliorate this problem would, in turn, impose substantial additional costs on banks, thus putting FDIC-INSURED institutions at a serious disadvantage vis-a-vis foreign or other non-insured institutions in arranging standby letter of credit transactions. This sort of disruption should be avoided absent the most compelling reasons. See Zenith Radio Corp. v. United States, 437 U.S. 443, 457-458 (1978). Equally as significant, Congress has legislated with the FDIC's reading of Section 1813(l)(1) in mind. It has provided that so-called industrial revenue bonds are exempt from federal tax unless guaranteed by the federal government -- while explaining that such bonds should not be viewed as federally-guaranteed simply because they are backed by standby letters of credit. The decision below, which leads to the conclusion that bonds backed by such letters are federally-guaranteed, disregarded this scheme. ARGUMENT AN UNFUNDED STANDBY LETTER OF CREDIT DOES NOT EVIDENCE A DEPOSIT THAT IS COVERED BY FEDERAL INSURANCE The court of appeals' decision is based on several fundamental misconceptions. Its holding that unfunded standby letters of credit are deposits within the meaning of Section 1813(l)(1) disregards both economic reality and the purposes of the federal deposit insurance program: the decision affords the benefits of federal deposit insurance to the beneficiary of a financial instrument that simply does not represent deposited funds. In so doing, the court entirely disregarded the settled views of the agency that for some 50 years has applied the current statutory definition of the term "deposit." And it upset both subsequent congressional action and settled industry practice that are grounded on the validity of the FDIC's approach. A. A Deposit Comes Into Existence Only When Something Of Value Is Entrusted To A Bank 1. a. The FDIC and the federal deposit insurance program were created by the Banking Act of 1933, ch. 89, 48 Stat. 162 et seq., as a response to the crisis caused by the public's loss of confidence in banking institutions during the Depression. /8/ See generally S.Rep. 77, 73d Cong., 1st Sess. 5-6, 12-13 (1933). The spate of bank failures during that period meant that "a very large number of persons (were) unable to meet their obligations and (that) many business houses (were) embarrassed through inability to get the use of their funds." Id. at 12. As a result, depositors naturally reacted to the specter of bank insolvencies (see id. at 5-6) by engaging in massive runs on banks, which culminated in the national "bank holiday" declared by President Roosevelt on March 6, 1933. See 19 Fed. Res. Bull. 113-132 (1933); 12 Cong. Dig. 98-105 (1933). See generally 77 Cong. Rec. 5895 (1933) (remarks of Rep. Steagall). Against this background, the purpose of the insurance program was plain from the beginning: it was "to make the savings of America safe" (77 Cong. Rec. 5862 (1933) (remarks of Sen. Vandeberg)) by fostering 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" (id. at 3837 (remarks of Rep. Steagall)). See S. Rep. 77, supra, at 11, 14; 77 Cong. Rec. 3837 (1933) (remarks of Rep. Blanton); ibid. (remarks of Rep. Carpenter); id. at 5895 (remarks of Rep. Steagall); id. at 5896 (remarks of Rep. Luce). /9/ Insuring these "hard earnings" and "assets" (S. Rep. 77, supra, at 12), it was believed, would restore the "confidence of the public" in the banking system. 77 Cong. Rec. 3837 (1933) (remarks of Rep. Steagall). See id. at 5896 (remarks of Rep. Rankin); id. at 5862 (remarks of Sen. Vanderberg); id. at 3903 (remarks of Rep. Busby). /10/ Given this history, it is evident that the protections of federal deposit insurance where intended to come into play only when necessary "to prevent the destruction of deposits because of bank failure and to protect depositors against loss." S.Rep. 1821, 86th Cong., 2d Sess. 2 (1960). Because it is only a "customer who delivers his own funds to the bank (who) risks their total or partial loss if the bank should suspend operations" (FDIC v. Irving Trust Co., 137 F.Supp. 145, 162 (S.D.N.Y. 1955)), Congress achieved its purpose by providing that insured deposits basically are defined as "money or its equivalent received or held by a bank." 12 U.S.C. 1813(l)(1); see 12 U.S.C. 1813(l)(2)-(5). If the bank's customer has not entrusted the bank with anything of value, there are no "assets 'tied up'" (S.Rep. 77, supra, at 12) when the bank fails, and accordingly no deposit in existence that warrants the protection of federal deposit insurance. The only question in this case, then, is whether Orion entrusted Penn Square with something of value that was lost when Penn Square closed its doors. b. The