FEDERAL DEPOSIT INSURANCE CORPORATION, PETITIONER V. PHILADELPHIA
GEAR CORPORATION

   No. 84-1972

   In the Supreme Court of the United States

   October Term, 1984

   The Solicitor General, on Behalf of the Federal Deposit Insurance
Corporation, Petitions for a Writ of Certiorari to Review the Judgment
of the United States Court of Appeals for the Tenth Circuit in this
Case.

   Petition for a Writ of Certiorari to the United States Court of
Appeals for the Tenth Circuit

            TABLE OF CONTENTS
   Opinions below
   Jurisdiction
   Statement
   Reasons for granting the petition
   Conclusion
   Appendix A
   Appendix B
   Appendix C
   Appendix D

                            OPINIONS BELOW

   The opinion of the court of appeals (App., infra, 1a-19a) is
reported at 751 F.2d 1131.  The February 9, 1984 order of the district
court (App., infra, 20a-45a) is unreported.

                             JURISDICTION

   The judgment of the court of appeals (App., infra, 19a) was entered
on December 27, 1983.  A petition for rehearing was denied on February
19, 1985 (App., infra, 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 jurisdiction of this Court is
invoked under 28 U.S.C. 1254(1).

                          QUESTION PRESENTED

   Whether a 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.  App., infra, 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 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
payment default by Orion (App., infra, 5a).  To this end, the letter
obligated Penn Square to pay Philadelphia Gear upon receipt of the
latter's "signed statement that (it) ha(d) invoiced Orion * * * and
that said invoices ha(d) remained unpaid" (id. at 3a).  As security
for this undertaking, Orion executed an 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, 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 2, 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
from the FDIC in its capacity as receiver (which is distinct from the
FDIC's corporate role as insurer of bank deposits) under the letter of
credit, 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 as receiver, however, refused to honor drafts on the letter of
credit.  App., infra, 4a.

   Respondent then brought this suit, claiming that the letter was a
"deposit" insured by the FDIC under 12 U.S.C. 1813(l)(1), which 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 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 $1000,000 in
insurance proceeds (App., infra, 2a, 4a).  See 12 U.S.C. 1821.

   2. The United States District Court for the Western District of
Oklahoma ruled for respondent.  The court explained 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" (App., infra, 40a;  emphasis in original).  The district court
then found that Penn Square had been "primarily liable" on the letter
(id. at 40a-41a).

   In relevant part, the court of appeals affirmed.  /2/ 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 1313's
precise meaning" (App., infra, 8a).

   In these circumstances, the court concluded that the FDIC's views
on the meaning of the statute were due no special deference (ibid.).
/3/

   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 unsecured back-up note.  While the court
acknowledged that both Orion and Penn Square understood that "nothing
would be considered due on the note" until Orion defaulted and
respondent made a proper demand, it nonetheless found that the note
was negotiable on its face (App., infra, 6a) and thus, evidently, was
by its nature the equivalent of money.  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" (App., infra, 6a).

   Rejecting the FDIC's proposed distinction between commercial and
standby letters of credit, the court next concluded that the letter in
this case was one on which "the bank (was) primarily liable." Again
declining to accord the FDIC deference, the court found that "(t)he
liability of a bank issuing a standby letter of credit is nearly
absolute," because the bank must pay claims against the letter even if
the customer has "ordinary" defenses to payment, such as failure of
consideration or fraud in the inducement.  App., infra, 10a-11a.
"(T)his facet of standby letter liability," the court concluded,
"places it closer to the paradigm of primary liability" (id. at 10a).

   Finally, the court added 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 the bank's
obligations to the Corporation's insurance fund (which are based on
total deposits, see 12 U.S.C;  1817).  App., infra, 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 letters should be
excluded from the definition, "the plain language dictates the
conclusion that these instruments are within the statutory definition
of a 'deposit.'" App., infra, 13a.  /4/

                   REASONS FOR GRANTING THE PETITION

   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
Act:  the decision affords the benefits of federal deposit insurance
to the beneficiary of a financial instrument that sinply 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."

   Despite its illogic, the decision below will have immediate,
substantial and continuing effects on banking and related financial
transactions in the United States.  It will bring under the FDIC's
insurance umbrella the almost $120 billion worth of outstanding
standby bank letters of credit, while making banks liable for more
than $100 million in additional annual insurance assessments.  At the
same time, the ruling will play havoc with the multi-billion dollar
market in industrial revenue bonds, which may lose their tax exempt
status if backed by an FDIC-insured letter of credit.  In these
circumstances, immediate review by this Court of the question
presented here is appropriate.

