United States District Court, Northern District of Illinois, E.D
December 18, 1981
AMERICAN EMPLOYERS INSURANCE COMPANY, PLAINTIFF,
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.
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
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
As this opinion will reflect those arguments are,
with a single (though important) limitation,
unanswerable as a matter of law.
Pioneer counters with a number of defenses. For
the most part they are little short of frivolous.
Initially Pioneer seeks dismissal because
American Employers asks specific performance though
it has an adequate remedy at law. That argument is
wholly groundless, given the prayer for
damages in each of the Complaint's three counts.
Pioneer next points to claimed defects in the
documentation presented by American Employers:
(1) Each of the 1975 Letters requires a sight
draft accompanied by a statement that American
Employers as surety has "executed one or more
bonds on behalf of Jenkins Industries, Inc., a
general partner, and S & A Mining Associates [S &
A], a limited partner. . . ." Pioneer asserts the
actual sight drafts and statements are
insufficient because they disclose bonds issued
on behalf of Jenkins alone.
(2) All three letters of credit call for a
statement that "a claim has been made or a
situation exists under which . . . claim may be
made or loss or expense sustained. . . ." Pioneer
attacks American Employers' statement as
insufficient because it did not adequately
explain the existing situation giving rise to the
American Employers first retorts that Pioneer has waived the
right to argue the demand did not conform to the letters of
credit. There is no doubt that Pioneer dishonored American
Employers' demand. Section 5-112(1) provides:*fn2
A bank to which a documentary draft or demand for
payment is presented under a credit may without
dishonor of the draft, demand or credit
(a) defer honor until the close of the third
banking day following receipt of the
(b) further defer honor if the presenter has
expressly or impliedly consented thereto.
Failure to honor within the time here
specified constitutes dishonor of the draft
or demand and of the credit.
Pioneer did not honor the demand within the time provided and
American Employers did not agree to an extension.
Not only did Pioneer dishonor the draft, but it never gave
American Employers a statement of its reasons for doing so.
American Employers says that failure constitutes a waiver
under First Arlington National Bank v. Stathis, 90 Ill. App.3d 802,
46 Ill.Dec. 175, 413 N.E.2d 1288 (1st Dist. 1980). There
Stathis had entered into an agreement to sell real estate to a
group of investors, who caused First Arlington National Bank
(the "Bank") to issue a letter of credit in favor of Stathis.
When the investors defaulted on their obligation to pay
Stathis, Stathis demanded payment of the Bank. Four days after
the demand the Bank wrote Stathis refusing to pay the letter of
credit, explaining how his accompanying statement had not
satisfied the conditions of the letter. Several days later the
Bank again wrote Stathis another letter stating an additional
reason for its refusal to honor his demand.
On appeal the Bank argued not only the reasons originally
provided to Stathis but two additional requirements of the
letter of credit Stathis had not satisfied. As to the
objections the Bank had raised only after suit was filed, the
court held (90 Ill. App.3d at 812, 46 Ill.Dec. at 183, 413
N.E.2d at 1296):
We note, however, that plaintiff made none of
these objections in its correspondence with
Stathis wherein it originally refused to honor
the credit. Those objections were therefore
waived and cannot now be asserted.
American Employers urges that Pioneer has similarly waived
all objections to its demand.
That argument has force as to many kinds of defective
compliance by a beneficiary. In First Arlington the Bank was
held to have waived all objections not specifically stated in
its pre-litigation refusal to honor the letter of credit. It
should follow a fortiori that an issuer's failure to present
any objections waives all objections. If First Arlington were
not so applied, the issuer would be better off to raise no
objections. But the whole point of requiring a response is to
enable the beneficiary to correct any curable defects. By
failing to provide any indication of why an issuer is
dishonoring a demand the issuer forces the beneficiary to file
suit. See Barclays Bank D.C.O. v. Mercantile National Bank,
481 F.2d 1224, 1236-37 (5th Cir. 1973).
First Arlington is further supported by the Illinois Code
comment to Section 5-114:
A party may be precluded from raising the issue
of conformity on grounds of waiver or estoppel.
Continental National Bank v. National City Bank,
69 F.2d 312 (9th Cir. 1934); Lamborn v. National Bank
of Commerce, 276 U.S. 469, 48 S.Ct. 378 [72 L.Ed.
