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Note: To assure payment of the costs to repair defects in subdivisions built by several Developers, the City of Kaysville (Beneficiary) required Developers to open escrow accounts to guarantee their work. Developers opened six lines of credit in escrow accounts with Barnes Banking Company that permitted Beneficiary to draw on the line of credit in the event that Beneficiary was forced to bear the cost of repairing defects. Four of the escrow accounts were funded by a revolving line of credit backed by a USD 1,000,000 promissory note and secured by real property. One escrow account was funded by a guarantee that Issuer could draw on the Developer's savings account, and the final escrow account was funded by a straight line of credit backed with an unsecured promissory note.

When Issuer became insolvent, the FDIC was "appointed both the receiver for the bank ("FDIC-Receiver") and the insurer of its deposits ("FDIC-Corporate")." One month after the FDIC's appointment, Beneficiary filed claims for deposit insurance on the six escrow accounts, which the FDIC denied. The District Court, Benson, J., ruled against Beneficiary, finding that on the day Issuer failed, five of the six escrow accounts consisted of only lines of credit, not insured deposit accounts, and that the city was not the rightful beneficiary of the funds. The District Court stated that "a line of credit is not a loan exhibiting the existence of money or its equivalent." (internal quotations omitted). On appeal, the United States Court of Appeals for the Tenth Circuit affirmed the District Court.

The Court of Appeals affirmed the on the basis of the Supreme Court's ruling in FDIC v. Philadelphia Gear Corp., 476 U.S. 426 (1986). Under the rule of that case, an insurable deposit is defined at § 1813(/) (1) as "(1) Unpaid balance of money or its equivalent (2) received or held by the bank (3) held in the usual course of business (4) for which it has given or is obligated to give credit, either conditionally or unconditionally." In Philadelphia Gear Corp., the Supreme Court ruled that "standby letters of credit backed by contingent promissory notes are not the type of "hard assets" constituting "money or its equivalent" contemplated by § 1813(/)(1)." The 10th Circuit rejected Beneficiary's contention that the ruling in Philadelphia Gear was limited to standby LCs and did not apply to lines of credit. The Court of Appeals noted the Supreme Court's direct comparison of lines of credit to a standby LC, and held that FDIC insurance does not extend coverage to lines of credit where no surrender of assets is involved.

[MJS]

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This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.