Federal Deposit Insurance v. Philadelphia Gear Corp.

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 *441there. 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, 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(i)(l). 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, *442and 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 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 af*443feet, much less invalidate, its original character.” J. Thorndike, Story on Promissory Notes 34 (7th ed. 1878) (footnotes omitted).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 *444are 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.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(0(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.

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.

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.