657] (1928); Consolidated Sales Co. v. Bank of
Hampton Roads, 193 Va. 307, 68 S.E.2d 652 (1952).
Other jurisdictions are in accord. Barclays Bank D.C.O. v.
Mercantile National Bank, 481 F.2d 1224
(5th Cir. 1973); Chase
Manhattan Bank v. Equibank, 550 F.2d 882
(3d Cir. 1977).
How does First Arlington serve American Employers? As to the
1975 Letters, not at all. If the disparity between the Letters'
terms (bonds on behalf of Jenkins and S & A) and the actual
bonds (solely on behalf of Jenkins) is material, American
Employers could not have cured that flaw had Pioneer identified
it in response to the demand for payment. Waiver notions would
therefore play no part in evaluating Pioneer's failure to state
that reason for dishonoring the drafts.
Neither party has provided any real assistance on that
score. American Employers simply asserts without support that
Pioneer "has misconstrued the language" of the 1975 Letters.
But at best the Letters are ambiguous. On a summary judgment
motion all reasonable inferences from the facts are to be
drawn against the movant.
This Court can reasonably posit a situation exemplified by the
It is not uncommon for a limited partnership to
be entered into between a general partner whose
major contribution is the rendition of services
and a limited partner whose entire contribution
is financial and who does not want to place his
or its total resources at the risk of the
venture. Assume a general partner with limited
resources (in this hypothesis Jenkins) that
invests say $20,000 in a partnership that goes
into a $1 million deal, so that the limited
partner (here S & A) invests $980,000. Jenkins'
2% interest in the partnership is of course worth
$20,000. Under such circumstances a bank might
well commit itself on a letter of credit looking
to the $1 million net worth partnership (so that
it would underwrite bonds issued on behalf of
Jenkins as general partner and S & A as limited),
but not on a letter of credit supported by Jenkins'
$20,000 partnership interest and any other net
worth Jenkins had (all that the bank could look to
where the bond had been issued solely on Jenkins'
American Employers must suffer the consequences of its failure
to eliminate any such possible factual issue, which could make
its performance fatally non-conforming.
Pioneer however has also given the Court nothing to act on
except its own speculation. When a summary judgment motion is
filed Fed.R.Civ.P. ("Rule") 56 calls for affidavits to negate
— or to pose — "genuine issues of material fact." Pioneer
like American Employers has not explained anything of the
circumstances of issuance of the 1975 Letters, anything that
would cast light on the meaning of their terms. Its reply
memorandum for the first time states (and not via affidavit at
that) some of the facts — incomplete even then — as to S & A.
Nonetheless, because the burden is on American Employers on its
motion, Pioneer must prevail to this limited extent.
On the other hand, as to the alleged flaw in
American Employers' statement as to potential
claims on the bonds (a matter that applies to all
three letters of credit):
(1) First Arlington requires the conclusion that
Pioneer has waived its right to complain of that
item, at worst a curable defect.
(2) Pioneer's position on the merits is
baseless in any event. American Employers
complied precisely with the terms of the letters
of credit, and each of them specifically vested
American Employers with the "sole judgment" and
the "discretion" to make the determination as to
potential claims. Pioneer seeks to rewrite the
letter of credit, and this it cannot do.
Accordingly Pioneer must lose on this point as to the 1974
Letter and, if in the future American Employers can overcome
the Jenkins-S & A problem, as to the 1975 Letters as well.
This opinion next turns to three more Pioneer defenses that
were not waived by its silence at the time of dishonor. Each
of them, though, is devoid of substance:
(1) In 1977 Jenkins underwent a reorganization under Chapter
11 of the Bankruptcy Act. Pioneer asserts:
Since the obligations of the parties may have
been modified in the Chapter 11 proceeding the
terms of the letters of credit may also have been
modified. It was therefore necessary for Pioneer
to ratify and reaffirm the letters of credit in
order for them to continue in force and
effect. Absent the request by plaintiff or
Pioneer to ratify these letters of credit, they
were cancelled by operation of law and are no
longer in force or effect.