court of appeals did not attempt to answer this question by considering whether Orion had in fact entrusted its bank with anything of value. Instead, the court concluded that the case began and ended with the language of the statute. Section 1813(l)(1), the court noted (Pet. App. 6a-7a), provides that an instrument must be regarded "as evidencing the receipt of the equivalent of money" -- and thus of the "assets" or "hard earnings" that Congress sought to protect -- when a bank issues it in exchange for, among other things, a "promissory note." Here, Orion "signed a promissory note: (id. at 6a). Therefore, the court held, the unfunded letter must be considered to evidence the receipt of the equivalent of money, because Penn Square issued it in exchange for Orion's contingent backup note (id. at 6a-7a). In reaching this conclusion, however, the court below disregarded both the purposes of the statute and economic reality, for the Orion note plainly was not a "promissory note" of the type that meaningfully may be termed the equivalent of money. In reality, the standby letter functioned as a line of credit that Penn Square offered to its customer, Orion, for the benefit of respondent; as such, the letter had to be included in Penn Square's calculation of its statutory lending limits. See 12 C.F.R. 7.6100, 208.8(d)(2), 337.2(b). Orion's backup note served simply to evidence Orion's repayment obligation. Under the controlling understanding between Orion and Penn Square (see Pet. App. 5a-6a), the liability evidenced by the note was wholly contingent -- through the note, Orion simply undertook to repay a debt that might arise in the future if certain contingencies occurred -- so that the note created no present indebtedness and bore no interest. Such a contingent instrument is in no economic sense the equivalent of money. /11/ Neither Orion nor respondent deposited any funds with the bank, or obligated itself to entrust anything of value to the bank, when Orion issued the note; there was nothing that either could "withdraw" on demand. Because the note did not represent an existing debt, Penn Square could not realistically expect to obtain value for it. And the contingent nature of the note meant that the bank could not offset it against any obligation that it had to Orion, or sue on or accelerate Orion's obligation. See generally Ryan, Letters of Credit Supporting Debt for Borrowed Money: The Standby as Backup, 100 Banking L.J. 404, 413 (1983). Thus, Penn Square at no point during the transaction functioned as a depository, and Orion at no point had its "own funds (at) * * * risk() * * * (had) the bank * * * suspend(e)d operations." Irving Trust, 137 F.Supp. at 162. In these circumstances, treating the letter of credit secured by Orion's backup note as an insured deposit would be contrary to the purposes of the federal deposit program and provide respondent with a windfall, because nothing of value ever was deposited with Penn Square. c. The court of appeals' error, then, lies in its assumption that Section 1813(l)(1) was intended to provide insurance protection to all instruments backed by documents termed "promissory notes," rather than to those instruments issued in exchange for promissory notes that are sufficiently valuable to be deemed the equivalent of money. /12/ A deposit obligation, of course, may be created in exchange for a promissory note that represents an unconditional liability; that is why Congress provided that promissory notes should be regarded as evidencing the equivalent of money. Cf. 77 Cong. Rec. 3905 (1933) (remarks of Rep. Busby); Federal Deposit Insurance Act: Hearings on H.R. 8916 and H.R. 8928 Before the Subcomm. of the House Comm. on Banking and Currency, 86th Cong., 2d Sess. 26 (1960) ("if (a) bank purchases (a) promissory note and gives credit for the purchase price thereof, a liability is created which is a deposit"). But whether a deposit has come into existence turns on the nature of the note, rather than its label. /13/ That this was Congress's intent is demonstrated by the other terms of the statute. The proviso to Section 1813(l)(1) states that an instrument (such as a letter of credit) "must be regarded as evidencing the receipt of the equivalent of money" when issued in exchange for a promissory note or for "checks or drafts * * * or for a charge against a deposit account, or in settlement of checks, drafts, or other instruments forwarded * * * for collection." All of these instruments have a substantial present value, and all represent unconditional obligations. Obviously, the inclusion on this list of a conditional backup note would have been highly anomalous. Cf. Fedorenko v. United