Article

Factual Summary: The 10 Year Distribution Agreement between Distributor (Lawrence Agency, Inc., Rudolph Lawrence, President) of motor fuel products and the Service Station Operator required posting a US$50,000 standby letter of credit in favor of Distributor. Daryl E. and Michele A. Lawrence, son and daughter in law of Service Station Operator applied for and obtained a standby letter of credit from Issuer. The text of the standby quoted in the opinion is set forth at the end of this summary. The LC required a statement that the funds for the purchase of motor fuel products represented by the drawing were due and owing from the applicant.

When Service Station Operator ceased ordering motor fuel products in breach of the agreement, Distributor/Beneficiary declared the contract to be in default and drew on the LC, presenting a draft, a demand quoting the terms of the standby regarding the amount being due and owing, and included a summary of the debt owed. Issuer refused verbally "because the applicant for the Letter of Credit differed from the company that signed the Agreement".

Distributor/Beneficiary made a re-presentation, quoting "the requested language from the Letter of Credit asking the Bank to honor the Letter of Credit by paying Plaintiff $50,000. [Court Doc. No. 1-5]. The request pursuant to the Letter of Credit was accompanied by a document entitled "Sight Draft" in the amount of $50,000" Issuer's refusal refused "for the same reason that existed" under the first presentation.

Issuer explained its refusal as follows:

It is the position of the bank and our customer that the letter of credit you reference required the "Applicant" of the letter of credit owe money to Van Zeeland Oil Company. Our applicant that sought the letter of credit was Daryl Lawrence and his wife, Michele Lawrence. The letter of credit states as follows: "Van Zeeland Oil Company, Inc. hereby represents, certifies, and warrants that the amount of the accompanying draft represents funds due and owing to Van Zeeland Oil Company, Inc., by the Applicant for purchases of products and services by Applicant from Van Zeeland Oil Company, Inc. according to such terms as are established by Van Zeeland Oil Company, Inc. from time to time or pursuant to a Retail Supply Agreement and/or Image Rebate Reimbursement Agreement executed by Van Zeeland Oil Company, Inc. and the Applicant."

Our applicants (customers) in this situation were Daryl Lawrence and Michele Lawrence, not Lawrence Agency, Inc., d.b.a. Centex [sic] Pit Stop. The letter of credit is void of any reference to Lawrence Agency, Inc., d.b.a. Centex [sic] Pit Stop as the "applicant". Do our customers (applicants) of the letter of credit, Daryl Lawrence and Michele Lawrence currently owe Van Zeeland Oil Company for any product and/ or service?

We agree that the beneficiary in the letter of credit is Van Zeeland Oil Company and the Peoples State Bank of Munising is the referenced bank, however, we disagree that our "applicant" for the letter of credit owes any money for product or services to Van Zeeland Oil Company.

Applicant stated under oath that he was in no way affiliated with Service Station Operator.

Beneficiary then sued beneficiary and Issuer for breach of contract. On cross motions for summary judgment, the trial court entered judgment in favor of Issuer.

Legal Analysis:

1. Standard of Compliance; Strict Compliance; US Rev. UCC Section 5-108. The Judge noted that Michigan adhered to the standard that documents must strictly comply with the terms and conditions of the letter of credit, citing case law to that effect but noting that this standard did not encompass a situation where a misspelling or "other flyspeck discrepancy" could not have mislead the issuer.

2. Applicant; US Rev UCC Section 5- 102(a)(2). The Judge recognized that the applicant need not be a party to the underlying party under the definition in US UCC Section 5-102(a)(2). The Judge examined cases in which a similar problem arose, concerning himself with whether or not the terms of the letter of credit required that the name of the applicant be mentioned. Looking to the terms of the LC, the Judge stated that "before honoring the Letter of Credit, the Bank would have been entitled to check with the applicants named in the Letter of Credit, Daryl and Michele Lawrence, to determine whether they personally owed funds to Van Zeeland based on a contract they entered with Plaintiff or other purchases from Plaintiff". The Judge rejected Beneficiary's argument that Issuer "must honor the letter of credit because Daryl and Michele Lawrence were the applicants and Daryl Lawrence held himself out as the "owner" of Defendant Lawrence", stating that "such an argument would require the Bank to analyze documents other than the Letter of Credit". The Judge stated that "As Plaintiff could not demonstrate strict compliance by showing funds owed to it by the applicants, the Bank was within its rights to refuse to honor the Letter of Credit".

Comments:

1. Ministerial Role. The Judge relied on a Michigan court decision that unfortunately described the role of a bank in a letter of credit transaction as "purely ministerial". Quoting from Osten Meat Co. 205 Mich.App. 686, 517 N.W.2d 742, at 745-746 the opinion stated:

"The bank's representative, who knows nothing of the parties, the underlying transaction, or the practices of the industry concerned, checks presented documents carefully against the requirements of the credit. Under a strict compliance standard, if the documents comply, the draft is paid. If there is a discrepancy between the requirements of the letter of credit and the submitted documents, the draft is not paid and the beneficiary is notified of the reason for the dishonor. The beneficiary then has the right to resubmit the correct documents before the credit expires".

The role of the issuer is not to make determinations of whether or not the representations contained in the documents are true but it is to make a professional decision about whether the representations comply. The examples given are simplistic. In most cases, what is required is an exercise of professional judgment. The label "Ministerial" does not assist a court in understanding the independence principle and most commonly is used to excuse the bank from fulfilling the difficult aspects of its professional obligations in issuing a letter of credit.

2. Issuer's Obligation. The opinion is somewhat dualistic in its explanation of what the issuer should have done. On the one hand, it says that the issuer should not have investigated whether or not the applicant held himself out as owner of the Service Station Operator, a conclusion which is entirely correct. On the other hand, it states that the issuer would have been entitled to check with the applicant to determinate whether they personally owed funds to the beneficiary based on the contract.

In this formulation of the role of the issuer, the opinion is wrong unless the question is one of letter of credit fraud or abuse. Otherwise, the only question is whether or not the documents complied with the terms of the LC. The first presentation did not because the recitation was to the effect that the funds were owed by Service Station Operator which was named in the accompanying documents. The second presentation, however, was not accompanied by such documents and apparently contained the recitation from the LC using the term "applicant" without identifying Service Station Operator or any individual person. In such a situation, the documents complied on their face and the only basis for refusal would have been LC Fraud or Abuse.

As to whether or not there was LC Fraud or Abuse, the opinion is silent but it may be argued that there was a basis for liability by the Applicant as a surety for the Service Station Operator. The LC certainly was intended to fulfill that role. As such, there was an arguable basis for a drawing and the parties should be left to work out the ultimate issues of liability after the LC had been honored.

[JEB/xn]

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