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OCCIDENTAL FIRE & CAS. CO. v. CONTINENTAL ILLINOIS

June 23, 1989

OCCIDENTAL FIRE & CASUALTY COMPANY OF NORTH CAROLINA, Plaintiff,
v.
CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, Defendant


Brian Barnett Duff, United States District Judge.


The opinion of the court was delivered by: DUFF

BRIAN BARNETT DUFF, UNITED STATES DISTRICT JUDGE

 Judge John M. Cannella once wrote, with some authority, that letter of credit liability cases were "particularly appropriate for judicial resolution without trial because they present solely legal issues." Bank of Cochin Ltd. v. Manufacturers Hanover Trust, 612 F. Supp. 1533, 1537 (S.D.N.Y. 1985). For every rule there is an exception, however, and the parties to the letter of credit case before this court have found it -- despite submitting cross-motions for summary judgment. Their work will narrow this dispute, but its ultimate disposition will depend on the outcome of a trial.

 The parties do not dispute the following facts. In 1984, Bill's Coal Company, Inc. was engaged in mining operations in Kansas. To comply with a request of the State of Kansas, Bill's Coal needed to obtain bonds to insure its obligation to reclaim its mining sites. Bill's Coal first sought the bonds from Union Indemnity Insurance Company of New York. Union Indemnity was not licensed as an insurer in Kansas, so Union Indemnity asked Occidental Fire & Casualty Company of North Carolina to issue the bonds instead. Union Indemnity promised Occidental Fire to reinsure these bonds 100%.

 Occidental Fire agreed to Union Indemnity's request, and issued 29 reclamation bonds in an aggregate penal amount of $ 4,239,816. One condition was that Bill's Coal obtain certain irrevocable letters of credit running in favor of Occidental Fire and Union Indemnity. Bill's Coal went to its banker, Continental Illinois National Bank and Trust Company of Chicago, and applied for seven such letters, which had an aggregate face value of $ 2,069,000. Bill's Coal requested that the "beneficiary" of each letter of credit be "Union Indemnity Ins. Co. of N.Y. and Occidental Fire & Casualty Co. of North Carolina as their respective interests may appear." Continental Illinois complied with Bill's Coal's instructions. Additionally, Bill's Coal required those seeking to draw under each letter of credit to certify to Continental Illinois that

 - You, as surety have executed or have procured the execution of bond(s) or undertaking(s) at the request of Bill's Coal Company, Inc., and that you have incurred liability in an amount not less than the amount of the accompanying sight draft(s), or that as of the close of business in Chicago on the day which is ten (10) days prior to the expiry date of this Letter of Credit you have received neither an amendment renewing this Letter of Credit for an additional year nor an acceptable replacement thereof.

 - Any funds drawn under the Letter of Credit shall be held apart by you for the purpose of reimbursing any incurred liabilities of the aforementioned bond(s) or undertaking(s).

 - Should funds drawn not be used by you for the satisfaction of or reimbursement of any loss, cost, claim for expenses of any nature whatsoever, incurred by you, (including unpaid premiums) on any such bond(s) or undertaking(s) as aforesaid, such amounts shall be returned directly to [Continental Bank]. . . .

 1985 was a bad year for two of the players in this story. Effective August 15, 1985, Union Indemnity went into liquidation. The Superintendent of Insurance of the State of New York became the Liquidator of the company. Four months later Bill's Coal went into bankruptcy, which meant that it would not reclaim its mining sites. The State of Kansas thus approached Occidental Fire the following spring and demanded that Occidental either honor its obligations under its surety bonds or else arrange for someone to reclaim the mining sites at Occidental Fire's expense. In September 1986 Occidental Fire agreed to forfeit $ 449,718 in bonds to the State and have a contractor perform reclamation work valued at $ 2,008,820.

 Occidental Fire and the Liquidator of Union Indemnity meanwhile sought to reduce their liability. In the Spring of 1986, the two presented Continental Illinois with sight drafts for payment under the letters of credit. Continental Illinois dishonored the drafts, but extended the expiration date of the letters to March 31, 1987. Occidental Fire submitted a new draft on its own in December 1986, which Continental Illinois rebuffed on the grounds that Union Indemnity had not joined in certifying it. Occidental Fire made another unilateral draw on February 6, 1987. Continental Illinois dishonored it on February 11, 1987, telling Occidental Fire again that it was not joined by union Indemnity. Unbeknownst to Continental Illinois, Occidental Fire was facing objections for these unilateral draws from the Liquidator, who was demanding that Occidental Fire deliver the letters of credit or else face suit.

 On March 25, 1987, Occidental Fire and the Liquidator delivered joint drafts to Continental Illinois, seeking to draw on the letters. In the certificate accompanying each draft, Occidental Fire and the Liquidator stated in part:

 We hereby certify that we, as sureties have executed or have procured the execution of bond(s) or undertaking(s) at the request of Bill's Coal Company, Inc. and that we have incurred liability in an amount not less than the amount of the accompanying sight drafts. Further, any funds drawn under this letter of credit shall be held apart by us for the express purpose of reimbursing any incurred liabilities for any bond(s) or undertaking(s).

 Should funds drawn not be used by use for the satisfaction of or reimbursement of any loss, cost, claim for expense of any nature whatsoever incurred by us, (including unpaid premiums), on any bond(s) or undertaking(s), such amounts ...


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