No. 98-1933
In the Supreme Court of the United States
AZTEC GENERAL AGENCY, PETITIONER
v.
FEDERAL DEPOSIT INSURANCE CORPORATION
ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
BRIEF FOR THE
FEDERAL DEPOSIT INSURANCE CORPORATION
IN OPPOSITION
SETH P. WAXMAN
Solicitor General
Counsel of Record
Department of Justice
Washington, D.C. 20530-0001
(202) 514-2217
WILLIAM F. KROENER III
General Counsel
JACK D. SMITH
Deputy General Counsel
ANN S. DUROSS
Assistant General Counsel
ROBERT D. MCGILLICUDDY
Supervisory Counsel
CHRISTOPHER J. BELLOTTO
Counsel
Federal Deposit Insurance
Corporation
Washington, D.C. 20429
QUESTION PRESENTED
Whether the FDIC correctly denied petitioner's claim for deposit insurance
on 24 letters of credit (LOCs) because the books and records of the failed
issuing institutions revealed that the LOCs were not backed by "hard"
or "tangible" assets on deposit.
In the Supreme Court of the United States
No. 98-1933
AZTEC GENERAL AGENCY, PETITIONER
v.
FEDERAL DEPOSIT INSURANCE CORPORATION
ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
BRIEF FOR THE
FEDERAL DEPOSIT INSURANCE CORPORATION
IN OPPOSITION
OPINIONS BELOW
The order of the court of appeals (Pet. App. 1) enforcing the determination
of the Federal Deposit Insurance Corporation (FDIC) is unreported. The FDIC's
denial of petitioner's claim for deposit insurance appears at Tab 7 to the
Administrative Record (A.R. Tab 7).
JURISDICTION
The petition for review was denied on November 18, 1998. Pet. App. 2. The
petition for a writ of certiorari was filed on February 16, 1999. The jurisdiction
of the Court is invoked under 28 U.S.C. 1254(1).
STATEMENT
1. Under the Federal Deposit Insurance Act, 12 U.S.C. 1811 et seq., the
Federal Deposit Insurance Corporation (FDIC) insures bank and savings association
deposits in prescribed circumstances. The issue in this case is whether
the FDIC properly rejected petitioner's claim that letters of credit, not
backed by any hard or tangible assets, were "insured deposits"
under the Act. An "insured deposit" is "the net amount due
to any depositor for deposits in an insured depository institution"
after deducting offsets, less any part thereof which is in excess of $100,000.
12 U.S.C. 1813(m)(1).1 When appropriate, the FDIC pays a depositor "as
soon as possible * * * in an amount equal to the insured deposit of such
depositor." 12 U.S.C. 1821(f)(1). The FDIC determines the amount of
an insured deposit by examining the deposit insurance records of a failed
federally insured institution. 12 C.F.R. 330.3(i). In making that determination,
the FDIC may rely on the deposit account records of the failed institution.
12 C.F.R. 330.5(a)(1).2
Letters of credit (LOCs) are insurable as deposits only when they are issued
in exchange for "tangible assets" or "hard earnings"
and are reflected as a liability on the bank's books and records. Philadelphia
Gear Corp. v. FDIC, 476 U.S. 426, 438-440 (1986). Without such hard assets,
the FDIC treats the letter of credit for deposit insurance purposes as though
no commitment had been made and therefore no insurable deposit had been
lost. Id. at 440.
2. On November 20, 1995, petitioner filed a claim for deposit insurance
with the FDIC for more than $6 million, plus $5 million in punitive damages,
contending that 52 LOCs issued for its benefit by 47 separate depository
institutions were insured deposits.3 On January 30, 1996, the FDIC denied
that claim, and petitioner sought review by the court of appeals. FDIC C.A.
Br. 2. On March 28, 1997, the court of appeals vacated the FDIC's determination,
stating that the agency's denial of petitioner's insurance claim "fails
to provide a reasoned explanation under the appropriate standard of review."
A.R. Tab 4, at 1. The court of appeals concluded that the FDIC's administrative
record contained deficiencies and remanded the case to the agency. Id. at
5.
3. On remand, the FDIC conducted an exhaustive investigation of the deposit
records of each issuing institution. It reviewed the books, records, and
files of each institution for all 52 LOCs that formed petitioner's November
20, 1995, claim. As part of that investigation, the FDIC, through its claims
agent in Dallas, also requested from petitioner any supplemental documentation,
written evidence, or argument in support of its claim. A.R. Tab 5. Petitioner
submitted no additional documentation or evidence, stating that the "LOCs
need no additional documentation." A.R. Tab 6.
On June 19, 1997, the FDIC issued its deposit insurance determination on
petitioner's claim. A.R. Tab 7. The FDIC first addressed 27 LOCs issued
by 20 institutions that had not failed and which therefore were not eligible
for payment of deposit insurance. A.R. Tab 7, Exhs. A-1 through A-20. The
FDIC advised petitioner that any claims based upon theories of recovery
on the 27 LOCs issued by open institutions "[are] properly addressed
to those institutions." A.R. Tab 7, at 1.
