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AMERICAN EMPLOYERS INS. v. PIONEER BK. & TRUST

December 18, 1981

AMERICAN EMPLOYERS INSURANCE COMPANY, PLAINTIFF,
v.
PIONEER BANK AND TRUST COMPANY, DEFENDANT.



The opinion of the court was delivered by: Shadur, District Judge.

MEMORANDUM OPINION AND ORDER

American Employers Insurance Company ("American Employers") sues Pioneer Bank and Trust Company ("Pioneer") alleging the wrongful dishonor of drafts presented under each of three irrevocable letters of credit issued by Pioneer. American Employers has moved for summary judgment and Pioneer has filed a cross motion to dismiss the Complaint. For the reasons stated in this memorandum opinion and order, Pioneer's motion is denied and American Employers' motion is granted in part and denied in part.

Facts

On November 1, 1974 Pioneer (the issuer) issued an Irrevocable Letter of Credit (the "1974 Letter") in favor of American Employers (the beneficiary) for the account of Jenkins Industries, Inc. ("Jenkins," the customer). Under its terms the 1974 Letter was automatically extended from year to year unless Pioneer provided American Employers with 30 days' notice before an anniversary date. Payment under the 1974 Letter was conditioned upon American Employers' presentation of a sight draft demanding payment and an accompanying statement:

  that [American Employers], as Surety, have
  executed one or more bonds on behalf of Jenkins
  Industries, Inc. and that a claim has been made
  or a situation exists under which, in the sole
  judgment of [American Employers], claim may be
  made or loss or expense sustained under said bond
  and that monies represented by [American
  Employers'] drafts are required in the discretion
  of [American Employers] for its protection under
  said bond(s) or for payment of premiums.
  On May 21, 1975 Pioneer issued two additional Irrevocable Letters of Credit (the "1975 Letters") employing the identical set of terms and conditions. They differed only in their principal amounts and in their being issued for the account of "Jenkins Industries, Inc., a general partner, and S & A Mining Associates, a limited partner," rather than Jenkins alone.

On July 23, 1981*fn1 American Employers July 21 and accompanying statements dated July 23, demanding payment under each of the letters of credit. Each statement referred to the execution of bonds on behalf of Jenkins, and each draft directed Pioneer to charge Jenkins' account.

Under Ill.Rev.Stat. ch. 26, § 5-112(1) ("Section 5-112(1)") Pioneer had until the close of business July 28 to honor American Employers' demand. When Pioneer failed to do so American Employers filed suit July 29.

American Employers' Contentions

American Employers asserts that:

    (1) All three letters of credit remained in
  effect in 1981 because Pioneer had never given
  notice of cancellation.
    (2) American Employers provided Pioneer with a
  sight draft and accompanying statement in full
  compliance with each letter of credit.
    (3) Pioneer's failure to respond amounted to a
  dishonor of the demand.
    (4) American Employers is therefore entitled to
  full payment under the terms of the letters of
  credit.

As this opinion will reflect those arguments are, with a single (though important) limitation, unanswerable as a matter of law.

Pioneer's Responses

Pioneer counters with a number of defenses. For the most part they are ...


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