States, 449 U.S. 490, 512 (1981). In fact, the legislative background provides strong evidence that Congress would not have anticipated such a reading of Section 1813(l)(1): when the current statutory definition first became effective in 1935 (see page 23, infra), a contingent note generally was not understood to be "promissory note" within the ordinary meaning of that term. See, e.g., 16 Fed. Res. Bull, 520 (1930) (Regulation A) (emphasis added) (defining promissory note as "an unconditional promise * * * to pay * * * at a fixed or determinable future time, a sum certain in dollars"); Gilman v. Commissioner of Internal Revenue, 53 F.2d 47 (8th Cir. 1931) (instrument is not a promissory note if there is no unconditional commitment to pay on it). Indeed, it is impossible to imagine why Congress would have wanted a standby letter of credit backed by a conditional note to be regarded as evidence of an insured deposit. Because the standby letter essentially creates a lending relationship between the bank and its customer, the court of appeals' decision -- as the facts here demonstrate -- causes the federal deposit insurance program not to protect "hard earnings" against loss, but instead to guarantee business transactions financed by standby letters. Such an application of the statute hardly seems necessary to inspire "depositor confidence" (77 Cong. Rec. 5862 (1933) (remarks of Sen. Vandenberg)). The determination whether Orion's back-up note was the equivalent of money also should not be affected by the court of appeals' finding (see Pet. App. 6a) that the note was negotiable on its face because the conditions attached to Orion's liability were not addressed in the note itself. That a note may in a technical sense be a negotiable instrument hardly answers the question whether it is the equivalent of money for purposes of the federal deposit insurance program. Given the agreement between the parties, Penn Square obviously could not have negotiated the note against Orion until the bank actually advanced funds to respondent. And while Penn Square conceivably could have sold the note fraudulently to an innocent third party, it is difficult to believe that Congress intended to define as "money or its equivalent" an instrument that becomes valuable only when used unlawfully. Accordingly, whether this particular note was technically negotiable was wholly immaterial to the purpose of the deposit insurance program: protecting funds that depositors have entrusted to banks. Here, no such funds (or their realistic equivalent) were deposited. 3. While the court of appeals relied primarily on the promissory note proviso to Section 1813(l)(1) in finding that the letter of credit here was issued for money or its equivalent, the court also noted that, under the plain language of the statute, the term "deposit" includes the equivalent of money "received or held by a bank * * * which is evidenced by * * * a letter of credit * * * on which the bank is primarily liable." Because a letter of credit is involved in this case, the court concluded that the instruments here "are within the statutory definition of a 'deposit'" (Pet. App. 13a). But in reaching this conclusion the court of appeals entirely disregarded the first portion of the stautory definition, for here the bank did not obtain money or its equivalent in exchange for the standby letter; it received only the contingent backup note. Cf. In re F & T Contractors, Inc., 718 F.2d 171, 181 (6th Cir. 1983) (standby letters are "contingent liabilities" that are supported by "contingent assets"). Indeed, as we have noted for regulatory purposes standby letters of credit issued for the account of bank customers are aggregated with loans from the bank (see 12 C.F.R. 7.6100, 208.8(d)(2), 337.2(b)), rather than with deposits received by the bank. /14/ In any event, there is a basic difference between an unfunded standby letter of credit and the other instruments listed in the first portion of Section 1813(l)(1). That portion of the statute provides that the term "deposit" means "money or its equivalent received or held by a bank * * * which is evidenced by its certificate of deposit, * * * or a check or draft drawn against a deposit account and certified by the bank, or a letter of credit or a traveler's check on which the bank is primarily liable." With the exception of unfunded letters of credit, the various listed instruments create unconditional liability of a certain value. /15/ A bank becomes liable to pay on an unfunded standby letter of credit only when certain conditions are met, however -- and the general expectation is that, in the usual situation, the bank never will become liable on such a