The FDIC then turned to 25 LOCs issued by institutions that had failed and
for which deposit insurance might be owing. A.R. Tab 7, Exhs. B-1 through
B-25. The FDIC denied deposit insurance coverage as to all 25 LOCs. The
FDIC set out a chart detailing the reasons for the denials, including: (1)
LOCs that were not listed on the books and records of the issuing institution;
(2) LOCs that had passed to a bank that had assumed the assets and liabilities
of the failed bank; (3) LOCs that had expired; (4) LOCs that were the subject
of an allowed receivership claim filed years before by petitioner; (5) an
LOC claim that had been settled in earlier litigation; (6) LOCs that had
been previously disaffirmed by the receiver as a standby letter of credit
(including the Chireno LOC that was the subject of the vacated district
court action); and (7) LOCs that had expired and were later disaffirmed
by the receiver. A.R. Tab 7, Exh. B.4 In a number of instances, more than
one of those defects applied. Petitioner was apprised of its right to request
review by the court of appeals. Pet. C.A. Br. Add. A.
4. The court of appeals denied, without opinion, petitioner's petition for
review. Pet. App. 1-2.
ARGUMENT
The court of appeals correctly enforced the FDIC's denial of deposit insurance
on all 24 LOCs that petitioner included in its appeal.5 The court's holding
does not conflict with any decision of this Court or any other court of
appeals. Further review therefore is not warranted.
1. Petitioner contends (Pet. 3) that the court of appeals' decision conflicts
with FDIC v. Philadelphia Gear Corp., 476 U.S. 426 (1986), which involved
an insurance claim on a standby letter of credit.6 Petitioner asserts that
Philadelphia Gear denied deposit insurance coverage for a standby letter
of credit backed only by a contingent promissory note (not hard assets),
and therefore all commercial letters of credit (which it claims the 24 LOCs
to be) are insured whether backed by hard assets or not. Pet. 4-8. That
argument is incorrect.
In Philadelphia Gear, this Court held that a standby letter of credit does
not constitute an insured deposit if it was issued in exchange for a contingent
note. 476 U.S. at 439-440. The beneficiary of a letter of credit is entitled
to recover deposit insurance upon the issuing bank's failure only if the
account party deposited "hard assets" or "tangible assets"
in exchange for the letter. See 476 U.S. at 440. As the Court noted, that
situation typically occurs with a standard commercial letter of credit.
Ibid. Where hard assets back up a letter of credit, the rationale of deposit
insurance-that "someone who put tangible assets into a bank could always
get those assets back"-is demonstrably met. Id. at 435.
Petitioner errs in interpreting Philadelphia Gear to mean that "only
standby letters of credit must be backed by hard assets to become insured
deposits." Pet. 5. The absence of hard assets on deposit, and not the
LOC's status as "standby," is what rendered the standby letter
of credit uninsurable in Philadelphia Gear. Petitioner's erroneous understanding
of Philadelphia Gear leads it to assert incorrectly (Pet. 5) that all commercial
letters of credit must be fully insured. Although this Court in Philadelphia
Gear noted that commercial letters of credit are "typically" backed
by hard assets, it did not find that every commercial letter of credit is
so backed and therefore is an insured deposit. See 476 U.S. at 440 ("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."). By the same token, the Court
did not rule that standby letters of credit can never be backed by hard
assets and therefore can never qualify for federal insurance. A standby
letter of credit may indeed qualify for deposit insurance when "hard
assets" have been deposited in the bank to back it up. See id. at 438.7
In short, this Court's decision in Philadelphia Gear makes clear that an
LOC is an insured deposit only when it is backed by hard assets. The court
of appeals properly applied that test here. Petitioner offers no authority
from any court of appeals to support its position.
2. The FDIC exhaustively examined the underlying documentation of the LOCs
and properly found that none of the 24 LOCs at issue was backed by "hard
assets." The FDIC claims agent located and examined in detail the books
and account records of every issuing institution, and not one of the LOCs
for which petitioner claims deposit insurance was listed as a liability
on any of the books and records of those failed banks. A.R. Tab 7, Exhs.
B-1 through B-25. The absence of appropriate documentation in those account
records- which include all types of records that "relate to the insured
depository institution's deposit taking function" (12 C.F.R 330.1(e))-is
dispositive. The FDIC may rely exclusively on the account records of the
failed institution in making deposit insurance determinations. See In re
Collins Sec. Corp., 998 F.2d 551, 554 (8th Cir. 1993) ("FDIC's longstanding
practice of looking primarily at the failed bank's deposit account records
in determining insurance claims is clearly a permissible interpretation
of [its] statutory mandate[]").8
Accordingly, the court of appeals correctly held that petitioner has no
entitlement to deposit insurance for any of its LOCs. Furthermore, any case-specific
dispute over the adequacy of the FDIC's factual inquiry in this case would
not warrant the Court's review.