   1. At the outset, the court of appeals erred in concluding that it
was entirely free to disregard the FDIC's views on the meaning of the
statutory term "deposit." The court flatly asserted 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 the greatest deference.  See 12 U.S.C. 1813(l)(5) and 1819
Tenth.  As a general matter, this background suggests that the
agency's views must 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.  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 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. 484 et seq.  /5/ 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 present "in exchange for * * * promissory
notes upon which the person procuring the instrument is primarily
liable." 12 C.F.R. 301 and 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 FDIC v. Irving Trust Co., 137 F. Supp. 145, 161 (S.D.N.Y 1955).
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.

   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.  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).  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 House
Comm. on Banking and Currency, 86th Cong., 2d Sess. 112-113 (1960)
(statement of Royal L. Coburn)), 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, 86th Cong., 2d Sess. 1 (1960).

   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
disturb the agency's views;  it actually incorporated those views into
the statute.  /6/

   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).

   2. There are no such indications in this case.  To the contrary,
the FDIC's interpretation of the term "deposit" is the only one that
is faithful both to the statutory language and to the congressional
purpose.  The federal deposit insurance program, of course, is
intended "to prevent the destruction of deposits because of bank
failure and to protect depositors against loss." S. Rep. 1821, supra,
at 2.  And 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" (Irving Trust, 137 F. Supp. 15 162), Congress has
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).  If 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.

   a. Section 1813(l)(1) provides that an instrument must be regarded
"as evidencing the receipt of the equivalent of money" when a bank
issues it in exchange for, among other things, a "promissory note";
the court of appeals in this case held that the unfunded letter here
in dispute fell within this proviso because Penn Square issued it in
exchange for Orion's unsecured back-up note.  But the Orion note
plainly was not a "promissory note" of the type that Congress intended
to describe when it enacted Section 1813(l)(1).  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, e.g., 12 C.F.R. 208.8(d)(2) and
337.2(b).  Orion's backup note served simply to secure this
undertaking.  Under the controlling understanding between Orion and
Penn Square (see App., infra, 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.  Neither Orion nor respondent deposited any funds with or
obligated themselves to entrust anything of value to the bank when
Orion obtained the note.  And because the note did not represent an
existing debt, Penn Square could not realistically expect to obtain
value for it.  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
back-up note as an insured deposit would frustrate the purposes of the
federal deposit program and provide respondent with a windfall,
because nothing of value ever was deposited with Penn Square.

   That the Orion note was not a "promissory note" within the meaning
of Section 1813(l)(1) is strongly corroborated by the other terms of
the statute.  The proviso to the Section 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 an unsecured
back-up note would have been highly anomalous.  Cf. Fedorenko v.
United States, 449 U.S. 490, 512 (1981).  That Orion and Penn Sauare
chose to use the statutory term by labelling their instrument a
"promissory note" should not change this conclusion, for the purpose
and structure of the statute make it plain that the nature of the note
at issue, rather than its title, should control its treatment for
insurance purposes.  /7/ Indeed, it appears that the drafters of
Regulation I would not have understood a contingent note to be a
"promissory note" within the ordinary meaning of that term.  See,
e.g., 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).

   This conclusion also should not be affected by the court of
appeals' finding (see App., infra, 6a) that the Orion note was
negotiable on its face because the conditions attached to Orion's
liability were not addressed in the note itself.  That the note may in
a technical sense have been a negotiable instrument hardly answers the
question whether it was the equivalent of money for purposes of the
federal deposit 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 it equivalent" an instrument that
becomes valuable only when used unlawfully.  In any event, whether a
particular note is negotiable has nothing to do with the purpose of
the deposit insurance program:  protecting funds that depositors have
entrusted to banks.  Here, it is undisputed that no such funds were
deposited.

   b. 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, a 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'" (App., infra, 13a).  But in
reaching this conclusion the court of appeals entirely disregarded the
first portion of the statutory definition, for here the bank did not
receive money or its equivalent in exchange for the standby letter;
it received only the contingent back-up note.  This distinction has
been accepted by the Sixth Circuit, which has held that a purchase and
assumption transaction effected by the FDIC in certain failed bank
siutations (see 12 U.S.C. 1823(c)(2)(A)) does not transfer liability
for standby letters of credit because such instruments are "contingent
liabilities" that are supported by "contingent assets" (In re F & T
Contractors, Inc., 718 F.2d 171, 181 (1983)) -- an analysis that
cannot be reconciled in principle with the decision below.  Indeed, as
we have noted, for regulatory purposes standby letters of credit
issued for the account of bank customers are aggregated with loans
from a bank (see, e.g., 12 C.F.R. 208.8(d)(2) and 337.2(b)), rather
than with deposits received by the bank.  /8/

   In any event, there is a basic difference between a 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 letters of credit, the
various listed instruments create unconditional liability of a certain
value.  A bank becomes liable to pay on a 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 a
standby letter of credit.  See note 1, supra.