letter of credit. See note 1, supra. /16/ In these circumstances "the essential test (of whether a letter of credit is a deposit) is whether the funds involved are those of the customer himself or funds of the bank which have been made available to the customer under a loan"; it is only in the first situation that the customer risks the loss of "his own funds * * * if the bank should suspend operations before they are paid out to the beneficiary or returned to the customer." Irving Trust, 137 F.Supp. at 162. An unfunded letter of credit thus cannot evidence the receipt of money or its equivalent. B. The Court Of Appeals Failed To Accord Proper Deference To The FDIC's Interpretation Of 12 U.S.C. 1813(l)(1) The court of appeals' error in disregarding the purposes of the Act was compounded by its conclusion that it was entirely free to ignore the FDIC's views on the meaning of the statutory term "deposit." The court flatly asserted (Pet. App. 8a) that the Corporation's views were entitled to no special deference here. In fact, however, the FDIC is the agency that for 50 years has administered the statutory provisions at issue, and Congress plainly has indicated that the FDIC's interpretation of Section 1813 must be accorded great deference. See 12 U.S.C. 1813(l)(5) and 1819 Tenth. See also 12 C.F.R. Pt. 330. In such circumstances, the agency's views must of course be given "controlling weight unless they are arbitrary, capricious, or manifestly contrary to the statute." Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., No. 82-1005 (June 25, 1984), slip. op. 5-7. As the discussion above demonstrates, the FDIC's reading more than meets this test. But beyond that, on the particular question in this case, the legislative history indicates that the FDIC's construction of the statute should be dispositive. The relevant portion of the definition of "deposit" that now appears in Section 1813(l)(1) was first used in a 1935 FDIC regulation issued pursuant to the Banking Act of 1935, ch. 614, 49 Stat. 684 et seq. /17/ The Corporation's Regulation I was in all relevant respects identical to the current Section 1813(l)(1), providing that "(t)he term deposit shall include * * * letters of credit on which the bank is primarily liable" when those letters are issued "(f) or money or its equivalent" or for "a charge against a deposit account." Regulation I further provided that such instruments would be deemed to have been issued for money or its equivalent when presented "in exchange for * * * promissory notes upon which the person procuring the instrument is primarily liable." 12 C.F.R. 301, 301.1(d) (1939). Although the language of Regulation I, like that of the current statute, did not in terms exclude unfunded standby letters of credit from the definition of deposit, from the moment of the regulation's promulgation the FDIC informally but consistently declined to treat such instruments as deposits. Immediately after the regulation went into effect, for example, an FDIC official explained its meaning to banking officials and auditors as follows: 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 of Notes Taken at a Special Meeting of N.Y. Bank Comptrollers and Auditors Conference 25-26 (Sept. 27-28, 1935), quoted in Irving Trust, 137 F.Supp. at 161. /18/ From 1935 until the time of the decision below, the FDIC accordingly never has assessed insurance premiums on letters of credit of the sort at issue here -- and never has paid out on insurance claims relating to such letters -- because it has not treated them as deposits. /19/ The FDIC's general approach was given judicial recognition by the Irving Trust court in 1955, which agreed that, "(i)n the context of deposit insurance * * * the only rational and relevant test" of whether a letter of credit represents a deposit "is whether the funds involved are those of the customer himself or funds of the bank which have been made available to the customer under a loan." 137 F.Supp. at 162. Although the Corporation's interpretation was by then a long-standing one, Congress did not disturb Regulation I when, in 1950, it substantially overhauled the federal deposit insurance program. See Federal Deposit Insurance Act of 1950, ch. 967, 64 Stat. 873 et seq.; H.R. Rep. 2564, supra, at 5-13; S.Rep. 1269, supra, at 2-4. Indeed, Congress in 1960 incorporated Regulation I's language concerning letters of credit and promissory notes directly into what is now Section 1813(l)(1). See S.Rep. 1821, supra, at 10. Although the FDIC's general regulatory approach was called to the attention of Congress at that time (see Federal Deposit Insurance Assessment: Hearings on H.R. 12465 Before the Senate Comm. on