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First Arlington Nat'l Bk. v. Stathis





APPEAL from the Circuit Court of Cook County; the Hon. ALLEN HARTMAN and the Hon. MYRON T. GOMBERG, Judges, presiding.


Rehearing denied January 7, 1981.

Defendant Stathis, in appealing the entry of summary judgment for plaintiff in an action for declaratory judgment concerning the parties' rights and obligations under a letter of credit, presents as the sole issue the propriety of that judgment.

The facts are largely undisputed. It appears that in early 1973, Stathis entered into an agreement for the sale of real estate to Ralph Edgar, Denis Rintz, and Phillip Grandinetti, Jr. Part of the consideration was a promissory note dated March 30, 1973 (hereafter "March note"), in the principal amount of $575,000, executed by the three purchasers and their respective wives. The note provided that the first principal payment of $275,000 would be due on September 30, 1975, and the final payment of $300,000 was due on March 30, 1976. Interest was assessed at a rate of 8 percent of the outstanding principal, with the first payment of interest due on March 30, 1974, and subsequent payments due on March 30 of each following year. The note further provided that the outstanding debt was to be secured by a letter of credit in the amount of $575,000 which was to be replaced each year at least 30 days prior to its expiration date. In the event the credit was not timely renewed, or in the event of default in the payment of either interest or principal, the balance due was to be immediately payable without notice.

Rintz, Grandinetti and Edgar arranged the issuance of a letter of credit from the plaintiff bank and, in exchange therefor, executed a demand note payable to plaintiff in the amount of $575,000 at 10 percent annual interest, which was secured by certain property. They also pledged certain collateral; namely, a certificate of deposit in the amount of $187,500 and certain real estate owned by Rintz and Edgar. The letter of credit which plaintiff issued to Stathis guaranteed payment of $575,000 upon his presentation of: the $575,000 March note, endorsed by him without recourse to the order of plaintiff; any documents securing the note; Stathis' notarized statement that the note is due by reason of acceleration and a detailed statement of the nature of the default; Stathis' notarized statement that "demand has been made upon the makers of the note for payment according to its accelerated maturity, and that such demand has not been complied with for a period of at least 10 days following the mailing of such demand letters"; and copies of such demand letters. It was further stipulated that the credit would expire on May 5, 1974.

The first payment of interest on the March note, which was due on March 30, 1974, was not made. On April 2, Stathis' attorney sent three notices of default (hereafter "demand letters") by certified mail — the first mailed to Ralph and Judy Edgar at Ralph's place of business; the second mailed to Denis and Marilyn Rintz at Denis' place of business; and the third mailed to Phillip and Betty Grandinetti at Phillip's place of business. Each letter stated that as of March 30, $46,000 in interest was due; that, as provided in the note, the letter of credit was to be replaced at least 30 days prior to its expiration date (May 5, 1974); and that, unless the first interest payment were made and the letter of credit replaced by April 8, 1974, "then, the entire principal and all interest due under said note shall be deemed automatically accelerated and immediately due and payable, without further notice." The demand letters were received on April 4, 1974.

On April 23, 1974, Phillip Grandinetti entered into an agreement with Stathis concerning the payment of the first installment of interest (hereafter the "Grandinetti agreement"). Initially, the agreement recited that Phillip desired to avoid litigation and the entry of judgment against himself and his wife and was willing to pay his portion of the interest as well as indemnify Stathis for the balance of the interest due. It further provided that Phillip would execute two notes payable to Stathis — the first, for one-third of the first interest installment ($16,257.55), was due on June 5, 1974; and the second, representing the remaining two-thirds of the interest ($32,515.11), was payable on demand. The agreement stated that Stathis would first attempt to collect this remaining two-thirds of the interest from the Edgars and Rintzes (Betty Grandinetti was not mentioned) and, if unsuccessful, would then make demand on Phillip Grandinetti for payment on the second note. After execution of the agreement, Phillip signed the two notes.