But that precise argument was rejected in First Arlington,
where the beneficiary of the letter of credit had renegotiated
the underlying transaction with certain of the customers (90
Ill. App.3d at 808, 46 Ill.Dec. at 180-81, 413 N.E.2d at
In this regard, we note that an issuing bank is
said to deal in documents and not in contract
performance [citation omitted] and is under a
duty to examine with care the documents submitted
by the beneficiary to determine whether they
comply on their face with the terms of the
credit. [Citation omitted]. `Generally, if the
documents presented conform to the requirements
of the credit, the issuer is not required or even
permitted to go behind the documents before
honoring the demands for payment' [citations
omitted], and `[i]f a conforming presentation of
documents is made, the issuer of a credit is
obligated to pay without reference to the rights
and obligations of the parties to the underlying
contract' [citations omitted]. Thus, the
obligation of the issuer to pay the beneficiary
is completely independent of the underlying
agreement between the beneficiary and the bank's
customers. . . .
Pioneer must fail on the same grounds. Jenkins' Chapter 11
reorganization can in no way affect Pioneer's obligation to
American Employers under the letters of credit.
(2) On August 16, 1977 American Employers notified Pioneer
of three potential claims under the letters of credit. Pioneer
argues that by waiting until 1981 to make its demand American
Employers is barred by laches, but:
(a) Pioneer presents no authority to support
that position. It cites only the inapplicable
decision in National Surety Corporation v. Midland
Bank & Trust Corporation, 408 F. Supp. 684 (D.N.J.
1976). National Surety involved a letter of credit
subject to a statutory limitation of one year.
Plaintiff's claim was held barred because the court
held that statute applicable even to letters of
credit otherwise automatically renewable on an
annual basis. Plainly the holding is in apropos
here. Indeed whatever force it might have had is
wholly vitiated by the fact (mentioned by neither
counsel) that the District Court was reversed on
precisely that point, 551 F.2d 21 (3d Cir. 1977).
(b) More significantly, laches must involve an
unreasonable delay in the assertion of a claim
that acts to a party's prejudice. Neither of
those conditions is present. First, there is
nothing to support the proposition that the
passage of time was unreasonable. As of any
anniversary date Pioneer was free to terminate
its further exposure on the letters of credit. It
did not do so. In fact American Employers sent
two letters to Pioneer, on November 13, 1978 and
October 6, 1980, confirming that the letters of
credit were still in force. Pioneer was silent.
Second, Pioneer shows no prejudice generated by
the "delay" in demanding payment under the
letters of credit.*fn5 It contends only that had
it been aware of American Employers' claim
earlier it would have taken action as to the
Jenkins reorganization. But as already discussed,
the Jenkins bankruptcy proceeding is irrelevant
to Pioneer's duty to American Employers. Pioneer
cannot escape the clear contractual obligation of
the irrevocable letters of credit.
(3) Pioneer makes one last attempt to extract a defense from
the Jenkins reorganization. It says this Court, as a court of
equity, should not assist a party with unclean hands because:
plaintiff has had the opportunity to remedy the
situation which is apparently resulting in the
forfeiture of the surety bonds. Plaintiff could
have assisted Jenkins in completing the project
relating to the issuance of the surety bonds and,
therefore, avoid the forfeiture of these bonds.
Instead, plaintiff elected to allow the surety
bonds to be forfeited and to look to Pioneer and
Jenkins for payment.
That argument again ignores the nature of Pioneer's obligation
to American Employers: independent of and unaffected by the
Jenkins reorganization. As the court put it in Baker v.
National Boulevard of Chicago, 399 F. Supp. 1021, 1024 (N.D.Ill.
1975) (cited in First Arlington, 90 Ill. App.3d at 807, 46
Ill.Dec. at 179, 413 N.E.2d at 1293):
Three separate agreements are involved in the
issuance of a letter of credit by the bank for
the benefit of a beneficiary. . . . 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 to pay the
beneficiary the amount of the letter of credit,
if the beneficiary complies with the terms of the
If Pioneer wished to be informed of bankruptcy proceedings
involving its customer Jenkins, it was free to provide for
that contingency in the letters of credit. Pioneer fails to
state a valid defense of unclean hands.
Pioneer's motion to dismiss the Complaint is denied. As for
American Employers' motion, except for the single issue
affecting the 1975 Letters, there is no genuine issue of
material fact. American Employers is entitled to a judgment as
a matter of law as to the 1974 Letter. American Employers'
motion for summary judgment under Rule 56 is granted as to
liability on the 1974 Letter.