Opposition Brief — Aztec General Agency v. Federal Deposit Insurance Corp.

Supreme Ceurt, U.S.

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No. 98-1933 VaaeiGE OF THE GLER}

Jn the Supreme Court of the United States

AZTEC GENERAL AGENCY, PETITIONER

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

WILLIAM F. KROENER III Counsel of Record

General Counsel Department of Justice

Washington, D.C. 20530-0001

(202) 514-2217

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.

(I)

TABLE OF CONTENTS

Page

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Jurisdiction ....... scenseacesaeiiseeeasautinmasiacianaenainannineaenetettts 1

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TABLE OF AUTHORITIES

Cases:

Abdulla Fouad & Sons v. FDIC, 898 F.2d 482

CG 3

Baker v. National Boulevard Bank, 399 F. Supp.

40 fe) S ( ) &

Collins Sec. Corp., In re, 998 F.2d 551 (8th Cir.

es 9

Ensco Envtl. Serv., Inc. v. United States,

650 F. Supp. 583 (W.D. Mo. 1986) .......:sesssesneseneeneerereensens a]

FDIC vy. Philadelphia Gear Corp., 476 U.S. 426

3, 4, 6, 7,8

Nimon v. RTC, 975 F.2d 240 (Sth Cir. 1992) .....cceseserees 3

Philadelphia Gear Corp. v. FDIC, 751 F.2d 1131

(10th Cir. 1984), rev’d on other grounds, 476 U.S.

a 3

Statute and regulations:

Federal Deposit Insurance Act, 12 U.S.C. 1811

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+ ROS Tome) )) 1) ) ) 2

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1S UBC. TGBUDI) eceecesecsveceesesrsecesesesesovesescessovecscqevesereeee ’ 2

12 C.F.R.:

Section SBO.1(€) ...cececsrereressrereresesseveseveveovsvenseseveresevesesevsesesoveoes 9

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Section 3B0.5(a)(1) ...cvcececesesesesesesveresesesesesesssvevsereceeesesessessonsoess 3,9

Section 887.2(8) ...ccccscsrsecerersressesersvseserscssessereressvessessssssssoseesers 6

(III)

§n the Supreme Court of the United States

No. 98-1933

AZTEC GENERAL AGENCY, PETITIONER

Vv.

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) en-

forcing the determination of the Federal Deposit Insur-

ance Corporation (FDIC) is unreported. The FDIC’s

denial of petitioner’s claim for deposit insurance ap-

pears 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).

(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 associa-

tion deposits in prescribed circumstances. The issue in

this case is whether the FDIC properly rejected peti-

tioner’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).'. 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

| A “deposit” in turn, is defined in 12 U.S.C. 1813(/)(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 commer-

cial, 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, with-

out limiting the generality of the term “money or its equiva-

lent,” 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.

3

of an insured deposit by examining the deposit insur-

ance 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

* 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).

4

commitment had been made and therefore no insurable

deposit had been lost. Jd. 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.’ On

January 30, 1996, the FDIC denied that claim, and peti-

tioner sought review by the court of appeals. FDIC

C.A. Br. 2. On March 28, 1997, the court of appeals va-

cated 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. /d. at 5.

3. On remand, the FDIC conducted an exhaustive

investigation of the deposit records of each issuing

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.

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 investiga-

tion, the FDIC, through its claims agent in Dallas, also

requested from petitioner any supplemental documen-

tation, 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 insur-

ance determination on petitioner’s claim. A.R. Tab 7.

The FDIC first addressed 27 LOCs issued by 20 institu-

tions 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 institu-

tions 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 rea-

sons for the denials, including: (1) LOCs that were not

listed on the books and records of the issuing institu-

tion; (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

6

the receiver. A.R. Tab 7, Exh. B.* 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, peti-

tioner’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 peti-

tioner included in its appeal.’ The court’s holding does

not conflict with any decision of this Court or any other

court of appeals. Further review therefore is not war-

ranted.

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.® Peti-

tioner 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 thererore all commercial letters of credit (which it .

claims the 24 LOCs to be) are insured whether backed

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.

® 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, typi-

cally obligates the issuer without regard to a default of the account

party. Ibid. See 12 C.F.R. 337.2(a).

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7

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

US. 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. Jbid. Where hard assets back up a letter of

credit, the rationale of deposit insurance—that “some-

one who put tangible assets into a bank could always

get those assets back”—is demonstrably met. Jd. 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 Phila-

delphia 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 de-

posit. See 476 U.S. at 440 (“With a standard ‘commer-

cial’ letter of credit, Orion would typically have uncon-

ditionally 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

8

the same token, the Court did not rule that standby let-

ters 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."

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 peti-

tioner 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”

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 perform-

ance, or default. See, eg., 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 Boule-

vard 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.”

9

(12 C.F.R 330.1(e))—is dispositive. The FDIC may rely

exclusively on the account records of the failed institu-

tion in making deposit insurance determinations. See

In re Collins Sec. Corp., 998 F.2d 551, 554 (8th Cir.

1993) (“F DIC’s longstanding practice of looking primar-

ily at the failed bank’s deposit account records in deter-

mining insurance claims is clearly a permissible inter-

pretation of [its] statutory mandate[]”).*

Accordingly, the court of appeals correctly held that

petitioner has no entitlement to deposit insurance for

any of its LOCs. Furthermore, any case-specific dis-

pute over the adequacy of the FDIC’s factual inquiry in

this case would not warrant the Court’s review.

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 docu-

mentation as they are insured deposits” (A.R. Tab 6)—provides no

contrary evidence that would call into question the FDIC’s deter-

mination.

10

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