Article

Factual Summary: To pay for fuel products sold to a gas station, Bank issued a letter of credit requiring presentation of a sight draft. As described in the opinion, the draft was to be "accompanied by the following document: 'STATEMENT SIGNED BY CARTER PETROLEUM PRODUCTS STATING THAT HIGHWAY 210, LLC HAS FAILED TO PAY OUTSTANDING INVOICES IN ACCORDANCE WITH TERMS OF PAYMENT.'" Additionally, it required presentation of the original LC. The credit also contained a statement requiring that "each draft must state that it is 'Drawn under Brotherhood Bank & Trust Company's Letter of Credit # 2001-270 dated July 26, 2001.' This credit must accompany the draft(s)."

The date of "July 26, 2001" was typographical error. In fact, the credit was dated October 19, 2001 which was its actual date of issuance. As explained in the opinion, the date in this required clause was typographical error by Issuer, referencing a previous LC in this series of LCs and not the date of the LC at issue.

At approximately 5:00 PM on the expiration day, which was a Wednesday, Beneficiary's credit manager carried the documents for presentation to Issuer's office. On finding the bank's lobby doors to be locked, he knocked, was admitted, asked for and was received by Issuer's Assistant Vice President who took the papers and stamped, signed, and dated them as having been received on the expiration date. At that time Issuer's drive-through window was still open for business, although inside the bank there were several signs alerting customers that any transactions after 2 p.m. would be posted on the next business day.

What was presented was the original operative instrument, one document described in the opinion as a draft, and copies of outstanding invoices to Applicant. The draft contained the following statements:

Pursuant to the terms stated in the Letter of Credit # 2001-270 dated October 19, 2001 (copy attached), Carter Petroleum Products, Inc., hereby exercises its option to draw against said Brotherhood Bank and Trust Company's Letter of Credit in the amount of $175,000 due to nonpayment of invoices in accordance with terms of payment (copies also attached).

and "that Highway 210 had failed to pay outstanding invoices and contained a statement that Carter was exercising its rights under the letter of credit."

The draft also listed the name of the account that was outstanding as "Highway 210, LLC". The applicant listed in the credit was "Highway 210 Texaco Travel Plaza, LLC".

Two days later, on a Friday, Issuer dishonored the presentation. As explained in the opinion, the notice of refusal stated "(1) The draft request was presented to the Bank after regular banking hours of the Bank on the date the letter of credit expired, and (2) the request failed to contain the specific language required by the letter of credit: 'Drawn under Brotherhood Bank & Trust Company's Letter of Credit # 2001-270 dated July 26, 2001.'"

Beneficiary sued Issuer for wrongful dishonor and both parties moved for summary judgement. The trial court granted Beneficiary's motion and denied that of Issuer.

Legal Analysis:

1. Construction; Interpretation: Citing judicial decisions, the court noted that "[l]etters of credit are governed by the rules applicable to the construction of ordinary contracts ... . The document must be construed from its four corners and all provisions must be considered together and not in isolation. When an ambiguity appears in a document, the language is construed against the party who prepared the instrument." It then noted that "[i]n the instant case, the Bank prepared the letter of credit ... ." and later that "[t]he Bank was the sole drafter of the letter of credit."

2. Strict Compliance; Compliance; Rev. UCC Section 5-108: The appellate court looked to the Kansas version of Revised UCC, § 5-108, noting that it adopts the standard of strict compliance, to determine whether the draft complied with the terms of the LC. The court also quoted several paragraphs from Official Comment 1 to that section which, among other things, provide that "[s]trict compliance does not mean slavish conformity to the terms of the letter of credit... . Identifying and determining compliance with standard practice are matters of interpretation for the court. ..."

