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United States District Court, Northern District of Illinois, E.D

December 30, 1981


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


Crocker Commercial Services, Inc. ("Crocker") sues Countryside Bank ("Bank") for having dishonored Bank's $20,000 irrevocable letter of credit (the "Letter of Credit") in Crocker's favor as beneficiary, issued for the account of Bank's customer Everyone's Effort, Inc. ("Effort"). Crocker and Bank have filed cross-motions for summary judgment. For the reasons stated in this memorandum opinion and order Crocker's motion is granted and Bank's is denied.


Crocker, a California corporation, is a wholly owned subsidiary of Crocker National Bank engaged in the factoring business. It provides financial services to manufacturers and suppliers of clothing, in part by purchasing accounts receivable generated by their sales of that clothing. On January 17, 1980 its corporate name was changed from Crocker United Factors, Inc. to Crocker Commercial Services, Inc.

Some two weeks later Bank issued the Letter of Credit to Crocker reading in relevant part (emphasis added to indicate the material language for purposes of this action):

Drafts must be accompanied by:

  Your signed statement certifying that the funds
  drawn hereunder are due you on account of
  Everyone's Effort, Inc., failure to pay, within
  terms quoted therein, invoice(s) issued to them by
  Crocker Commercial Services, I IBM Plaza, Suite
  3335, Chicago, Illinois 60611 that demand for
  payment has been made and the funds have not been
  forthcoming from Everyone's Effort, Inc., or any
  other source.

Crocker proceeded to factor the accounts receivable of its several customers who sold clothing to Effort. Concurrently with each sale the resulting account receivable was assigned to Crocker on the invoices preprinted with legends reflecting the assignment and identifying the assignee as Crocker United Factors, Inc.*fn2

Crocker made every reasonable effort to collect from Effort but was not successful. On January 16, 1981, within the extended period of the Letter of Credit (which by renewal was to expire January 21, 1981), Crocker delivered to Bank its $20,000 sight draft and the following certification (again emphasis has been added for the same reason as above):

  We hereby certify that the funds drawn hereunder
  are due us on account of Everyone's Effort Inc.'s
  failure to pay, within terms quoted therein,
  invoices issued to them by factored clients of
  Crocker Commercial Services, and which are assigned
  to Crocker Commercial Services, 1 IBM Plaza, Suite
  3335, Chicago, Illinois 60611. We also certify that
  demand for payment has been made, and the funds
  have not been forthcoming from Everyone's Effort,
  Inc. or any other source.

Although not required to do so Crocker accompanied the draft and certification by copies of the underlying invoices and a summary schedule on a "Crocker United Factors, Inc." form, listing past due invoices aggregating $37,392.50. Its forwarding letter concluded:

  Please use the enclosed return envelope for your
  payment, otherwise it may result in unnecessary
  delays in processing. If you have any questions,
  please retain all documents and place an urgent
  telephone call to the undersigned at (312)

Instead Bank waited until the Letter of Credit had expired and wrote Crocker January 30, 1981 stating:

  The documents on their face are not in accordance
  with the terms and conditions of the credit.

It referred to the disparity in language reflected by the emphasis in the previous quotations and the fact that the accompanying invoices and the invoice schedule were those of Crocker United Factors, Inc. and not Crocker Commercial Services. This action followed.

Applicable Law

This diversity action (Bank is an Illinois corporation) looks to Illinois conflict of laws rules under Klaxon Co. v. Stentor Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). Under the test employed by the Illinois courts (Cook Associates, Inc. v. Colonial Broach & Machine Co., 14 Ill. App.3d 965, 971, 304 N.E.2d 27, 31-32 (1st Dist. 1973)) Illinois substantive law applies, for Bank issued the Letter of Credit here to Crocker at its Chicago office for the account of Effort, an Illinois-based customer.

Crocker's Substantial Compliance

This time of year invariably brings forth a spate of dramas in which the hard-hearted banker is the villain, sometimes regenerate (Scrooge in Dickens' Christmas Carol), sometimes unregenerate (as in Frank Capra's It's a Wonderful Life). By chance this is the second occasion during the past two weeks*fn3 in which the Court has had to deal with the unregenerate type — which tries to extricate itself from an unquestioned obligation by the kind of hypertechnical argument that has often tended to give the term "banker" pejorative connotations.

Illinois law however rejects Bank's position. Last year's decision in First Arlington National Bank v. Stathis, 90 Ill. App.3d 802, 814-16, 46 Ill.Dec. 175, 185-86, 413 N.E.2d 1288, 1298-99 (1st Dist. 1980) turned away from the "traditional standard" of strict compliance to confirm that reasonable compliance with a letter of credit entitles beneficiary to payment.

