Article

Note: To finalize the purchase of pneumatic blowing equipment, Express Blower, Inc. (Seller) arranged for a finance lease under which it sold the equipment to IFC Credit Corporation (Buyer/Lessor) who in turn leased it to Earthcare LLC (Lessee). Seller undertook to assure Buyer/Lessor that Lessee would fulfill its obligations under the lease, and to repossess and repurchase the equipment in the event of default. To assure payment by Lessee, Seller obtained a standby LC in favor of Lessor. When Lessee failed to make payments, Seller remitted monthly payments and then repossessed and repurchased the equipment. Its total loss was US$169,368.19.

To recover this amount, Seller sued Lessee and its officers, claiming funds due under the lease. On cross motions for summary judgment, the U.S. District Court for the West District of Louisiana, Hicks, J., granted summary judgment in favor of Lessee. On appeal, the U.S. Court of Appeals for the Fifth Circuit, in a per curiam opinion, reversed and entered judgment for Seller. The appellate court ruled that Seller was a surety for Lessee and entitled to reimbursement.

Comment:

In detailing the scope of the suretyship relationship, the opinion stated that, "letters of credit . . . are, by definition, contracts of suretyship on future debts." The court cited Sizeler Prop. Investors, Inc. v. Gordon Jewelry Corp., 550 So.2d 237, 241 (La. Ct. App. 1989) as authority for this proposition. In Sizeler, the court stated, "Louisiana courts have upheld letters of credit which are necessarily contracts of suretyship on future debts. Id., citing Menard and Vigneaud v. Scudder and Stewart, 7 La. Ann. 385 (1852); Gerson v. Hamilton, 30 La. Ann. 737 (1878); Hibernia Bank & Trust Co. v. Succession of Cancienne, 140 La. 969, 74 So. 267 (1917); Continental Supply Co. v. Tucker-Rose Oil Co., 146 La 671, 83 So. 892 (1920)."

This proposition is as dubious as the authority on which it rests. The most recent case was decided in 1920, almost half a century before Louisiana adopted Prior U.C.C. Article 5 and almost eighty years before it adopted Revised UCC Article 5.

Of the four cited, two cases do not even reference a letter of credit (Gerson and Continental Supply). Both cases contained the terms "credit" and "letter" although not in the context of "letter of credit," suggesting that they might have surfaced on a word search engine.

Hibernia Bank stands for the proposition that under some types of accessory guarantees, it is necessary for the beneficiary to notify the guarantor that it has accepted the guarantee. Bank of Illinois involved two separate undertakings, a letter of credit and an accessory guarantee by a third party written on the letter of credit. The opinion did not suggest that a letter of credit was a Suretyship undertaking; indeed, it treated the two undertakings as of a different albeit overlapping character performing similar functions, which is a far cry from suggesting that they have the same legal character.

Menard and Vigneaud is even more remote authority. The 1852 decision is not about a letter of credit but an accessory guarantee, which was deemed to be continuing for good-faith advances made to a decedent's estate after his death and without notice of the death. In discussing the legal issues related to whether the beneficiary must give notice of acceptance of the accessory guarantee, the court cited two even older decisions involving special letters of credit. In Cremer v. Higginson, 6 F. Cas. 797 (Circuit Court, D. Mass., 1817), the Menard and Vigneaud Judge stated that Mr. Justice Story held that the plaintiff had a duty to notify defendants "that reliance was placed on the guaranty." In Edmonston v. Drake, 30 U.S. 624 (1831), the Merard and Vigneaud Judge stated that Mr. Chief Justice Marshall observed that it would be extraordinary if a merchant acted on a letter of credit without giving notice to the issuer that it had so acted. In Cremer, an 1817 decision by Justice Story, sitting as a Circuit Judge, involved an action by the beneficiary of a Suretyship guarantee issued to induce the beneficiary to issue its letter of credit. In Edmonston, Mr. Chief Justice Marshall stated that a subsequent letter following any prior issuance operated as a collateral undertaking binding the issuer as a surety. In neither case is there any indication, much less a statement, that a letter of credit is by definition a Suretyship contract.

Decided in an era when there was no doctrinal clarity, much less a statutory definitional framework (an era which apparently still exists in the 5th Circuit of Louisiana), the vague allusions to similar rules or the confusion between the names given undertakings does not mean that a letter of credit is a suretyship undertaking.

A letter of credit may serve many of the same functions as a suretyship undertaking, but so does insurance. Both are legally different with respect to the nature of the obligation. A letter of credit is independent. Both a suretyship and insurance undertaking are dependent.

Moreover, there is no reason that a letter of credit cannot serve as an undertaking to pay a past debt or a contemporaneous and not a future one, there being no requirement of consideration, the issue is irrelevant to a letter of credit.

[JEB/eml]

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