Banking and Currency, 86th Cong., 2d Sess. 50 (1960) (statement of William G. Loeffler); Federal Deposit Insurance Act: Hearings on H.R. 8916 and H.R. 8928 Before the Subcomm. of the House Comm. on Banking and Currency, 86th Cong., 2d Sess. 112-113 1960) (statement of Royal L. Coburn, citing FDIC v. Irving Trust Co., supra)), /20/ absolutely nothing in the legislative history of the 1960 amendment expresses congressional dissatisfaction with, or an intent to depart from, the FDIC's application of Regulation I. To the contrary, the 1960 legislation was designed principally to simplify the determination of assessments owed by FDIC-insured banks. See S.Rep. 1821, supra, at 1. This legislative background strongly suggests that Congress affirmatively intended to endorse the FDIC's treatment of unfunded standby letters of credit: "once an agency's statutory construction has been 'fully brought to the attention of the public and the Congress,' and the latter has not sought to alter that interpretation although it has amended the statute in other respects, then presumably the legislative intent has been correctly discerned." United States v. Rutherford, 442 U.S. 544, 554 n.10 (1979). See Lorillard v. Pons, 434 U.S. 575, 580-581 (1978). And Congress did more here than decline to distrub the agency's views; it actually incorporated those views into the statute. /21/ Cf. Bob Jones University v. United States, 461 U.S. 574, 601-602 (1983). At the very least, the factors at work here present the clearest imaginable case for deference to the FDIC. The Corporation developed the statutory language (see Miller v. Youakim, 440 U.S. 125, 144 (1979)); the interpretation at issue involved a contemporaneous construction of that language (see Zenith Radio Corp. v. United States, 437 U.S. 443, 450 (1978)) that has been followed for 50 years; Congress has expressed no dissatisfaction with the Corporation's approach, despite congressional amendment of the controlling statute (see Lorillard, 434 U.S. at 580-581); and, of course, Section 1813(l)(1) is a central portion of a complex regulatory scheme that the FDIC is charged with administering (see Board of Governors v. Investment Company Institute, 450 U.S. 46, 56 & n.21 (1981)). In these circumstances, the court of appeals could appropriately have rejected the FDIC's approach only if it found "compelling indications that (the approach) is wrong." Red Lion Broadcasting Co. v. FCC, 395 U.S. 367, 381 (1969). Even the most cursory examination of the legislative background, however, demonstrates that the FDIC's interpretation of the statute is the only one that is faithful both to the statutory language and to the congressional purpose. C. Both Congress And The Banking Industry Have Relied On The FDIC's Reading Of 12 U.S.C. 1813(l)(1) Given the lengthy pedigree and previously unchallenged nature of the FDIC's interpretation of Section 1813(l)(1), it is not surprising that the Corporation, the banking industry, and Congress itself have demonstrated "substantial reliance" on the FDIC's views. Zenith Radio Corp., 437 U.S. at 457. Because the FDIC never has assessed insurance premiums on the approximately $120 billion in outstanding unfunded standby letters of credit, the decision below (to the extent that it would treat all such letters as representing insured deposits) would increase the aggregate domestic deposits held by FDIC-insured banks by some 8%, while proportionately reducing the ratio of the FDIC's insurance fund to deposits outstanding. /22/ Moreover, because bank failures are not an altogether uncommon occurrence, /23/ a decision that permits additional creditors to make insurance claims can be expected to impose significant new demands on the FDIC. While aspects of this problem may be ameliorated over time through the payment by insured banks of increased insurance premiums to the FDIC, those premium adjustments in turn would impose significant, unexpected, and disruptive burdens on banking institutions. The FDIC generally assesses contributions to its insurance fund at 1/12 of 1% of a bank's deposits (see 12 U.S.C. 1817(b)); given the current volume of unfunded standby letters of credit outstanding, the FDIC would be forced to collect additional annual assessments in excess of $100 million if those letters were treated as deposits. Indeed, the FDIC's discretionary authority to charge back assessments for up to a five-year period (see 12 U.S.C. 1817(g)) could make banks liable for a one-time payment (including interest) of close to $400 million. By thus increasing the cost of standby letters of credit, this development could put American banks at a serious disadvantage vis-a-vis foreign or other