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12/13/94 VILLAGE LONG GROVE v. AUSTIN BANK CHICAGO

December 13, 1994

THE VILLAGE OF LONG GROVE, PLAINTIFF-APPELLEE,
v.
AUSTIN BANK OF CHICAGO, DEFENDANT-APPELLANT (ROBERT R. KRILICH, INTERVENOR-APPELLANT).



Appeal from the Circuit Court of Lake County. No. 91-L-1146. Honorable William D. Block, Judge, Presiding.

Rehearing Denied January 25, 1995.

The Honorable Justice Colwell delivered the opinion of the court: Inglis, P.j., and McLAREN, J., concur.

The opinion of the court was delivered by: Colwell

JUSTICE COLWELL delivered the opinion of the court:

Defendant, Austin Bank of Chicago (Bank), and Robert R. Krilich, defendant-intervenor (herein referred to collectively as defendants), appeal the judgment of the trial court granting summary judgment to the Village of Long Grove (Village) regarding payment on a letter of credit issued to the Village by the Bank on Krilich's behalf. Defendants contend the trial court erred in finding that the Village is entitled to the proceeds of the letter of credit despite the failure of the underlying agreement between the Village and Krilich, erred in awarding prejudgment interest on the full value of the letter of credit, and erred in awarding attorney fees. We affirm.

In January 1989, the Village enacted an ordinance giving final approval to Krilich for a development to be called the Saddle Club on land known as the Gridley farm property. The ordinance provided in pertinent part that Krilich would build requisite roadways and would landscape the development within two years of final planned unit development approval. The ordinance further required, in accordance with Village policy, that Krilich post a letter of credit or other surety in an amount equal to 150% of the estimated cost of the required common improvements. This surety was to be released in stages as the phases of the development were completed. Under the terms of the ordinance, no building permits would be issued until approval by the Lake County health department and the Village of planned on-site waste disposal systems. Pursuant to the ordinance, Krilich established a $750,000 letter of credit at the Bank in favor of the Village.

With the Village's permission, site preparation was begun by Riverwoods Development Corporation, a land trust of which Krilich was the beneficiary. Soon thereafter, Lake County health department officials inspected the site. The health department found the site unsuitable for the installation and maintenance of proposed underground waste systems and refused to issue septic permits. As a result, the site is not suitable for residential development. Krilich asked the Village to be excused from the obligation to install the streets and landscaping, but the Village refused. Krilich continued the landscaping and common area development, apparently to prevent the Village from demanding payment on the letter of credit. Krilich ceased construction in August 1990 as a result of a rainwater drainage dispute with adjacent landowners. After a new engineering plan was approved by the Village, Krilich resumed construction in January 1991.

On February 1, 1991, at the expiration of the two-year time limit imposed by the ordinance, the Village made a payment demand on the Bank for $750,000 pursuant to the letter of credit. The Bank failed to respond to the demand within the statutory three-day period, or apparently during the succeeding several weeks. In March 1991 Krilich was granted a temporary restraining order enjoining the Bank from tendering and the Village from collecting payment on the letter of credit. The underlying complaint was dismissed on June 26, 1991, and the TRO was dissolved. Apparently at the Bank's request, the Village then made a second demand for the full amount of the letter of credit on July 10, 1991. The Bank again refused to honor the demand.

The Village filed suit against the Bank on August 1, 1991. Krilich and Riverwoods each sought leave to intervene, which was denied by the trial court. Summary judgment was entered for the Village and an appeal ensued. We reversed the trial court's denial of the petitions to intervene. Citing the possible application of the fraud defense based on the allegations in the intervention petitions, we remanded the case for reconsideration. Upon remand Krilich was granted leave to intervene. Riverwoods had dissolved in the interim and thus did not re-petition to intervene. Krilich responded to the Village's motion for summary judgment and asserted as an affirmative defense the failure of the underlying contract between himself and the Village. He did not elaborate on the fraud allegations in his petition except to allege that the Village's attempt to collect on the letter of credit was manifestly unjust given the failure of the underlying development agreement. Krilich appended to his answer an engineer's affidavit stating that the total cost to complete the required improvements was $161,700. The Village responded with its own engineer's affidavit estimating the cost at approximately $500,000.

The trial court again granted the Village's motion for summary judgment, and ordered the Bank to pay the Village $837,266.03, which was described as representing the face amount of the letter of credit plus prejudgment interest. The court subsequently granted in part the Village's fee petition and awarded an additional $38,825.30. It is from those orders that this appeal is taken.

This court reviews a summary judgment de novo. ( Wiseman-Hughes Enterprises, Inc. v. Reger (1993), 248 Ill. App. 3d 854, 187 Ill. Dec. 589, 617 N.E.2d 1310.) Our function is to determine whether the trial court correctly found that there were no genuine issues of material fact and, if there were not, whether the trial court correctly entered judgment as a matter of law based upon the pleadings, depositions, admissions, and affidavits on file. Summary judgment is proper where no genuine issue of material fact exists, and the question before the court is solely a matter of law. 735 ILCS 5/2-1005 (West 1992); Guenther v. G. Grant Dickson & Sons, Inc. (1988), 170 Ill. App. 3d 538, 121 Ill. Dec. 393, 525 N.E.2d 199.

To understand the essence of a letter of credit transaction, it is imperative to focus on the unique nature of this type of security device. The court in Jupiter Orrington Corp. v. Zweifel (1984), 127 Ill. App. 3d 559, 82 Ill. Dec. 946, 469 N.E.2d 590, explained that three separate contracts are involved in this sort of agreement. The first is the contract between the beneficiary and the customer (here, the Village and Krilich), which is the contract underlying the letter of credit. The second is between the customer and the bank, when the customer offers collateral in exchange for the bank's issuance of a letter of credit. The third contract is between the bank and the beneficiary, wherein the bank agrees to pay the beneficiary an amount stated when and if the beneficiary complies with the terms cited in the letter of credit. ( Jupiter, 127 Ill. App. 3d at 562.) As in the Jupiter case, the type of letter of credit at issue here is a standby letter of credit, which obligates the bank to pay the beneficiary upon presentation of the requisite documents indicating a default. Jupiter, 127 Ill. App. 3d at 562.

The general rule, known as the independence principle, posits that if the documents presented conform to the requirements stated in the letter of credit, the bank may not look to the underlying contract between the customer and the beneficiary in determining whether to honor the demand. This rule is firm in that it requires the bank to pay the beneficiary even if the beneficiary breached the underlying agreement, so long as the breach was not fraudulent. ( Jupiter, 127 Ill. App. 3d at 562.) This rule is codified in the Uniform Commercial Code, which states:

"(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 * * * between the customer ...


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