CONCLUSION
The petition for a writ of certiorari should be denied.
Respectfully submitted.
SETH P. WAXMAN
Solicitor General
WILLIAM F. KROENER III
General Counsel
JACK D. SMITH
Deputy General Counsel
ANN S. DUROSS
Assistant General Counsel
ROBERT D. MCGILLICUDDY
Supervisory Counsel
CHRISTOPHER J. BELLOTTO
Counsel
Federal Deposit Insurance
Corporation
SEPTEMBER 1999
1 A "deposit" in turn, is defined in 12 U.S.C. 1813(l)(1), in
pertinent part, as follows:
the unpaid balance of money or its equivalent received or held by a bank
or a savings association 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 savings
association, or a letter of credit or a traveler's check on which the bank
or savings association 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.
2 12 C.F.R. 330.5(a)(1) provides, in pertinent part:
[I]n determining the amount of insurance available to each depositor, the
FDIC shall presume that deposited funds are actually owned in the manner
indicated on the deposit account records of the insured depository institution.
If the FDIC, in its sole discretion, determines that the deposit account
records of the insured depository institution are clear and unambiguous,
those records shall be considered binding on the depositor, and the FDIC
shall consider no other records on the manner in which the funds are owned.
Courts have held that those records provide conclusive support for the FDIC's
determination. See, e.g., Nimon v. RTC, 975 F.2d 240, 246 (5th Cir 1992)
("when the account records are clear and unambiguous, their statement
of the capacity in which funds are owned is conclusive"); Abdulla Fouad
& Sons v. FDIC, 898 F.2d 482, 484 (5th Cir. 1990) ("Congress has
restricted the class of possible federal deposit insurance claimants by
providing that FDIC may recognize ownership of deposit accounts only when
held by persons whose name or interest is disclosed on the deposit account
records."); Philadelphia Gear Corp. v. FDIC, 751 F.2d 1131, 1138 (10th
Cir. 1984) ("The law provides that the records of the insolvent bank
are conclusive as to a claimant's entitlement to deposit insurance."),
rev'd on other grounds, 476 U.S. 426 (1986).
3 In September 1991, petitioner had filed a state court action against the
FDIC and Chireno State Bank (Chireno), seeking recovery on one LOC. That
LOC, issued by Chireno at the request of J&D Construction, was backed
by a contingent promissory note secured by equipment and was payable if
petitioner drew upon it. A.R. Tab B-24, at 2-3. The FDIC, however, had been
appointed Chireno's receiver in May 1991. It intervened, removed the case
to federal court, and moved to dismiss on jurisdictional grounds. The district
court instead granted summary judgment in petitioner's favor. Pet. App.
9. The court of appeals vacated that decision because petitioner had failed
to file a claim with the FDIC for a final insurance determination. Such
a determination is itself reviewable only by a court of appeals. FDIC C.A.
Br. Add. A. The court of appeals remanded to the district court with instructions
to dismiss. When petitioner filed its deposit insurance claim with the FDIC
on November 20, 1995, however, the number of LOCs for which it claimed deposit
insurance had increased to 52.
4 In addition, two of the LOCs were issued by credit unions. The FDIC lacks
regulatory authority over credit unions and does not have a legal obligation
to insure deposits in those institutions. A.R. Tab 7, at 1.
5 In the court of appeals, petitioner dropped claims to several LOCs, limiting
itself to 24 LOCs issued by failed institutions. Pet. C.A. Br. 4-5.
6 A standby letter of credit typically obligates the issuer to make payment
on an indebtedness of the account party, or to make payment on a default
of the account party. See Philadelphia Gear, 476 U.S. at 428. A commercial
letter of credit, by contrast, typically obligates the issuer without regard
to a default of the account party. Ibid. See 12 C.F.R. 337.2(a).
7 Petitioner also wrongly suggests that "commercial" letter of
credit is synonymous with "clean" letter of credit. Pet. 3. A
letter of credit is "clean" when the beneficiary may draw upon
it upon presentation of a sight draft; the issuing bank may not require
other documents, such as proof of the account, party's performance, or default.
See, e.g., Ensco Envtl. Serv., Inc. v. United States, 650 F. Supp. 583,
589 (W.D. Mo. 1986). A standby letter of credit, however, may also be "clean."
Baker v. National Boulevard Bank, 399 F. Supp. 1021, 1024 (N.D. Ill. 1975).
The FDIC's deposit insurance determination does not turn on whether a letter
of credit is "clean."
8 In this case, the FDIC did not limit itself to the books and records of
the failed institutions in determining that each of the LOCs upon which
petitioner sued was not an insured deposit. The FDIC also exercised its
discretion to inquire into whether petitioner had evidence to support its
claim and invited petitioner to produce any such evidence. See 12 C.F.R.
330.5(a)(1); A.R. Tab 5. Petitioner's response-that the LOCs "need
no further documentation as they are insured deposits" (A.R. Tab 6)-provides
no contrary evidence that would call into question the FDIC's determination.