   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.  A
standby letter of credit thus cannot evidence the receipt of money or
its equivalent, /9/ and the fundamental error of the court below was
its conclusion to the contrary.

   c. The court of appeals erred for a second reason as well in
rejecting the FDIC's conclusions here.  A letter of credit may
represent a deposit only if it was issued for the equivalent of money
and if the issuing bank was "primarily liable" on it.  As we have
shown, the letter in this case was not issued for the equivalent of
money.  And Penn Square -- like any bank issuer of a standby letter of
credit -- was not in any event primarily liable on the letter within
the meaning of Section 1813(l)(1).

   While there are some ways in which a standby letter of credit
differs from a simple guaranty or performance bond (see Comment, The
Independence Rule in Standby Letters of Credit, 52 U. Chi. L. Rev.
218, 223-224 (1985)), there is little doubt that such a letter is
"closely akin to a suretyship or guaranty contract." Colorado National
Bank v. Board of County Commissioners, 634 P.2d 32, 37 (Colo. 1981).
Indeed standby letters often are discribed as "guaranty" letters of
credit (see, e.g., Kimball & Sanders, Preventing Wrongful Payment of
Guaranty Letters of Credit -- Lessons From Iran, 39 Bus. Law.  417
(1984);  Verkuil, Bank Solvency and Guaranty Letters of Credit, 25
Stan. L. Rev;  716 (1973)) because "(t)he bank is, in essence,
secondarily liable (on a standby letter), a conceptual distinction
that separates the guaranty letter of credit from traditional letters
of credit." Id. at 725.  That distinction is readily apparent here:
the letter issued by Penn Square indicated on its face that respondent
was required both to provide invoices and to attest to Orion's default
before the bank became liable.

   Viewed in this light, the court of appeals' analysis of the primary
liability issue, which looked to the type of defenses that could have
been asserted by Penn Square in the event of a claim by respondent, is
largely beside the point.  /10/ The purpose of a standby letter of
credit is to guarantee payment of an underlying debt, on which the
customer -- in this case Orion -- is primarily liable.  And absent
fraud or other unusual circumstances, the bank's liability is in fact
contingent on the customer's default.  The court of appeals' finding
that Penn Square was "primarily liable" on the letter in this case
therefore entirely disregards the purpose of a standby letter of
credit.  Indeed, the court's analysis would appear to make issuing
banks "primarily" liable on all letters of credit, a reading that
would make the statute's use of that limiting term meaningless.  In
these circumstances, the FDIC's conclusion that banks are primarily
liable on commercial but not on standby letters of credit plainly is
reasonable.  Cf. 12 C.F.R. 208.8(d)(2) and 337.2(b) (standby and
commercial letters of credit accorded different treatment for purposes
of bank lending limits).

   3. The decision below will have an immediate and significant effect
on the regulation of the banking industry and, potentially, on each of
the nation's FDIC-insured banking institutions.  Most obviously, the
court of appeals' ruling would for the first time accord insurance
coverage to the approximately $120 billion in outstanding standby
letters of credit -- a development that would increase the aggregate
domestic deposits held by FDIC-insured banks by some 9%, while
proportionately reducing the ratio of the FDIC's insurance fund to
deposits outstanding.  /11/ Moreover, because bank failures are not an
altogether uncommon occurrence, /12/ a decision that permits
additional creditors to make insurance claims can be expected to
impose significant new demands on the FDIC.  This development is
particularly troubling given the standby letter of credit's essential
character as a loan to the bank's customer;  as this case
demonstrates, the court of appeals' decision potentially makes the
federal government the guarantor of business transactions that are
financed by standby letters of credit.

   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 new
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 letters
of credit outstanding, the FDIC would be forced to collect additional
annual assessments of approximately $100 million.  Indeed, the FDIC's
discretionary authority to charge back assessments for a four-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, Fed. 18, 1984, at D1.  /13/

   Moreover, the effects of the decision below are not confined to the
banking industry;  the Tenth Circuit's ruling also has significant
implications for the bond market.  Under the Deficit Reduction Act of
1984, Pub. L. No. 98-369, 98 Stat. 494 et seq., so-called industrial
revenue bonds -- which include many municipal bonds -- are exempt from
federal tax unless they are guaranteed by the federal government.
Such bonds are viewed as federally guaranteed if, among other things,
they are "invested (directly or indirectly) in federally insured
deposits." Pub. L. No. 98-369, Section 622, 98 Stat. 919.  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.  While the Internal Revenue Service recently announced
that it will give "grandfather" tax exempt status to all standby
letter of credit industrial revenue bond transactions issued by
December 31, 1985, the uncertainty created by the court of appeals'
ruling is threatening to disrupt the extraordinarily sensitive market
in tax free bonds.  And again, this development may give foreign or
other non-insured institutions an advantage in the financing of such
bond offerings.  Ibid.  /14/

                              CONCLUSION

   The petition for a writ of certiorari should be granted.

