Article

Note: At the request of Dana Partnership (Applicant), Cass County Bank (Issuer) issued a standby LC in the amount of US$90,228 in favor of Upland Construction Co. (Beneficiary) in connection with a subcontract to perform roofing work for a waste disposal facility. The standby had an expiration date of 1 June, the date by which it was projected that the roof would be completed.

As collateral for the issuance of the LC, Applicant and the parents of the partners (Sureties) issued a promissory note payable to order of Issuer in the same amount as the LC with a maturity date aligned with the expiration date of the LC. Similar notes had been issued to support other LCs and loans. The record indicated that "[T]he Bank would not advance any money or issue a letter of credit without first acquiring the necessary signatures." The note "provided that it was 'further governed by the Commercial Loan Agreement.'" This loan agreement was signed and dated by the Sureties and contained an integration clause that provided that "this writing, which is the complete and exclusive statement of the agreement between us, except as we may later agree in writing to modify it" also guaranteed "each and every debt, of every type and description, that [Applicant] may now or at any time in the future owe [Issuer]."

Because the project would not be completed by the LC expiration date, Beneficiary insisted that the LC expiration date be extended to 31 October. Multiple conversations occurred between principals of Applicants, one of the Sureties, and Issuer's account officer. As the expiry date approached, there was concern that the LC would expire before it was extended. Issuer's officer therefore issued a replacement LC which was similar except for the expiry date although he had not obtained Sureties' signatures amending the note. The Issuer's officer claimed to have been promised orally on several occasions that the amendments to the notes would be signed.

Subsequently, disputes arose over the project and Beneficiary drew on the LC. At that point, Applicant informed Issuer that the drawing was unfounded, and claimed that it had agreed to an extension only to 31 August and had never received a copy of any extended LC. Although Applicant sought a temporary restraining order and preliminary injunction, its request was denied and issuer honored.

When Applicant and Sureties refused to reimburse Issuer, it sued them for reimbursement. The State of Nebraska District Court, 2nd District, Cass County, Rehmeier, J., entered judgment in favor of Issuer. On appeal, the Supreme Court of Nebraska in an opinion by Gerrard, J., applying Nebraska law, affirmed.

The appellate court ruled that the trial court's conclusions that Applicant and Sureties had consented to issuance of the replacement LC and the amendment of the note were supported by evidence. The appellate court also ruled that Applicant and Sureties were estopped by their promise to sign the amendment to the notes from asserting the clause prohibiting any amendment not supported by a signed surety. "Given the circumstances under which the promise was made-in particular, the short amount of time remaining with which to extend the original letter of credit before the original letter of credit expired-it was both reasonable and foreseeable that [Surety's] promise would induce the Bank to act in reliance upon it. And to refuse to enforce [Surety's] promise would work an injustice on the Bank."

[JEB/rrs]

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.