On April 25, 1974, Stathis sought payment on the letter of credit and presented to plaintiff a sight draft in the amount of $575,000; the March note endorsed by Stathis without recourse to the order of plaintiff; Stathis' affidavit that the March note was due by reason of acceleration; Stathis' affidavit that the demand letters were sent; and copies of the demand letters and the certified mail return receipts.

Plaintiff mailed Stathis a letter on April 29, 1974, refusing to pay the letter of credit, explaining that "the demand letters which you have attached to your notarized statement do not satisfy the conditions of the letter." On May 3, plaintiff mailed another letter, explaining further its basis for refusing to honor the credit. First, it stated that the demand letters "mailed to the men's places of business [do not] constitute reasonable notice to the wives, each of whom is jointly and severally liable for the full amount of the note as a co-maker or guarantor thereof." Second, it stated that it had learned of the Grandinetti agreement and it viewed this agreement as effectively releasing all of the other comakers from their obligations under the note and thus "a substantial part of the security we are holding to protect the bank's position in this matter belongs to the guarantors." The parties' attempts at settling the dispute were unsuccessful, and on June 13, 1974, plaintiff sent Stathis a final letter summarizing its position.

On June 14, 1974, plaintiff filed a complaint for declaratory judgment against Stathis, Denis and Marilyn Rintz, Phillip and Betty Grandinetti, and Ralph and Judy Edgar, seeking a determination as to whether it was obligated to honor Stathis' demand under the letter of credit. *fn1 Plaintiff and defendants filed motions for summary judgment, and the trial court granted plaintiff's motion but denied defendants', stating:

"I am not persuaded by the argument put forth in the motion by the bank with respect to whether or not the proper demand was made. I think the demand was proper and sufficient. I have no problem with it really.

* * * So, too, with the service on the parties. I believe proper service has been made. The demand on a party is a demand on all. It's true that the demand was received by agents for the husbands at a business address but I believe that demand on one is a demand on all and the wives are included within the demand, so I am not persuaded either with respect to that argument.

* * * [T]he difficulty I believe is generated by the side agreement, not because it was secret, if that is the characterization that one party wishes to place on it.

I put no particular emphasis on whether it was known or unknown at the time, not because it took the interest as a principle of accepting interest; however, I do find, and the basis for my decision this morning is that when Mrs. Grandinetti was excused from having to remain liable, in effect, what has happened is that all accommodation parties are thereby released. You could not thereby give back the note in proper form.

* * * I do not believe that the way it was done gave the bank the kind of security that it bargained for and that act I believe has created a problem for me in the case.

* * * [I]t's clear [Betty Grandinetti] has been released under that agreement and with her gone, I think the entire question of guaranties and accommodation makers flies with it."

After entry of the judgment order, Stathis filed a motion to reconsider and, in support thereof, submitted his attorney's affidavit stating that he subsequently discovered duplicates of the two notes executed pursuant to the Grandinetti agreement and that they are signed by Betty Grandinetti. His position was that as a result of these newly discovered notes, Betty was not released from her obligations; that thus none of the other comakers was released; and that the trial court's ruling was therefore based on incomplete information. The trial court ordered that depositions be taken of the Grandinettis; however, the motion to reconsider was ultimately denied on the grounds that Stathis made no proper showing as to why these notes had not been discovered sooner. This appeal followed.


Initially, we note that the transactions surrounding a bank's issuance of a letter of credit were explained by the court in Baker v. National Boulevard Bank (N.D. Ill. 1975), 399 F. Supp. 1021, 1024:

"Three separate agreements are involved in the issuance of a letter of credit by the bank for the benefit of a beneficiary. [Citation.] The first is the contract between the beneficiary * * * and the customer * * * which is the agreement underlying the letter of credit. Under the second contract, the customer procures a letter of credit, often from a bank, in return for consideration or collateral. The third agreement consists of the bank's agreement ...

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