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First Arlington Nat'l Bank v. Stathis

OPINION FILED MAY 27, 1983.

FIRST ARLINGTON NATIONAL BANK, PLAINTIFF-APPELLANT AND CROSS-APPELLEE,

v.

GUS STATHIS, DEFENDANT-APPELLEE AND CROSS-APPELLANT — (DENIS J. RINTZ ET AL., DEFENDANTS).



Appeal from the Circuit Court of Cook County; the Hon. Brian B. Duff, Judge, presiding.

JUSTICE SULLIVAN DELIVERED THE OPINION OF THE COURT:

This appeal is from the entry of summary judgment for Gus Stathis (defendant) in an action for declaratory judgment brought to determine the rights and obligations of the parties under a letter of credit issued by the plaintiff bank. Plaintiff contends that the trial court erred in ruling that (1) none of the exceptions contained in section 5-114(2) of the Uniform Commercial Code (the Code) (Ill. Rev. Stat. 1979, ch. 26, par. 5-114(2)) excused plaintiff's duty to honor the letter of credit; (2) defendant did not breach any warranties made by him pursuant to section 5-111(1) of the Code (Ill. Rev. Stat. 1979, ch. 26, par. 5-111(1)); (3) none of the other warranty sections of the Code were applicable to the transaction in question; and (4) defendant was entitled to prejudgment interest pursuant to section 2 of "An Act in relation to the rate of interest and other charges in connection with sales on credit and the lending of money" (the Interest Act) (Ill. Rev. Stat. 1979, ch. 74, par. 2) *fn1 from the date of his demand for payment. In his cross-appeal, defendant maintains that the trial court erred in limiting its award of prejudgment interest to 5%.

In a prior appeal in this case, First Arlington National Bank v. Stathis (1980), 90 Ill. App.3d 802, 413 N.E.2d 1288, we reversed the trial court's entry of summary judgment for plaintiff and remanded for further consideration of defendant's cross-motion for summary judgment. The facts of the transaction in question are set forth in detail in that opinion, and the parties presented no additional evidence after remand; therefore, we shall repeat only such facts as are relevant to the issues herein.

In 1973, defendant agreed to sell certain real estate to Ralph Edgar, Denis Rintz, and Phillip Granidnetti, Jr., and as partial consideration therefor received a promissory note dated March 30, 1973 (the March note), executed by the three purchasers and their wives in the principal amount of $575,000 with an interest rate of 8% on the outstanding principal. The 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 before its expiration date. If the letter of credit was not renewed, or if the purchasers defaulted in the payment of either interest or principal, the balance due was immediately payable without notice.

Plaintiff issued the required letter of credit, to expire May 5, 1974, in exchange for a note executed by Rintz, Edgar, and Grandinetti in the principal amount of $575,000 at 10% interest, secured by certain property, and the pledge of collateral, i.e., a certificate of deposit in the amount of $187,000 owned by Grandinetti and real estate owned by Rintz and Edgar. The letter of credit guaranteed payment of $575,000 to defendant upon default of the March note, provided that his demand was accompanied by the March note, endorsed by him without recourse to the order of plaintiff; any documents securing the note; defendant's notarized statement that the note was due by reason of acceleration and a detailed statement of the nature of the default; defendant's notarized statement that demand had been made on the makers, and the demand was not complied with for a period of at least 10 days following the demand; and copies of the demand letters.

The makers defaulted on the first payment of interest, due on March 30, 1974, and failed to provide a timely renewal of the letter of credit. On April 23, 1974, Grandinetti, desirous of avoiding litigation concerning the interest due, entered into an agreement with defendant (the Grandinetti agreement). Pursuant thereto, Grandinetti executed a note for one-third of the first interest installment, due June 5, 1974, and a second note for the remaining two-thirds, payable on demand. Defendant agreed to attempt to collect the remaining two-thirds of the interest from the Edgars and Rintzes (Grandinetti's wife was not mentioned) and, if successful, cancel the second note. *fn2

