A US court has ordered First Community Bank (FCB) of the US to pay Arch Specialty Insurance (ASI) US$300,000 plus nearly US$45,000 in interest for refusing to honour a letter of credit (L/C) issued to guarantee the insurer was paid its premium.

The banks may also have to pay court costs.

Hospital bankruptcy

The bank issued the L/C in November 2007 on behalf of Crittenden Regional Hospital in West Memphis.

ASI had provided insurance coverage to the hospital and required the L/C to draw on if the hospital failed to meet its payment obligations.

Court judgment

When the hospital filed for Chapter 7 bankruptcy liquidation in 2014 and failed to meet its payment obligations, ASI asked FCB for the US$300,000, but the bank refused to pay.

Lawyers for FCB argued that the L/C was not straightforward or ordinary and there were several reasons why the bank should not have paid it, including the fact that ASI had not notified the bankruptcy court of the L/C.

But the court disagreed with the arguments. It found that the bank improperly refused to honour the L/C and "must pay on an unconditional letter of credit regardless."

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