Article

Factual Summary:

To support its obligations upon becoming a "Name" of Lloyds of London, the applicant applied for a standby letter of credit in October 1987. Both the application and the credit itself referred to the obligation as a "Stand-By Letter of Credit." To secure the issuance of the credit, the applicant delivered a promissory note and mortgage to the issuer. The LC was confirmed by a UK bank.

The FDIC subsequently placed the issuer in receivership on 19 September 1991. Another bank then contracted with the FDIC for the purchase of some of the issuer's assets and liabilities, including some of its LCs, and reaffirmed the letter of credit, notifying the beneficiary. Subsequently, the applicant notified the issuer's successor that he believed he had been defrauded by the beneficiary and requested that the issuer's successor not honor any demands under the credit. He also recorded a notice limiting future advances in the Duval County public records.

In March 1993, the confirming bank notified the issuer's successor that a conforming presentation had been made and that its correspondent account had been debited. The issuer's successor then called upon the applicant to make payment under the promissory note and mortgage. The applicant refused to do so and the issuer's successor filed suit to enforce those obligations.

The court, in granting summary judgment to the issuer's successor, found that the letter of credit was a commercial letter of credit properly purchased by the issuer's successor. The applicant appealed this decision on the grounds that a material question of fact existed as to whether the credit was a standby or a commercial. The applicant argued that if the credit was a standby, it had not been properly purchased by the successor pursuant to its contract with the FDIC. On appeal, reversed and remanded.

Legal Analysis:

1. Classificaffon: Standby or Commercial. The court looked to the definition of a 'standby letter of credit' found in 12 C.F.R. - 337.2(a). It provides: "(a) Definition. As used in s 337.2, the term "standby letter of credit" means any letter of credit, or similar arrangement however named or described, which represents an obligation to the beneficiary on the part of the issuer: (1) To repay money borrowed by or advanced to or for the account of the account party, or (2) to make payment on account of any indebtedness undertaken by the account party, or (3) to make payment on account of any default (including any statement of default) by the account party in the performance obligation. The 'similar arrangement' includes the creation of an acceptance or similar undertaking." It stated the general proposition that a standby letter of credit covers a default on the underlying contract. While the court could find nothing in the application or credit concerning a default, it determined that an issue of fact remained based on the fact that both the application and credit used the term "Stand-By." Accordingly it reversed and remanded the summary judgment for a factual determination as to the exact nature of the letter of credit involved.

Comment:

Without doubt the LC is a standby. Unfortunately in understanding what is a standby, the court was confused by descriptive notions that equate common function (default payment) with essence (an undertaking to pay against documents which is not a commercial LC). This case is one of the few where the difference has any legal significance, due mainly to the terms of the asset purchase agreement but a standby is not necessarily payable on default. The approximately US$ 200 billion in financial standbys with direct pay features evidence this principle.

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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.