On April 25, 1974, defendant sought payment on the letter of credit and presented to plaintiff the documents required by the terms thereof. Plaintiff refused to pay, claiming that, among other defects, the March note did not comply with the letter of credit in that the Grandinetti agreement effectively released Grandinetti's wife from liability on the March note and, as a result, released the other comakers as well by application of section 3-606 of the Code. (Ill. Rev. Stat. 1979, ch. 26, par. 3-606.) It filed a complaint for declaratory judgment and, in granting plaintiff's motion for summary judgment therein and denying defendant's cross-motion, the trial court ruled that plaintiff was not required to honor the letter of credit as a result of the Grandinetti agreement. On appeal, we held that plaintiff could not look beyond the documents presented to the underlying agreement in determining whether to honor the letter of credit. (First Arlington National Bank v. Stathis (1980), 90 Ill. App.3d 802, 809, 413 N.E.2d 1288, 1295.) Since the documents presented complied on their face with the letter of credit (90 Ill. App.3d 802, 816, 413 N.E.2d 1288, 1299) and there was no fraud arising from the Grandinetti agreement which would justify dishonoring the letter of credit (90 Ill. App.3d 802, 811, 413 N.E.2d 1288, 1295), plaintiff was required to honor the demand pursuant to section 5-114 of the Code (Ill. Rev. Stat. 1979, ch. 26, par. 5-114), and we reversed the order granting summary judgment to plaintiff and denying it to defendant. However, because plaintiff had raised other arguments in opposition to defendant's motion for summary judgment which were not considered by the trial court in ruling thereon, we remanded the matter for further consideration.

On remand, the parties agreed that the only remaining issue with regard to defendant's motion for summary judgment was whether he breached any warranties on presentment of his draft for payment under the letter of credit. Plaintiff argued that the Grandinetti agreement, which allegedly released Grandinetti's comakers from liability on the March note, and defendant's failure to deliver to it the personal judgment notes executed by Grandinetti under the agreement, breached warranties made by defendant under sections 5-111, 3-417, 4-207, 7-507, and 8-306 of the Code. (Ill. Rev. Stat. 1979, ch. 26, pars. 5-111, 3-417, 4-207, 7-507, 8-306.) The trial court concluded that our prior opinion barred any consideration of the Grandinetti agreement as grounds for dishonoring the letter of credit. *fn3 However, it went on to rule that the only applicable warranty was section 5-111(1), and that defendant warranted thereunder merely that the tendered documents complied on their face with the terms of the letter of credit; that this warranty was not breached; and that, in any event, the Grandinetti agreement did not release any of the comakers, contrary to plaintiff's assertion. It further ruled that defendant was entitled to prejudgment interest from April 25, 1974, the date of his demand for payment, at the rate of 5%, "although a greater rate of interest would be more equitable in the present situation." These cross-appeals followed.

OPINION

• 1 Plaintiff first contends that the trial court erred in ruling that none of the exceptions to an issuer's duty to honor a demand which complies on its face with the terms of the letter of credit excused plaintiff's duty to honor. It relies on section 5-114(2)(b) of the Code (Ill. Rev. Stat. 1979, ch. 26, par. 5-114(2)(b)), which provides in relevant part:

"(2) Unless otherwise agreed when documents appear on their face to comply with the terms of a credit but a required document does not in fact conform to the warranties made on negotiation or transfer of a document of title (Section 7-507) or of a security (Section 8-306) or is forged or fraudulent or there is fraud in the transaction

(b) * * * as against its customer, an issuer acting in good faith may honor the draft or demand for payment despite notification from the customer of fraud, forgery or other defect not apparent on the face of the documents but a court of appropriate jurisdiction may enjoin such honor."

The trial court held that the warranties under sections 7-507 and 8-306 (Ill. Rev. Stat. 1979, ch. 26, pars. 7-507, 8-306) are inapplicable to the transaction in question and that plaintiff could not relitigate the question of fraud in the transaction, which was decided adversely to it in our prior opinion. Plaintiff apparently concedes the inapplicability of sections 7-507 and 8-306 but maintains that the trial court read section 5-114(2)(b) too restrictively, and that the intent of the drafters was clearly to include not only the warranties arising thereunder but also those arising under sections 3-417 and 4-207 (Ill. Rev. Stat. 1979, ch. 26, pars. 3-417, 4-207). It further argues that because defendant did not disclose the Grandinetti agreement when making presentment, the fraud contemplated by section 5-114(2)(b) was present.

With regard to its first argument, plaintiff cites as its sole authority the official comment to the Code. (Ill. Ann. Stat., ch. 26, par. 5-114, Uniform Commercial Code Comment, at 600 (Smith-Hurd 1963).) However, a careful reading of that commentary in its entirety discloses no such intention to include warranties other than those specifically mentioned in the statute. Therefore, we must look to the general rules of statutory construction to determine the intention of the drafters. The statutory language itself is the best indicator of that intention (Coryn v. City of Moline (1978), 71 Ill.2d 194, 374 N.E.2d 211), and where that language is certain and unambiguous, it must be enforced as enacted (People ex ...


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