Airline Reporting Corp. v. First Nat. Bank of Holly Hill, No. 86-2631

CourtUnited States Courts of Appeals. United States Court of Appeals (4th Circuit)
Writing for the CourtBefore RUSSELL and WILKINSON; DONALD RUSSELL; HOFFMAN
Citation832 F.2d 823
Parties4 UCC Rep.Serv.2d 1146 AIRLINE REPORTING CORPORATION, Plaintiff-Appellant, v. The FIRST NATIONAL BANK OF HOLLY HILL, Defendant-Appellee.
Docket NumberNo. 86-2631
Decision Date29 October 1987

Page 823

832 F.2d 823
4 UCC Rep.Serv.2d 1146
AIRLINE REPORTING CORPORATION, Plaintiff-Appellant,
v.
The FIRST NATIONAL BANK OF HOLLY HILL, Defendant-Appellee.
No. 86-2631.
United States Court of Appeals,
Fourth Circuit.
Argued May 7, 1987.
Decided Oct. 29, 1987.

Page 824

John Randolph Pelzer (Pelzer & Algar, P.A., Charleston, S.C., on brief), for plaintiff-appellant.

G. Dana Sinkler (Sinkler, Gibbs & Simons, Charleston, S.C., on brief), for defendant-appellee.

Before RUSSELL and WILKINSON, Circuit Judges, and HOFFMAN, United States District Judge for the Eastern District of Virginia, sitting by designation.

DONALD RUSSELL, Circuit Judge:

The Airline Reporting Corporation ("ARC") is appealing the district court's Order dismissing the ARC's action against The First National Bank of Holly Hill (Bank) for wrongful dishonor of a letter of credit. This case requires the court to apply South Carolina commercial law to determine whether the district court was correct in finding that the ARC committed fraud in drawing on a letter of credit given by the Bank as a guarantee of payment by a travel agency for tickets distributed to the agency for resale. We find that the ARC did not commit fraud and reverse.

I. FACTS

The ARC began operation on January 1, 1985 as the successor entity of the Air Traffic Conference of America ("ATC"). The ARC, as did the ATC before it, administers sales by travel agencies of airline tickets and payment to the airlines for tickets sold by the agencies. The ARC accredits travel agencies, issues plates for validation purposes and issues airline ticket stock to accredited agencies. The accredited agencies report their ticket sales weekly, and the ARC drafts their accounts ten (10) days after each reporting period to pay the appropriate airlines.

The terms of the relationship between the ARC and travel agencies are delineated in the Agents' Handbook provided to accredited agencies which contains the Passenger Sales Agency Agreement. The Agreement "governs the terms and conditions under which an agent for any member is authorized to sell or issue [airline tickets]...." As defined in the Agreement, the Handbook contains "rules, regulations and instructions of members covering an agent's responsibilities and activities under the agreement...." The Agreement provides, inter alia, that: (a) all agencies located in the United States are required to maintain a bond or letter of credit, (b) the same bond or letter of credit covers branch locations as well as the home office, (c) the Agreement may not be assigned by an accredited agency to another agency without the ARC's approval, and (d) generally, a proposed new owner of a home or branch office must submit the standard application and a bond or letter of credit to attain accreditation. The Handbook, expanding upon the agent's responsibilities under the Agreement, states that the accredited owner of an agency remains liable for the actions of the new owner until the ARC approves the new ownership:

The traffic documents and airline plates remain the liability of the present owner until approval of the new ownership or entity is granted. Agency operations must continue without interruption and approval of the new ownership is contingent upon satisfactory evidence that all requirements of Resolution 90.3 have been met. The present owner(s), under the provisions of the Agreement, is held responsible for all acts of the agency until such time as ATC enters into an agreement with the new owner(s).... If the change of ownership requires a new bond, ATC will not process the change until the bond has been received.... Additionally, the present bond must not

Page 825

be cancelled until approval of the new ownership has taken place.