Under a fair application of the First Arlington reasonable compliance doctrine, Crocker is clearly entitled to payment:

    (1) Its certification conformed
  precisely to the Letter of Credit by referring to
  "Crocker Commercial Services." Although it
  gratuitously enclosed documents that referred to
  "Crocker United Factors, Inc.," and though that
  disparity might possibly have relieved Bank of
  responsibility had it been a real discrepancy,*fn4
  the fact is that no discrepancy existed. Crocker
  United Factors, Inc. was Crocker Commercial
  Services, and Bank will not be permitted to palter
  with justice by its less than specious argument.
  Because the same corporation was involved, the
  change in corporate name does not negate
  "reasonable compliance."

    (2) Bank's parsing of the language to
  distinguish invoices "issued . . . by Crocker"
  from invoices "issued by factored clients of
  Crocker . . . and . . . assigned to Crocker" is
  pretextual and will also not be allowed to
  prevail. Bank's Letter of Credit agreed to
  guarantee credit extended by Crocker for the
  account of Effort, and that is precisely what
  took place — albeit by factoring the sale of goods
  to Effort instantaneously with such sales. Moreover
  the accompanying documentation

  (on which Bank seeks to rely so heavily for its
  other purposes) discloses the facts plainly.
  Crocker's six-page billing directly to Effort
  refers to and itemizes "invoices." First
  Arlington's standard of reasonable compliance is
  unquestionably satisfied.

Bank's Waiver or Estoppel

There is another and self-sufficient ground that, though not mentioned by either party, also defeats Bank's nit-picking position. Bank's conduct may fairly be viewed as creating either a waiver or an estoppel, for it stood by silently and permitted the Letter of Credit to run out, even though an identification of the claimed deficiencies would have enabled Crocker to cure them.

Crocker hand-delivered its draft, certificate, accompanying documents and forwarding letter to Bank January 16, 1981 (a Friday). Under UCC § 5-112(1) Bank was given "until the close of the third banking day following receipt" to pay the draft, failing which it was dishonored. No Illinois case has decided whether the day of receipt is counted for that purpose (in which case Bank would have had to notify Crocker of dishonor by the close of the banking day January 20) or is not counted (in which case the date would be January 21).*fn5

If Bank had to notify Crocker before the Letter of Credit expired January 21, First Arlington would again point the way, for it confirms the doctrine of waiver in connection with the dishonor of letters of credit, 90 Ill. App.3d at 812, 46 Ill.Dec. at 183, 413 N.E.2d at 1296. This Court will simply quote from its opinion in American Employers (see n. 3), 538 F. Supp. at 1357:

  That argument [that failure to respond waives
  objections to the demand under a letter of
  credit] 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

  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).

For that reason the failure to make timely objection is a waiver of any curable flaws in the beneficiary's demand. Had Bank voiced its objections to Crocker at any time through January 20, Crocker could have cured the hypertechnical language difficulties now relied upon by Bank.*fn6 It is only equitable to apply the doctrine of waiver — if the time sequence permits — to bar Bank's purported defenses.

It would seem more reasonable, though, to construe UCC § 5-112(1) to exclude the day of receipt from the three-banking-day count. If so (and if the factor referred to in n. 5 is inapplicable) Bank could have deferred honor of the draft until the close of the January 21 banking day, in which event the Letter of Credit would have expired.

Though waiver could not then be held to have occurred, the situation nonetheless calls for invocation of an estoppel against Bank. Each of the matters it now relies on was apparent on the face of the certification — Bank needed no time for investigation. Indeed Bank's arguments simply contrast the language of the certification and accompanying documents with the literal language of the Letter of Credit. Had Bank done what Crocker reasonably requested in the form of an "urgent telephone call" identifying the now-alleged problems, Crocker could have timely delivered a conforming document. All the classic components of estoppel are present.

Accordingly alternate grounds of waiver or estoppel serve to support summary judgment in Crocker's favor. It should be stressed that this holding is independent of the doctrine of "reasonable compliance," which alone requires the same result.


There is no genuine issue as to any material fact, and Crocker is entitled to a judgment as a matter of law. Crocker's motion for summary judgment is granted, while Bank's is denied. Because Crocker has not identified the basis for its prayer that it be allowed reasonable attorney's fees, this opinion does not rule on that aspect of its motion.

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