   Respectfully submitted.

   CHARLES FRIED

      Acting Solicitor General

   RICHARD K. WILLARD

      Acting Assistant Attorney General

   LAWRENCE G. WALLACE

      Deputy Solicitor General

   CHARLES A. ROTHFELD

      Assistant to the Solicitor General

   ANTHONY J. STEINMEYER

   ROGER CLEGG

      Attorneys

   JOHN C. MURPHY, JR.

      General Counsel

   LAWRENCE F. BATES

      Counsel

   RALPH E. FRABLE

      Senior Attorney

   JANE ROSSOWSKI

      Attorney Federal Deposit Insurance Corporation

   JUNE 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 when due.  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 guarantees 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. Section 5-117, official comment (1985);
 Resnick, The Risky New Wrinkles in Letters of Credit, N.U. 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 court of appeals overturned the district court's award of
prejudgment interest to respondent (App., infra, 15a-16a).

   /3/ Although these statements were made during the course of the
Tenth Circuit's analysis of "primary liability" (see pages 5-6,
infra), the court's view on 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).

   /4/ The court also rejected the FDIC's argument that respondent's
claims were unrecorded contingent liabilities (see 12 U.S.C. 1822(c)),
holding that the claims were provable because they were in existence
prior to insolvency and were certain at the time that the beneficiary
sued the bank's receiver (App., infra, 14a-15a).  That conclusion is
not challenged here.

   /5/ That statute defined a deposit as "the upaid balance of money
or its equivalent received by a bank in the usual course of business
and for which it has given or is 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 prescribe by its
regulations to be deposit liabilities by general usage." 49 Stat.
685-686.

   /6/ Indeed, Congress very recently reaffirmed 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." Pub. L. No.
98-369, 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. Pring 1984).  Thus, it is still the congressional
view that standby letters of credit (that is, those used to guarantee
payment) are not federally insured.

   /7/ 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 back-up 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.

   /8/ While 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. 117.7(c)(9)(viii),
11.44, 206.7(e)(12)(vii), 335.621, 335.627.

   /9/ This distinction has been recognized by the Federal Reserve
Board, which has excluded from its definition of "deposit" those
obligations "that represent( ) a conditional, contingent or endorser's
liability." 12 C.F.R. 204.2(a)(2)(i).

   /10/ Indeed, that analysis might not even have been accurate on its
own terms.  Looking generally to law concerning traditional commercial
letters of credit, the court concluded that Penn Square's liability on
the letter here was "nearly absolute" (App., infra, 10a), whatever the
state of the underlying transaction between respondent and Orion.  But
application of this rule may well be improper in cases involving
standby letters of credit, because "the rule distorts the
'bargain-in-fact' between the parties to the underlying contract by
requiring the bank to pay even when the customer has not in fact
breached (his) contract (with the beneficiary)." Comment, 52 U. Chi.
L. Rev. at 228-229.  See Note, "Fraud in the Transaction":  Enjoining
Letters of Credit During the Iranian Revolution, 93 Harv. L. Rev. 992,
1011-1013 (1980).

   /11/ 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.

   /12/ The FDIC reports that in the years 1982-1984 there were 179
bank failures in the United States.  Through mid-June. there were 47
bank failures in 1985.

   /13/ 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. 325.  The FDIC estimates that, in the
aggregate, this development could increase bank capital requirements
by as much as $6.5 billion.

   /14/ Because the decision below imposes new demands on the federal
deposit insurance program and is disrupting the national market in
industrial revenue bonds, we believe that review by this Court is
warranted despite the absence of an existing conflict in the circuits
on the question presented.  Briefing on a case involving similar
issues recently was completed in the Sixth Circuit (Allen V. FDIC, No.
85-5003) in a suit growing out of the failure of Knoxville's United
American Bank.  Because the default in Allen occurred six months after
the bank's failure, however, the Sixth Circuit could rule for the FDIC
simply by holding that a deposit obligation cannot be created by
events occurring after the failure of a bank -- a holding that would
not conflict directly with the decision below.  We are now aware of
any other cases pending in the courts of appeals presenting similar
issues.

                               APPENDIX