Wilson Travel Service, originally a sole office in Summerville, South Carolina, became accredited in 1975 when it was a sole proprietorship owned by Hugh Wilson, Sr. Mr. Wilson had provided the ATC with a bond to guarantee payment by the agency. In 1976, Mr. Wilson, with the prior approval of the ATC, sold the agency to his son, Hugh Wilson, Jr. In April 1982, Wilson Travel purchased Ketchum Travel Service of Charleston which it then operated as a branch of Wilson Travel. The ARC approved the change of ownership and required no new bond. On May 21, 1982, Wilson Travel obtained a letter of credit for the amount of $43,000 from the Bank. This credit was later increased to $50,000 on May 16, 1983. The ARC provided the format for the letter of credit which provided in part:

2. Any draft(s) drawn by you under this Letter of Credit shall be accompanied by a letter executed by an authorized official (or one describing himself or herself therein as an authorized official) of the Air Traffic Conference ("ATC") stating as follows: Claims have been submitted or may be submitted to ATC by members of ATC for airline accountable documents ("tickets") sold by the referenced travel agency for gross sales of air transportation, less earned commissions, wholly within the United States which remain unpaid by the travel agency, and the funds represented by the attached draft(s) are required for the protection of ATC and its members.

The letter of credit was referenced to Wilson Travel Service, Summerville, South Carolina, ATC Code # 93872-2. Each approved branch is given its own ATC Code number for purposes of tracking ticket sales. Wilson's Ketchum Office had a distinct ATC Code number which was not referenced in the letter of credit.

As a condition of issuing the letter of credit, the Bank required collateral from Wilson Travel. Accordingly, a mortgage on Hugh Wilson, Jr.'s home was assigned by the First National Bank of South Carolina to the Bank. The Bank, however, failed to perfect its interest in the collateral, so it lay vulnerable to significant loss if its letter of credit was drawn upon by the ARC.

In August 1983 Wilson Travel filed a written notification with the ARC of a change in location and name for the Ketchum branch. The branch was to be relocated at Charleston Airport and renamed Wilson Travel d/b/a Airport Travel. Also in 1983, Hugh Wilson formed a closely held corporation called ARW, Inc., together with Bruce Abbott. Wilson, without approval by the ARC and without obtaining a new letter of credit for the corporation, transferred ownership of Airport Travel to the corporation. In May 1984, again without alerting the ARC, Abbott and Wilson severed their business relationship, and Abbott became the sole owner of Airport Travel which was owned as a branch of Abbott Travel Service, Inc. Abbott opened a new bank account under the name of Airport Travel from which the ARC could make drafts. The ARC did not require a new bond or letter of credit from Abbott since it was still unaware of a change in ownership from Wilson's sole proprietorship.

In October or November 1984 the ARC became aware of the true ownership of Airport Travel. The ARC attempted to work with Abbott to obtain accreditation for the airport office, but Wilson apparently refused to cooperate. Thus, in December 1984 the ARC attempted to recover the ticket stocks and plates held by Abbott for Airport Travel. Abbott resisted, but the ARC finally recovered the items in January 1985, and the airport office closed.

Subsequently, three drafts on Airport Travel's bank account were dishonored, amounting to a loss to the ARC of $25,263.38. Since the Agent's Handbook provided that Wilson Travel remained liable for the actions of its unaccredited transferee, the ARC, by letter dated March 8, 1985, attempted to recover on the letter of credit it held to guarantee payment by Wilson Travel. Using the language provided in the letter of credit, it reported the ticket

Page 826

sales made by Abbott's airport office as sales made by Wilson Travel. The Bank, by letter dated March 26, 1985, refused to honor the letter of credit after discovering that the ticket sales were not from Wilson Travel's Summerville office but were in fact made by an entity separate from Wilson Travel.

The ARC, therefore, brought suit against the Bank on September 17, 1985, for wrongful dishonor of the draft. The Bank answered that under the commercial law of South Carolina it was not obligated to honor the draft because the ARC's attempt to draw on the letter of credit was fraudulent. See S.C.Code Ann. Sec. 36-5-114(2). The Bank argued that (a) the letter of credit covered only the Summerville office of Wilson Travel and (b) that the letter of credit could not cover sales made by Airport Travel because that office was distinct from the Summerville office and was no longer associated with Wilson Travel Service. The ARC argued that under the Agency Agreement entered into by Wilson Travel and the ARC, the letter of credit covered all offices of Wilson Travel and that under the Agents' Handbook, Wilson Travel was liable for the ticket sales of Airport Travel because the ARC had never approved the change in ownership.

The court, following a non-jury trial, held for the Bank and dismissed the ARC's claim. The court examined S.C.Code Ann. Sec. 36-5-114(2) to determine whether the Bank properly dishonored the letter of credit. That section provides in part that an issuer of a letter of credit need not honor a draft upon presentation when "documents appear on their face to comply with the terms of a credit but a required document ... is forged or fraudulent or there is fraud in the transaction."

