Article

Note: In order to provide the Alabama Department of Environmental Management with financial assurance in the event of an environmental cleanup at Alabama Plating, Inc.'s place of business, First National Bank of Childersburg (Predecessor Bank) issued a standby letter of credit in favor of the Agency in 1985. Due to Applicant's inability to provide additional financial assurances, a trust was created naming the Agency as its Beneficiary. The opinion stated that "[t]he trust was funded by the entire amount pledged in the letter of credit."

When the Agency conducted a cleanup, it attempted to access the funds in the trust without success.

Subsequently, the Predecessor Bank was sold by the holding company to another holding company, Peoples State Bank of Commerce, (Successor Bank). As a result of disputes regarding the sale, a settlement was reached, specifically addressing the standby. The agreement provided that proceeds from another loan that had been participated out would be used to fund an escrow account to be used to pay a judgment in favor of the Agency or to settle obligations under the standby. The Predecessor Bank also agreed to defend Successor Bank in any action and to pay all costs but it retained full discretion to defend or settle any claim. The agreement provided that the escrow would be terminated and all funds re-paid to the Predecessor Bank after two years provided that there was "no litigation pending relating to any claim" by the Agency.

Prior to the end of the two-year period, Successor Bank contacted the Agency, inquiring when it would make a claim and later confirmed the existence of the trust agreement. When the Agency sought payment, Successor Bank indicated to Predecessor Bank its intention to comply with the demand. Predecessor Bank insisted that Successor Bank had no right to comply.

Successor Bank then interpleaded the funds, naming the Agency and the Predecessor Bank as parties. The complaint stated that the Agency "had demanded payment pursuant to the letter of credit." Predecessor Bank filed a counterclaim against Successor Bank, alleging a breach of their agreement.

Both parties to the interpleader moved for summary judgment as to the interpleaded funds. The Jefferson Circuit Court of Alabama granted summary judgment in favor of the Agency, Peoples State Bank of Commerce v. Childersburg Bancorporation, Inc. and Alabama Dep't of Env'tl. Mgmt., No. CV- 03-3885, Jefferson Circuit Court, and Predecessor Bank appealed. The Supreme Court of Alabama, Houston, Brown, Johnstone, Harwood, and Stuart, JJ., affirmed.

Noting that Predecessor Bank did not dispute the Agency's entitlement to the funds, the appellate court concluded that Agency was entitled to ownership of the funds. The appellate court stated that the argument of Predecessor Bank was "based entirely on the settlement agreement." Conceding that Predecessor's interpretation of the agreement may be correct, the appellate court observed that it "does not affect who is entitled to payment under the letter of credit and then the trust agreement." The appellate court concluded that Predecessor Bank's argument was without merit when applied to the Agency as to which the only evidence indicated that it was entitled to payment under the LC and the trust agreement.

Two Justices, Lyons and Woodall, JJ., dissented. They would have distinguished between the Agency's entitlement to recover on the trust agreement and its right to the interpleaded funds, concluding that under the agreement the funds belonged to Predecessor Bank and that any liability with respect to the agreement was a separate issue.

[JEB/mgb]

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