Bank of Montreal v. FEDERAL NAT. BANK

• Decision Date: 30 May 1984
• Docket Number: No. CIV 83-261-R.,CIV 83-261-R.
• Citation: 622 F. Supp. 6
• Parties: BANK OF MONTREAL, Plaintiff, v. FEDERAL NATIONAL BANK AND TRUST COMPANY OF SHAWNEE, a National Bank of Oklahoma, and Harris Trust & Savings Bank, an Illinois State Bank, Defendants, and Barton Valve Company, Inc., Intervenor.
• Court: U.S. District Court — Western District of Oklahoma

622 F. Supp. 6

BANK OF MONTREAL, Plaintiff, v. FEDERAL NATIONAL BANK AND TRUST COMPANY OF SHAWNEE, a National Bank of Oklahoma, and Harris Trust & Savings Bank, an Illinois State Bank, Defendants and Barton Valve Company, Inc., Intervenor.

No. CIV 83-261-R.

United States District Court, W.D. Oklahoma.

May 30, 1984.

Burck Bailey and Richard F. Campbell, III, Fellers, Snider, Blankenship, Bailey & Tippens, Oklahoma City, Okl., for plaintiff.

Ronny D. Pyle, Pyle & Poarch, Norman, Okl., James A. Cherney, Latham & Watkins, Hedlund, Hunter & Lynch, Chicago, Ill., Bruce W. Day and William B. Federman, Day & Timmons, Oklahoma City, Okl., for defendants.

ORDER

DAVID L. RUSSELL, District Judge.

The Plaintiff, Bank of Montreal, brought this action to enforce a letter of credit against the Defendants, Federal National Bank and Trust and Harris Trust and Savings Bank. Barton Valve was permitted to intervene as a party defendant and promptly filed a counterclaim for declaratory judgment against the Bank of Montreal. The case is presently at issue on cross Motions for Summary Judgment on the Plaintiff's claim.

The relevant facts are not in dispute. Barton Valve sought financial aid from the Bank of Montreal for its business associates Blow Out Products, Ltd., Blow Out Prevention Equipment Services, Ltd, and Mattco Machine, Ltd., known collectively as the "Blow Out Companies." To obtain from the Bank of Montreal advances to the Blow Out Companies, Barton Valve caused Federal National to issue a letter of credit to the Bank of Montreal in the amount of one million dollars. As these two banks were not associates in the industry, Harris was secured as a confirming bank at the request of the Bank of Montreal.

Irrevocable Letter of Credit No. 621 was a deceptively simple document consisting of only three paragraphs. The first paragraph purported to establish the letter of credit, noting that it was issued "at the request of Barton Valve Company, Inc. and relative to Bank of Montreal's advances to Blow Out Products, Ltd., Blow Out Prevention Equipment Services, Ltd., and Mappco Machinery, Ltd." The second paragraph was the so-called "certification clause", and was comprised of two subparagraphs, each of which stated a condition precedent to Federal National's duty to pay drafts on the letter of credit. The first subparagraph, designated as A, required a signed statement that proceeds of the draft would "be applied in repayment of ... advances to Blow Out Prevention, Ltd., Blow Out Prevention Equipment Services, Ltd., and Mappco Machinery, Ltd." The second subparagraph, B by designation, required the Bank of Montreal to make an irrevocable assignment to Barton of all security taken for the previously mentioned advances. The last full paragraph recited the date and origin of the letter or credit.

Relying on this letter and the confirmation, the Bank of Montreal made advances to the Blow Out Companies in excess of one million dollars. On June 14, 1982, the Bank attempted to draw on the letter of credit from Harris, enclosing a statement that the proceeds of the draft would be applied in repayment of advances to Blow Out Products, Ltd. Also enclosed were assignments of security to Barton Valve, with a statement that the assignments conveyed all security taken for the advances. Harris refused to honor the draft for several reasons, most notable of which was the assertion that Blow Out Products, Ltd, was not among the companies listed in subparagraph A.

The Bank of Montreal then attempted to draw on the letter of credit from Federal National. On January 24, 1983, the Bank forwarded its statement that the proceeds would be applied in repayment of advances to Blow Out Products, Ltd., including an explanation that subparagraph A of the letter of credit mistakenly referred to that company as Blow Out Prevention, Ltd. The January 24 letter to Federal National also recited the assignment of security to Barton Valve, noting that the supporting documents were in the possession of Harris. Federal National refused to honor the draft, noting that Blow Out Products was not among the companies listed in subparagraph A, and that no assignment had been made of security taken from Blow Out Prevention, Ltd.

On February 17, 1983, the Bank of Montreal again attempted to draw on the letter of credit from Federal National. The Bank further clarified that subparagraph A was erroneously drafted in that Blow Out Prevention, Ltd. was substituted for the intended Blow Out Products, Ltd. The Bank also noted that Blow Out Prevention, Ltd. did not exist, and that Barton Valve could verify these facts. Nevertheless, Federal National again refused to honor the draft, stating that Blow Out Products, Ltd. was not among the companies listed in subparagraph A. The written refusal also recited the rather cryptic objection that the security mentioned in subparagraph B had not been assigned to Barton Valve.

Both sets of litigants feel that this set of facts entitles them to summary judgment on the Plaintiff's claim. The Defendants argue that their dishonors were proper because the Plaintiff was not in strict compliance with conditions specified in the letter of credit. The Plaintiff argues, however, that had subparagraph A been properly drafted, its performance would have been sufficient compliance to obtain payment of the draft.

It is true that a party issuing a letter of credit is not obliged to honor drafts thereon unless the conditions in the letter are satisfied with strict compliance. See, e.g., Venizelos v. Chase Manhattan Bank, 425 F.2d 461, 465 (2d Cir.1970). This is the so-called "New York Rule", and it is widely accepted in jurisprudence relevant to letters of credit. See Far Eastern Textiles, Ltd. v. City National Bank & Trust Co., 430 F.Supp. 193, 195 (S.D.Ohio 1977). Thus, the Defendant banks would be justified in their dishonor of the drafts if the Plaintiff failed to render strict compliance with the terms of the letter of credit.

The issue of strict compliance, presumably an easy matter to determine in most cases, is complicated by the ambiguity of the letter of credit in this case. The establishment clause, the first paragraph, gives a list of the companies to whom advances are expected. The certification clause, subparagraph A of the second paragraph, lists the companies about whom documentation is required to draw on the letter of credit. One would reasonably expect that the two lists would be identical, since the first anticipates that advances will be made and the second outlines the procedure to obtain repayment of the advances. However, the lists are not identical; the certification clause differs from the establishment clause in that Blow Out Prevention, Ltd. is substituted for Blow Out Products, Ltd.

The Defendants seek to avoid this ambiguity by asserting that, as the certification clause is controlling, the discrepancy is irrelevant. They argue that subparagraph A can be satisfied only if the Bank of Montreal provides documentation relative to Blow Out Prevention, Ltd., Blow Out Prevention Equipment Services, Ltd., and Mappco Machinery, Ltd.¹ Under this theory the Defendant banks would be justified in dishonoring the drafts because the Plaintiff's documentation concerned Blow Out Products, Ltd., a company not listed in subparagraph A.

The problem with this construction of the letter of credit is that it exalts form over...