non-insured institutions in arranging standby letter of credit transactions. See, e.g., Quint, Bank Credit Rulings Cause Concern, N.Y. Times, Feb. 18, 1984, at D1. /24/ This sort of effect -- which was entirely disregarded by the court of appeals -- plainly counsels that "the longstanding administrative construction of the statute should 'not be disturbed except for cogent reasons'" of a sort that have not been advanced here. Zenith Radio Corp., 437 U.S. at 457-458, quoting McLaren v. Fleischer, 256 U.S. 477, 481 (1921). See Udall v. Tallman, 380 U.S. 1, 18 (1965). Equally as significant, Congress has legislated with the FDIC's reading of Section 1813(l)(1) in mind. As noted above (note 21), the Deficit Reduction Act of 1984 provides that so-called industrial revenue bonds -- which include many municipal bonds -- are exempt from federal tax unless they are guaranteed by the federal government. When it enacted this provision, Congress expected that bonds would not be viewed as federally-guaranteed, and thus would not lose their tax exempt status, simply because they are backed by a guarantee (that is, a standby) letter of credit. See Joint Comm. on Taxation, 98th Cong., 2d Sess., General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984, at 941 (Comm. Print 1984). Yet the decision below suggests that the many billions of dollars worth of such bonds that are backed by standby letters of credit (see Quint, supra, at D4) may be viewed as federally-guaranteed and therefore as not tax exempt. /25/ The court of appeals' ruling thus threatens to disturb both the expectations of bondholders and the scheme created by Congress. CONCLUSION The judgment of the court of appeals should be reversed. Respectfully submitted. CHARLES FRIED Solicitor General RICHARD K. WILLARD Assistant Attorney General LAWRENCE G. WALLACE Deputy Solicitor General CHARLES A. ROTHFELD Assistant to the Solicitor General JOHN C. MURPHY, JR. General Counsel ANN S. DUROSS Assistant General Counsel LAWRENCE F. BATES Counsel JANE ROSSOWSKI Attorney DECEMBER 1985 /1/ A standby letter of credit functions as a guarantee mechanism in which the issuing bank (the "issuer") undertakes to pay a third party (the "beneficiary") in the event that the bank's customer does not itself make payment to the beneficiary. The issuer generally must make payment on the letter when the beneficiary presents documents establishing the customer's default. See generally Comment, The Independence Rule in Standby Letters of Credit, 52 U. Chi. L. Rev. 218, 219-220, 222-226 (1985). Such letters typically are unfunded (that is, they are not supported by funds on deposit with the bank), because banks do not anticipate having to pay out on them; the customer simply agrees that the bank will be reimbursed if it is forced to pay out on the letter. In contrast, traditional "commercial" letters of credit are not contingent on a default. They function as a payment mechanism; in the typical case, the letter will obligate the issuing bank to pay the seller of goods upon the presentation of a bill of lading indicating that the seller has made delivery to the buyer, the bank's customer. See id. at 218-219. Such letters generally are backed (or funded) by the customer's placement of funds into an account in the issuing bank in an amount sufficient to pay the seller. See U.C.C. Sections 5-114, 5-117 official comment (1985); Resnick, The Risky New Wrinkles in Letters of Credit, N.Y. Times, Nov. 11, 1984, Section 3, at 8-9. See generally Verkuil, Bank Solvency and Guaranty Letters of Credit, 25 Stan. L. Rev. 716 (1973). /2/ The letter is set out in the opinion of the court of appeals at Pet. App. 3a-4a. /3/ The FDIC's role as receiver is distinct from its corporate role as insurer of bank deposits. See 12 U.S.C. 1819 Ninth; FDIC v. Ashley, 585 F.2d 157 (6th Cir. 1978). /4/ The district court also ruled that FDIC, in its capacity as receiver, was obligated to pay respondent $45,200 (the face value of the letter adjusted by the $100,000 insurance award) in the form of a receiver's certificate (Pet. App. 27a-36a, 44a-45a). This contractual ruling is not at issue here. /5/ The court of appeals overturned the district court's award of prejudgment interest to respondent (Pet. App. 15a-16a). Respondent has not challenged the validity of that holding. /6/ Although these statements were made during the course of the Tenth Circuit's analysis of "primary liability" (see note 7, infra), the court's view of the FDIC's regulatory role presumably affected its holding on the other issues in the case as well. Indeed, in the discussion of the other issues the court failed even to suggest that the FDIC has special expertise in