3. Presentation, Timely; UCP500 Article 45; Deadlines; Banking Hours: Issuer argued that the presentment was untimely under UCP500 Art. 45 which states "banks are under no obligation to accept presentation of documents outside their banking hours." It based this argument on the 2 PM deadline provided in the signs posted in the bank, and in the alternative, because presentation was made after regular business hours, even though the drive through window was still open. The appellate court noted, however, that:

The letter of credit made no reference that the sight draft must be presented before the lobby closed on June 26, 2002. Similarly, it did not state that the draft needed to be presented before 2 p.m. or before 5 p.m. The letter of credit did not state that the draft needed to be presented to a loan officer, a vice president, or any particular person. The letter of credit simply stated that the money was available by draft at 'sight' and would be honored "if presented at this office in Shawnee, KS no later than June 26, 2002."

It ruled that the presentation was timely since the bank was still open for business. Although the lobby was closed, by the terms of the letter of credit, anyone working at the Bank was authorized and could have accepted the draft, including the drive-through teller who was open for business.

Although the Bank may have intended to limit the presentment of a sight draft to either before 2 p.m. or 5 p.m. on June 26, 2002, the Bank did not specify in the letter of credit that presentment was to be conducted in this way. This was the source of the confusion; other than the date, no specific time of day was mentioned as to when it must be presented. For example, the letter of credit could have stated that it must be presented "no later than 5 p.m., June 26, 2002, at which date and time the letter of credit expires." The letter of credit failed to contain such language or any similar language to that effect.

4. Strict Compliance; Compliance; Draft; Name of Beneficiary; Beneficiary's Name: Issuer argued that the draft was not in strict compliance with the terms of the LC because the name of the applicant in the credit was given as "Highway 210, LLC" whereas the name in the draft was stated as "Highway 210 Texaco Travel Plaza, LLC". Reviewing a line of relevant cases, the court concluded that the test to be applied in such cases was whether or not there was a possibility that the bank could be mislead by the additional terms or text. The appellate court noted that:

Although the draft request listed the account name as "Highway 210 Texaco Travel Plaza, LLC," not "Highway 210, LLC" as requested in the letter of credit, the draw request was accompanied by the letter of credit which properly named the account. Obviously, there was no confusion caused by the different name referred to in the draft request because the Bank did not rely on this ground in rejecting the letter of credit ... .

The draft request also contained all of the other pertinent information requested in the letter of credit. The letter of credit accompanied the draft, the draft stated it was drawn under [Issuer]'s letter of credit, and the draft contained the correct letter of credit number: # 2001-270. Additionally, as required by the letter of credit, the draft stated that [Beneficiary] was exercising its option to draw against the Bank due to nonpayment of invoices in accordance with the terms of payment.

The appellate court also noted that the issuer had failed to raise this argument before the trial court.

5. Discrepancy; Compliance; Draft, Date of Letter of Credit. Issuer also argued that the draft misstated the date of the LC, giving the correct and actual date of the LC rather than the incorrect one erroneously stated in the LC. The appellate court dismissed this argument with the statement that "[h]ad Carter referred to the incorrect date as specified in the letter of credit, it would have been likely to cause confusion on the part of [Issuer] because the October 19, 2001, letter of credit was for a different amount and superceded the July 26, 2001, letter of credit."

Comments:

1. The court's reference to LC construction being determined by the rules of contract construction is unfortunate. Actually, the rule that one considers the document as a whole is also applicable to LCs. The ambiguity rule is also applicable but not in the manner that the court appeared to apply it, seeking to determine who "prepared" the LC unless the court took it for granted that the bank prepared the LC without inquiry beyond the issuance by the bank. Such an inquiry would be inconsistent with the independent character of the LC.

2. The appellate court's decision on the compliance issues was sound. The standard evolved by the courts in this federal circuit is workable, whether or not the data would mislead the issuer. It is a pity that the LC banking community cannot formulate a workable standard such as this one.

3. On the issue of when banking hours end, the appellate court is also correct. The failure to state banking hours is fatal. One would have thought, however, that even were they stated in the credit, having accepted the document and marked it as having been received might have produced a different result were the credit merely to state the banking hours instead of a deadline with date and time.

[JEB/lhd]

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