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Pastor v. Nat'l Republic Bk. of Chicago





APPEAL from the Circuit Court of Cook County; the Hon. FRANCIS T. DELANEY, Judge, presiding.


Rehearing denied January 26, 1978.

Plaintiff, Louis Pastor, filed an action in the circuit court of Cook County seeking injunctive relief to prevent defendant, National Republic Bank of Chicago, from paying out funds evidenced by an irrevocable letter of credit. This instrument had been issued by defendant at plaintiff's request to Summit Insurance Company of New York (hereinafter Summit). Summit then entered into liquidation in New York, and Thomas A. Harnett, the Superintendent of Insurance in New York, was appointed as liquidator. He forwarded a sight draft to defendant requesting defendant transfer the aforesaid funds for use in the liquidation proceedings. The trial court granted plaintiff's request for a preliminary injunction to prohibit such transfer. It also denied the liquidator's petition for leave to intervene and he has appealed, contesting the propriety of the latter determination.

We reverse and remand the matter for further proceedings.

The complaint for injunctive relief alleged that plaintiff was affiliated with Associated Surety Agents, Inc. (hereinafter Associated), which was an insurance agency representing Summit since June 1972. Summit and Associated had entered into a general agency agreement at that time as a retrospective profit commission contract. The complaint further averred that in order to secure any deficits arising from the agreement, plaintiff obtained a letter of credit issued by defendant. Thereafter, the liquidator claimed that the funds evidenced by the letter of credit should be issued to him. However, plaintiff denied such funds were owing to Summit and asserted that the liquidator had not shown Summit was entitled to the funds.

In his petition to intervene, the liquidator asserted that Summit had been ordered into liquidation in a New York judicial proceeding. As liquidator, he had been invested with title to all property, contracts, and rights of action accruing to Summit. Noting that a preliminary injunction has already been issued on behalf of plaintiff to prevent transfer of the funds as evidenced by the irrevocable letter of credit, the liquidator sought leave to intervene and dissolution of the preliminary injunction.

The trial court denied the liquidator's right to intervene, finding only that the irrevocable letter of credit was not assignable or transferable thereby depriving the liquidator of a sufficient basis upon which to predicate intervention. It also directed that all prior orders would remain in effect. The court then found that no just reason existed to delay enforcement of the order or appeal. Ill. Rev. Stat. 1975, ch. 110A, par. 304(a).

Both plaintiff and defendant argue, inter alia, that the trial court did not err in disallowing the liquidator's petition to intervene. They rely on section 5-116(1) of the Uniform Commercial Code which provides "The right to draw under a credit can be transferred or assigned only when the credit is expressly designated as transferable or assignable." (Ill. Rev. Stat. 1975, ch. 26, par. 5-116(1).) They characterize the liquidator as merely an assignee of any rights which Summit may have had (cf. McIlvaine v. City National Bank & Trust Co. (1942), 314 Ill. App. 496, 520-21, 42 N.E.2d 93, 105); and they conclude that since the irrevocable letter of credit did not expressly allow assignability, the liquidator had no basis upon which he might seek to intervene.

• 1 A letter of credit is "an engagement by a bank or other person made at the request of a customer * * * that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit * * *." (Ill. Rev. Stat. 1975, ch. 26, par. 5-103(1)(a).) While originally established to secure the shipment of merchandise, the concept of a letter of credit has expanded into other commercial endeavors. Harfield, The Increasing Domestic Use of the Letter of Credit, 4 U.C.C.L.J. 251, 252 (1971-72).

• 2 No party has cited controlling authority in the construction of section 5-116(1) of the Uniform Commercial Code under the circumstances presented in this case. In construing section 5-116(1), we are to give effect to the intention of the legislature. (Berry v. G.D. Searle & Co. (1974), 56 Ill.2d 548, 553, 309 N.E.2d 550, 553.) In this endeavor, we may examine the Uniform Code Comment as to discern the legislature's intent. See People v. Wallace (1974), 57 Ill.2d 285, 290, 312 N.E.2d 263, 266.

The Uniform Commercial Code was compiled by the National Conference of Commissioners on Uniform State Laws in conjunction with the American Law Institute (hereinafter referred to as ALI). Several drafts of the Code were propounded and the version adopted in 1958 with limited variations was enacted in Illinois in 1961. Jenner and Davenport, General Introduction, Ill. Ann. Stat., ch. 26, at XLIV-XLV (Smith-Hurd 1963).

The ALI's proposed final draft in 1950 concerning letters of credit provided that the beneficiary of an irrevocable letter of credit could assign his rights unless otherwise expressly prohibited. (ALI U.C.C. § 5-126(1), at 548 (Spring 1950 Draft).) The drafter's commentary referred to a typical import-export commercial transaction in favoring the assignment of rights under any irrevocable letter of credit. ALI U.C.C. § 5-126, Comment 1, at 549 (Spring 1950 Draft).

In 1952, ALI adopted an official draft. However, it took the position that rights derived from a letter of credit could be assigned only by the authority of the issuer of the credit and if such right was expressly stated to be assignable. The comment set forth the principle that in such transactions "the supplier (beneficiary) chosen by the buyer (customer) cannot substitute another supplier in his place, without the buyer's authorization." ALI U.C.C. § 5-115, Comment 1, at 531 (1952 Draft).

As heretofore set forth, section 5-116, as enacted in Illinois, prohibits assignment or transfer of rights under a letter of credit unless expressly provided. The Code Comment to this section refers to the usual commercial transaction involving a manufacturer. While the term "assignment of the credit" is not delimited, it is noted that a letter of credit was designed to secure and insure performance in a commercial ...

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