interpreting Section 1813(l)(1). /7/ The court also held that the letter of credit was one on which Penn Square was "primarily liable" (Pet. App. 7a-11a) and that respondent was a "depositor" entitled to recover any insurance proceeds (id. at 13a-15a), and rejected the FDIC's argument that respondent's claims were unrecorded liabilities (see 12 U.S.C. 1822(c)) (Pet. App. 14a-15a). Those conclusions are not challenged here. At the same time, the court of appeals affirmed the district court's conclusion that the FDIC in its capacity as receiver owned respondent $45,200 in the form of a receiver's certificate, rejecting respondent's contention that the letter of credit should have been valued at $724,658.50 rather than $145,200.00 (id. at 16a-19a). This holding also is not at issue here. /8/ The 1933 Act created the FDIC through the addition of a Section 12B to the Federal Reserve Act (48 Stat. 168). See 12 U.S.C. 1811 note. Section 12B was amended frequently in subsequent years (see 12 U.S.C. 1811 note; pages 23-25, infra). In 1950, Section 12B was removed from the Federal Reserve Act and set out separately as the Federal Deposit Insurance Act of 1950 (FDI Act), ch. 967, 64 Stat. 873 et seq. See 12 U.S.C. 1811 note; H.R. Rep. 2564, 81st Cong., 2d Sess. 5 (1950); S.Rep. 1269, 81st Cong., 2d Sess. 4 (1950). Section 1813(l)(1) is now a part of the FDI Act. /9/ As President Roosevelt stated during his first "fireside chat" with the Nation, shortly after declaring the nationwide "bank holiday," "(i)t needs to prophet to tell you that when people find that they can get their money -- that they can get it when they want it for all legitimate purposes -- the phantom of fear will soon be laid." President Roosevelt Delivers His First Fireside Chat, March 12, 1933, in 4 Documentary History of Banking and Currency in the United States 2708-2711 (1969); 2 Pub. Papers 61-65 (1938). /10/ In designing the federal deposit insurance program, Congress was inspired by the state deposit guarantee systems created in the early twentieth century. See 12 Cong. Dig. 114 (1933) (Rep. Steagall) ("(t)he state depositors' insurance laws pointed the way to a sound national insurance system"). See generally 11 Fed. Res. Bull. 626 (1925); Legislation: Federal Insurance of Deposits, 36 Colum. L. Rev. 809 (1936); Note, Precedents for Federal Bank Deposit Insurance, 19 St. Louis L. Rev. 62 (1933). These state systems had provided that deposits would be protected only when they represented the equivalent of money entrusted to a bank. See 9 C. Zollman, Banks and Banking Section 5921, at 102 (1938). And as a rule, the state laws "look(ed) through all semblances and forms to ascertain the actual fact as to whether or not there ha(d) been a bona fide deposit made." Kidder v. Hall, 113 Tex. 49, 56-58, 251 S.W. 497, 500 (1923). See, e.g., Spillman v. Farmers' State Bank of Dix, 115 Neb. 574, 214 N.W. 4 (1927); Spillman v. Gross State Bank of Gross, 113 Neb. 119, 202 N.W. 460 (1925); Fourth Nat'l Bank v. Wilson, 110 Kan. 380, 204 P. 715 (1922); Peoples Bank of Dixon v. Bone, 121 Kan. 768, 250 P. 276 (1926). See generally 9 C. Zollman, Banks and Banking Section 5921, at 102 (1938). /11/ This has been recognized by the Board of Governors of the Federal Reserve System (Board). While the Board's definition of "deposit" is in terms quite similar to that in the Section 1813(l) (see 12 C.F.R. 204.2(a)(1)(i)), the Board has made it plain that obligations "represent(ing) a conditional, contingent or endorsers liability" are excluded from its definition. 12 C.F.R. 204.2(a)(2)(ii). The Board's approach has special significance here because Congress intended each of the federal banking agencies to use an identical definition of "deposit" to avoid imposing dual reporting requirements on FDIC-insured banks. See S. Rep. 1821, supra, at 7. /12/ The analysis used below was perhaps most clearly stated by the district court, which read the statute to provide that, whether or not the letter represented an actual obligation, it "must be considered as having been issued in exchange for 'money or its equivalent' because it was issued in exchange for Orion's promissory note" (Pet. App. 40a; emphasis in original). /13/ Similarly, it is not significant that the controlling conditions that made the note contingent were spelled out in a separate agreement between Orion and Penn Square, rather than on the face of the backup note itself. Any other conclusion would allow the parties to such agreements to obtain federal insurance for their transactions simply by engaging in clever drafting. /14/ While the FDIC, the Board of Governors of the Federal Reserve System, and the Comptroller of the Currency