Murphy v. Federal Deposit Insurance Corp.

This is a dispute between the Federal Deposit Insurance Corporation and Patrick J. Murphy, the holder of two letters of credit issued by a failed bank, The First National Bank, Chico. Mr. Murphy was an investor in the parent company of the bank, Pacific National Bancshares (“PNB”), and had also served as one of PNB’s directors. The Bank *1487 issued the letters of credit as security for the obligations of PNB to Murphy..

In this litigation, Murphy sought to enforce the letters of credit against the FDIC in its corporate capacity as assignee of the assets and liabilities of the bank.' The FDIC defended on the ground that it was not responsible for obligations of the Bank that were not properly carried on its books and records, relying upon the doctrine of D’Oench, Duhme & Co. v. FDIC, 315 U.S. 447 , 62 S.Ct. 676 , 86 L.Ed. 956 (1942), and its partial codification in 12 U.S.C. § 1823 (e). The FDIC also contended that it was not responsible for the Bank’s obligations that violated federal statutes prohibiting inadequately secured credit transactions between the Bank and affiliate entities. See 12 U.S.C. §§ 371c(e), 375b. The district court, relying upon our decision in First Empire…

dissenting:

The majority holds that the FDIC is not required to honor two letters of credit issued by the First National-Bank, Chico, before the FDIC took it over. Although the majority rejects the FDIC’s efforts to rely upon the D’Oench, Duhme doctrine, § 1823(e), and § 371c(c)(l) as justification for refusing to *1493 honor the letters of credit, it nonetheless rules in favor of the FDIC on the basis of a novel legal doctrine it forges from disparate elements of § 1823(e) and § 371e(c)(l). In applying the new law it makes to the facts of this case, the majority eviscerates the principle that the validity of a letter of credit is not affected by irregularities in the underlying transactions.

I

The standby letters of credit in dispute were issued by the Bank to appellee Patrick J. Murphy to secure promissory notes issued to Murphy by the Bank’s holding company. The holding company ultimately defaulted on the notes, and when Murphy attempted to draw upon his letters of credit, the Bank refused to honor them. 1 When the FDIC was appointed the Bank’s receiver, it too refused to honor the letters of credit.

Murphy brought this action to enforce payment of his letters of credit. By…