Newspaper article THE JOURNAL RECORD

New Ruling Could Reverse Penn Square Bank Claims

Newspaper article THE JOURNAL RECORD

New Ruling Could Reverse Penn Square Bank Claims

Article excerpt

Some $1 million in deposit insurance claims on letters of credit against the receivership of Penn Square Bank in O klahoma City could be reversed as a result of a recent U.S. Supreme Court ruling, according to Larry Bates, attorney for the Federal Deposit Insurance Corp.

The claims had been granted by U.S. district and appelate courts.

The U.S. Supreme Court ruled last week that standby letters of credit backed by promissory notes are not equivalent to insured deposits by the FDIC.

That decision overturned an order by the 10th Circuit U.S. Court of Appeals that the FDIC pay $145,100 to Philadelphia Gear Corp. on a claim against the FDIC deposit insurance fund based on lettersof credit.

A standby letter of credit is a guarantee by a bank to make good on a loan agreement made between two parties if one of the parties defaults.

"There may be about $1 million of deposit insurance claims based on letters of credit granted by the court," said Bates, attorney for the FDIC's Washington office. "Hopefully, those will be reversed. The beneficiaries of those letters of credit would still have their claim against the Penn Square receivership estate."

Bates said the $145,100 deposit insurance claim by Philadelphia Gear Corp. is the first to be ruled on out of five or six lawsuits claiming letters of credit were insurable deposits. About $1 million in claims of that sort had been approved by the U.S. District Court in Oklahoma City, he said.

"We've appealed every case that the district court said was insurable," Bates added. He said he expects the remainder of cases to be taken care of in district and appellate courts, as a result of Tuesday's Supreme Court ruling.

Yet to be decided, however, is whether standby letters of credit constitute a provable claim against the Penn Square receivership estate, attorneys say.

If such claims are accepted by the court, the creditors would be issued receivership certificates like any other uninsured depositors, said Paul Heafy, chief liquidator in the FDIC's Oklahoma City office.

At least two schools of thought prevail on the status of letters of credit, according to Oklahoma lawyers familiar with the area.

Some argue that, like deposits, letters of credit retain the same status after an institution is closed.

Others point out that when a bank reaches the point of insolvency, it operates under a new set of rules. A standby letter of credit is a contingent liability - a guarantee of payment by the bank in case a party defaults on a loan, and often needs never to be drawn upon. …

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