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Transparent Products Corp. v. Paysaver Credit Union

decided: December 16, 1988.


Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No. 85 C 1741--James B. Parsons, Judge.

Bauer, Chief Judge, Easterbrook, Circuit Judge, and Grant, Senior District Judge.*fn*

Author: Easterbrook

EASTERBROOK, Circuit Judge.

Uncertain of the difference between a line of credit and a letter of credit, the president of Paysaver Credit Union signed this document on the Credit Union's letterhead:

Transparent Products Corporation

Bensenville, IL. 60101

RE: Thomas Wells


We hereby establish our letter of credit at the request of Thomas Wells of 1003 South 23rd Avenue, Maywood and of Titan Tool of 1315 South 3rd Avenue, Maywood up to the aggregate amount of fifty-thousand dollars ($50,000).

At the time Paysaver signed this document, Titan Tool owed Transparent some $3,000 on open account credit for plastics. Titan wanted to buy another $61,000 worth, but Transparent had balked unless Titan's creditworthiness could be assured. Wells, an employee of Titan who had a $50,000 certificate of deposit with Paysaver, procured this document. Transparent apparently deemed it insufficient assurance of payment and did not sell additional goods to Titan. Some 13 months later Titan, then a debtor in bankruptcy, still had not paid the original $33,000. Transparent demanded that Paysaver make good the debt. Transparent believes that the document guarantees Titan's general debts; Paysaver believes that the document is a mishmash with no legal effect.

The district court concluded after a trial (at which the president of Paysaver allowed that he did not understand how letters of credit differed from lines of credit) that the document is a letter of credit. The court then held, in part on the basis of the intent underlying Paysaver's decision to send the document, that Transparent's delay in making a demand equitably estopped it from collecting. The injection of such considerations into the enforcement of letters of credit is unprecedented and would be most unfortunate. The district court did not find that Transparent deceived Paysaver or otherwise induced detrimental reliance on an unkept promise; it found only that Transparent tarried unduly. Letters of credit are designed to provide assurance of payment and could not serve that purpose if the beneficiary risked being denied payment for withholding a demand "for too long" while attempting to collect from the primary debtor. We need not consider, however, whether principles of estoppel are forever beyond the pale when dealing with letters of credit, for Paysaver defends its judgment on the ground that the document is not one.*fn1

Letters of credit facilitate commercial transactions by providing the assurance of a reliable party that a debt will be paid quickly and with no fuss. Letters often provide that the issuer will pay on presentation of shipping documents, relieving the seller of the risk of nonpayment (or delayed payment) while shifting to the buyer the risk that the goods will be defective and it will need to pursue the seller. Standby letters of credit do not contemplate immediate payment by the issuer but serve as assurance if the debtor does not pay. Guarantee letters of credit serve a role similar to more conventional guarantees of debt, but with the promise that the issuer will pay on demand rather than balk and precipitate litigation to determine whether the underlying debt was due (a common event when guarantees are issued by officers or shareholders of the debtor), and with the additional benefit of enabling banks to stand behind their customers' transactions when they are forbidden to issue straight guarantees. See generally Cassondra E. Joseph, Letters of Credit: The Developing Concepts and Financing Functions, 94 Banking L.J. 816 (1977). In any of these cases, the issuer specifies conditions under which payment will be made. The Uniform Commercial Code defines "credit" by reference to these conditions. The definition has two stages. Section 5-102, Ill. Rev. Stat. ch. 26 § 5-102, establishes the scope of Article 5 (governing letters of credit), and § 5-103(1) defines "credit":

5-102. Scope. (1) This Article applies

(a) to a credit issued by a bank if the credit requires a documentary draft or a ...

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