Article

Factual Summary: To assure performance of a contract with a governmental beneficiary to make road improvements in exchange for a zoning variance, the bank issued a standby LC. Among the LC's requirements was "presentation of a sight draft, accompanied by a statement executed by the judge of Denton County certifying that [the applicants] failed to complete the road improvements". Subsequent to the issuance of the LC, the Denton County Judge delegated to Commissioner Sandy Jacobs the duty of presiding over the Denton County Commissioner's Court. When the road work was not completed, the beneficiary drew down on the LC and the issuer honored. Among the presented documents was "a letter on Denton County Commissioners Court letterhead, issued following a hearing and addressed to [the issuer], which certifie[d] that [the applicants] failed to complete the road improvements, and [was] signed by Sandy Jacobs as 'Acting Denton County Judge.' Printed in the letterhead [was] the name 'Sandy Jacobs' over the words 'Precinct 2,' and the name 'Judge Jeff Moseley' under the words 'Denton County Commissioners Court.'"

Following payment the applicants sued the issuer and beneficiary for conversion, negligence, and state Deceptive Trade Practices Act violations, alleging that the issuer wrongfully honored and also alleged that the beneficiary prevented the applicants from performing on the underlying transaction. Following the discovery phase of the case, the issuer claimed that there was no evidence of the essential elements of the applicant's claims and therefore filed a "no-evidence" motion for summary judgment, which was ultimately granted. The applicants' cross-motion for summary judgment was denied. Without specifying grounds, on appeal, affirmed.


Legal Analysis:

1. Compliance; Strict Compliance; Signature; Person Signing: On appeal, the applicants' argued that the trial court erred in granting the issuer's motion for summary judgment and denying theirs because they had proved that the beneficiary did not strictly comply with the terms of the LC. The applicants claimed that "Sandy Jacobs was not 'the Judge of Denton County, Texas,' and that [the issuer] cited no law supporting its contention that the Denton County Commissioners Court [was] empowered to appoint an 'acting judge.'" In its defense, the issuer argued that the LC was governed by the UCP and the beneficiary "reasonably complied" with its terms.

The Court of Appeals, after examining the Texas Business and Commerce Code and local case law, found that strict compliance was the standard followed in Texas. However, it stated that "[t]o deduce that an issuer wrongfully honored a demand that contains a documentary discrepancy, such as the one in the case at bar, from the general rule that an issuer must honor a demand for payment that strictly complies with the terms of the letter of credit, requires a presumptive leap in logic that we will not take." [Footnote omitted.] It also stated that "although maintaining the integrity of the strict compliance rule is important to the usefulness of letters of credit as a commercial tool, ... that even where strict compliance is the standard, 'oppressive perfectionism' is not demanded."

Noting that "the determination of inconsistency must be made from the perspective of the issuing bank", the court stated "a banker, in examining the face of the documents, is charged with knowledge of banking practices, but is not expected to be familiar with the structure of county government and courts, or whether the commissioners court is authorized by law to appoint an acting county judge." The court reasoned that "it is not unreasonable to conclude that there is nothing irregular or inconsistent between the requirement that a statement be signed by the judge of Denton County, and the corresponding demand, signed by a person whose name is printed in the official Denton County Commissioners Court letterhead, identifying herself as acting county judge. Furthermore, we do not think that Appellee Bank, faced with this discrepancy, should be placed in a position of having to determine whether this particular discrepancy would be significant to Appellants. Had Appellants wanted to make the requirement of [the regular judge's personal] signature on the demand an express condition, it should have been explicit, so that Appellee Bank would know precisely and unequivocally its duties with regard to the letter of credit."

Comment:

1. The result in this decision is to be commended. A required certification by a County Judge is satisfied by a certification by an Acting County Judge. The court analyzes the standard of examination from a practical and documentary perspective, properly concluding that if an "Acting County Judge" would not suffice for a County Judge, the terms of the standby must be more precise.

2. Interestingly, the opinion refers to the UCP as "law". The LC "incorporated the UCP as the law governing the credit, to the extent Texas laws are inconsistent with the UCP."

3. Comparing the "strict compliance" rule of Texas case law with UCP500 Article 13, the court asks whether the UCP standard is more liberal. Expressing itself as "not convinced" on this point, it notes that "neither standard requires the demand to be a word-for-word or mirror image duplicate."

4. In focusing on the UCP standard, the court concentrated on the "reasonable care" requirement. This phrase is problematic because it raises the issue of the degree of care exercised by the issuer when what matters is not so much the degree of care but the results, i.e., do the documents comply with the LC terms. This phrase should be reconsidered in the revision of UCP500.

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