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Banking Law Keyed to Barr, 3rd Ed.
Federal Deposit Insurance Corporation v. Philadelphia Gear Corp.
Citation:
476 U.S. 426 (1986)Facts
Orion Manufacturing Corporation was a customer of Philadelphia Gear Corporation. At Orion’s request, Penn Square Bank issued a standby letter of credit for $145,200 benefiting Philadelphia Gear. The letter of credit would be honored only if Philadelphia Gear provided a signed statement that it had invoiced Orion and the invoices remained unpaid for at least 15 days. On the same day, Orion executed an unsecured promissory note for $145,200 in favor of Penn Square, with the purpose listed as “Back up Letter of Credit.” Both Orion and Penn Square understood that nothing would be due on the note, and no interest charged, unless Philadelphia Gear presented drafts on the standby letter of credit after Orion’s nonpayment. When Penn Square was declared insolvent on July 5, 1982, the FDIC was appointed receiver. Philadelphia Gear subsequently presented drafts on the standby letter of credit for payment of over $700,000 for goods delivered before Penn Square’s insolvency. The FDIC returned the drafts unpaid, leading Philadelphia Gear to sue the FDIC, claiming the standby letter of credit was an insured deposit under 12 U.S.C. § 1813(l)(1).
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