all have promulgated regulations providing that a bank's deposits must be set forth on the liability side of its balance sheet, standby letters of credit must be disclosed only in the "general notes" to the sheet. See 12 C.F.R. 11.7(c)(9)(viii), 11.44, 206.7(e)(12)(vii), 335.621, 335.627. If standby letters are deposits, there would of course be no need for this special treatment. /15/ When a bank receives funds in exchange for a letter of credit, it has an unconditional obligation either to pay when the letter is drafted upon, or to reimburse the funds to its customer when the letter expires. /16/ Letters of credit evidently were included in the definition of deposit because there was considerable uncertainty under the old state deposit guarantee programs (see note 10, supra) about whether funds deposited with a bank but segregated to meet an specific obligations were guaranteed. Compare Johnson v. Johnson, 134 Miss. 729, 99 So. 369 (1924) and Spry v. Hirning, 46 S.D. 237, 191 N.W. 833 (1923) with Tyler County State Bank v. Rhodes, 256 S.W. 947 (Tex. Civ. App. 1923). In certain circumstances, funds backing a letter of credit would fall into this category. See H. Harfield, Bank Credits and Acceptances 245-246 (5th ed. 1974). The statute (and its predecessor regulations (see pages 23-25, infra)) was written to ensure that such segregated "special deposits" are insured. In identifying a deposit, then, the crucial question is not whether the bank has issued something labeled a "letter of credit"; it is whether the letter was issued for money or its equivalent. /17/ The Banking Act of 1933, which created the FDIC (see page 12, supra), did not define insured deposits. The first statutory description of the term appeared in the 1935 Act, which defined a deposit as "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 its 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." 49 Stat. 685-686 (emphasis added). /18/ A copy of this transcript has been lodged with the Clerk of the Court and provided to counsel. /19/ If the FDIC is required to treat unfunded standby letters of credit as deposits, it will be forced to collect additional annual insurance assessments in excess of $100 million. See page 28, infra. /20/ Indeed, at the time that Congress enacted Section 1813(l)(1) in 1960, FDIC regulations provided that a note (whether or not denominated a "promissory note") backing only a commitment to advance funds did not create a deposit. 12 C.F.R. 327.145, 327.148 (1959). /21/ Congress very recently affirmed its long-settled view that standby letters of credit are not insured deposits within the meaning of Section 1813(l)(1). The Deficit Reduction Act of 1984, Pub. L. No. 98-369, 98 Stat. 494 et seq., provides that industrial revenue bonds lose their tax exempt status if they are "invested (directly or indirectly) in federally insured deposits." Section 622, 98 Stat. 919. A bond is not viewed as federally guaranteed, however, "solely because a financial institution guarantees repayment of the loans (to financial institutions) other than by means of federal deposit insurance (e.g., by a letter of credit)." Joint Comm. on Taxation, 98th Cong., 2d Sess., General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984, at 941 (Comm. Print 1984). Thus, it is still the congressional view that standby letters of credit (that is, those used to guarantee payment) are not federally insured. /22/ The figures estimating the amounts involved have been provided to us by the FDIC, and are derived from its annual reports and published statistics on banking, and from call reports submitted to the FDIC by banking institutions. /23/ The FDIC reports that in the years 1982-1984 there were 179 bank failures in the United States. Through November, there were 108 bank failures in 1985. /24/ In addition, depending upon the required accounting method, treating standby letters of credit as deposits could increase bank capital requirements. FDIC-insured banks are required to maintain a minimum level of capital as a ratio to assets. If banks must carry standby letters of credit on their books as deposits, total bank assets will be increased; as a result, banks will be required to carry additional capital. See generally 50 Fed. Reg. 11128 (1985), to be codified at 12 C.F.R. Pt. 325. The FDIC estimates that, in the aggregate, this development could increase bank capital requirements by as much as $6.5 billion. /25/ The Internal Revenue Service has announced that it will give "grandfather" tax exempt status to all standby letter of credit industrial revenue bond transactions completed within 120 days of the Court's decision in this case. IR-85-113 (Nov. 27, 1985).