The court found that the ARC's conduct in presenting the letter of credit to the Bank for payment constituted fraud in the transaction such that the Bank was justified in dishonoring the letter of credit. The court first determined that the letter of credit was meant to cover only the specific office of Wilson Travel indicated on the letter, that being the Summerville office, because the ARC code number on the letter of credit referred only to the Summerville office. Based upon this determination, the court...

To continue reading

Request your trial
6 practice notes
  • In re Valley Vue Joint Venture, Bankruptcy No. 90-10499-AB.
    • United States
    • Bankr. V.I.
    • January 29, 1991
    ...virtually every court that has considered the device has emphasized that it is not a guaranty. In Airline Reporting v. First Nat'l Bank, 832 F.2d 823, 827 (4th Cir.1987), the court stated that although the letter of credit is issued to guarantee the customer\'s obligation under an underlyin......
  • Ace Am. Ins. Co. v. Bank of the Ozarks, 11 Civ. 3146 (PGG)
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • September 30, 2014
    ...the fraud if it alleges fraud as a defense to an action for wrongful dishonor." Airline Reporting Corp. v. First Nat'l Bank of Holly Hill, 832 F.2d 823, 827 (4th Cir. 1987); see 3Com Corp., 2 F. Supp. 2d 452, 461 (S.D.N.Y. 1998) ("Because [the issuer] has failed to demonstrate that a [genui......
  • Boston Hides & Furs, Ltd. v. Sumitomo Bank, Ltd., CA No. 93-11933-JLT.
    • United States
    • United States District Courts. 1st Circuit. United States District Courts. 1st Circuit. District of Massachusetts
    • November 29, 1994
    ...to the defense of fraud in the transaction, not fraud in the documents. See Airline Reporting Co. v. First Nat. Bank of Holly Hill, 832 F.2d 823, 828 (4th Cir.1987). Accordingly, it is inapplicable in the present 16 U.C.C. § 7-402 provides that, where the same issuer issues "duplicate" or "......
  • Amwest Sur. Ins. Co. v. Republic Nat. Bank, No. 91-2713
    • United States
    • United States Courts of Appeals. United States Court of Appeals (4th Circuit)
    • October 1, 1992
    ...delimited in the letter replaces the promise of the party which established the credit. See Airline Reporting Corp. v. First Nat'l Bank, 832 F.2d 823, 826 (4th The virtues of letters of credit are their simplicity, reliability, and predictability, all of which depend upon the limitation of ......
  • Request a trial to view additional results
6 cases
  • In re Valley Vue Joint Venture, Bankruptcy No. 90-10499-AB.
    • United States
    • Bankr. V.I.
    • January 29, 1991
    ...virtually every court that has considered the device has emphasized that it is not a guaranty. In Airline Reporting v. First Nat'l Bank, 832 F.2d 823, 827 (4th Cir.1987), the court stated that although the letter of credit is issued to guarantee the customer\'s obligation under an underlyin......
  • Ace Am. Ins. Co. v. Bank of the Ozarks, 11 Civ. 3146 (PGG)
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • September 30, 2014
    ...the fraud if it alleges fraud as a defense to an action for wrongful dishonor." Airline Reporting Corp. v. First Nat'l Bank of Holly Hill, 832 F.2d 823, 827 (4th Cir. 1987); see 3Com Corp., 2 F. Supp. 2d 452, 461 (S.D.N.Y. 1998) ("Because [the issuer] has failed to demonstrate that a [genui......
  • Boston Hides & Furs, Ltd. v. Sumitomo Bank, Ltd., CA No. 93-11933-JLT.
    • United States
    • United States District Courts. 1st Circuit. United States District Courts. 1st Circuit. District of Massachusetts
    • November 29, 1994
    ...to the defense of fraud in the transaction, not fraud in the documents. See Airline Reporting Co. v. First Nat. Bank of Holly Hill, 832 F.2d 823, 828 (4th Cir.1987). Accordingly, it is inapplicable in the present 16 U.C.C. § 7-402 provides that, where the same issuer issues "duplicate" or "......
  • Amwest Sur. Ins. Co. v. Republic Nat. Bank, No. 91-2713
    • United States
    • United States Courts of Appeals. United States Court of Appeals (4th Circuit)
    • October 1, 1992
    ...delimited in the letter replaces the promise of the party which established the credit. See Airline Reporting Corp. v. First Nat'l Bank, 832 F.2d 823, 826 (4th The virtues of letters of credit are their simplicity, reliability, and predictability, all of which depend upon the limitation of ......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT