APPELLATE COURT OF ILLINOIS, FIRST DISTRICT, FOURTH DIVISION
523 N.E.2d 57, 168 Ill. App. 3d 811, 119 Ill. Dec. 589 1988.IL.467
Appeal from the Circuit Court of Cook County; the Hon. Robert L. Sklodowski, Judge, presiding.
PRESIDING JUSTICE JIGANTI delivered the opinion of the court. JOHNSON and McMORROW, JJ., concur.
DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE JIGANTI
The plaintiff, The Bazaar, Inc., contracted with Nutmeg Mills, Inc., a defendant, to purchase sweat shirts. Under the terms of the contract, Bazaar was required to pay for the merchandise by means of an irrevocable letter of credit. The letter was purchased by Bazaar from the defendant, Exchange National Bank, for the benefit of the seller, Nutmeg. The letter of credit was in the amount of $48,125 payable on 30 days' sight. The term 30 days' sight is of considerable importance in the issues as they finally evolve in this case. When presented to Exchange by Bazaar, the letter of credit was to be accompanied by a signed commercial invoice and a signed bill of lading.
The president of Bazaar colorfully testified that at about 10 a.m. on July 17, 1987, he had called Exchange and explained that the goods he received from Nutmeg were "total garbage" and that what was received might just as well have been "rocks." He asked that the letter of credit be stopped. Exchange told him that it could not do anything about it because the bank deals in documents only and not merchandise.
On that same day, the bank received a draft, an unsigned commercial invoice, and an unsigned bill of lading from Florida National Bank requesting that the draft be discounted at Nutmeg's expense and the funds be remitted. *fn1 A representative of the bank described a draft in terms of a letter of credit as a demand for payment. When a draft has a term of 30 days' sight and it is drawn on the bank, if the bank puts its stamp on it, the bank accepts it and it becomes a financial instrument that can be used by the beneficiary for financing. It can be discounted upon request. At the request of the Florida National Bank, the draft was in fact discounted in the amount of $398.33, which was deducted from the face amount of the letter of credit and the balance was sent to the Florida National Bank on July 17 at 5:26 p.m.
On August 11, 1987, Bazaar sought to enjoin Exchange from paying Nutmeg's draft or any other draft drawn under the letter of credit. Further, Bazaar sought to enjoin Exchange from reimbursing itself from Bazaar for any sums paid under the letter of credit. The trial court issued a preliminary injunction enjoining Exchange from honoring the draft from Nutmeg and from obtaining reimbursement from Bazaar for any sums paid under the letter of credit. The trial court found that pursuant to the Uniform Commercial Code, section 5-114 (Ill. Rev. Stat. 1985, ch. 26, par. 5-114), it had jurisdiction to issue an injunction to enjoin the honor of a draft where there has been notification to the bank of fraud by its customer. The court reasoned that when Exchange discounted the draft on July 17, it became the holder and owner and took a market risk position because the bank had been put on notice of the facts that tended to show that there was fraud.
A letter of credit is issued by a bank at the request of a customer and provides that the bank will honor a draft that complies with the conditions specified in the letter of credit. (Ill. Rev. Stat. 1985, ch. 26, par. 5-103(1)(a).) It is independent of the underlying agreement between the customer and the beneficiary. (Edgewater Construction Co. v. Percy Wilson Mortgage & Finance Corp. (1976), 44 Ill. App. 3d 220, 231, 357 N.E.2d 1307, 1316; 7 R. Anderson, Uniform Commercial Code § 5-114:9, at 327 (3d ed. 1985).) Section 5-114 of the Uniform Commercial Code explains the duties of an issuer.
"Issuer's Duty and Privilege to Honor; Right to Reimbursement. (1) An issuer must honor a draft or demand for payment which complies with the terms of the relevant credit regardless of whether the goods or documents conform to the underlying contract for sale or other contract between the customer and the beneficiary." (Emphasis added.) (Ill. Rev. Stat. 1985, ch. 26, par. 5-114(1).)
Honor is explained in the Uniform Commercial Code at section 1 -- 201(21) as:
"To 'honor' is to pay or accept and pay, or where a credit so engages to purchase or discount a draft complying with the terms of the credit." (Emphasis added.) (Ill. Rev Stat. 1985, ch. 26, par. 1 -- 201(21).)
The time for honoring or rejecting a letter of credit is explained in the Uniform Commercial ...