Article

Note: To assure payment for issuance of airline tickets, Associate Travel, Inc., a travel agency, maintained several standby letters of credit for the benefit of various airlines. When Sophia Ho, owner of all outstanding stock in the corporation, sold 95% of the shares to Benjamin Pan, she agreed "not to withdraw the existing letter of credit with Northwest Airlines until agreed upon by the parties, but not to exceed two annual renewal periods following the Closing Date. Seller agrees not to withdraw letters of credit with other airlines, not to exceed one annual renewal period following the Closing Date."

At the time of the sale, the standbys were collateralized by a deposit of US$360,000. During the year after the sale, the funding requirements for several of the standbys were lowered and Ho personally withdrew the excess collateral and deposited it in her personal account.

Subsequently, Pan died suddenly and without having informed his wife, who was also his heir, of his ownership of the travel agency. At approximately the same time, the seller ceased working for the travel agency.

The widow subsequently refused to transfer funds from the outstanding standbys when they were released and the seller sued the widow and the agency for breach of contract in refusing to return the collateral. The Superior Court of King County, Washington, entered summary judgment in favor of the widow. On appeal, the Court of Appeals of Washington, Division 1, Coleman, J., reversed the trial court and awarded summary judgment to the seller.

Looking at the conduct of the parties and the text of the agreement, the appellate court concluded that if the seller was entitled to withdraw the standbys under the contract, it was assumed that she had the right to do so and, accordingly, the right to the collateral which supported them.

In considering the meaning of this contract clause, neither the parties nor the courts explained how an applicant could "withdraw" a letter of credit that was outstanding.

[JEB/bso]

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