Bank of North Carolina, N.A. v. Rock Island Bank, 76-1984
| Decision Date | 10 March 1978 |
| Docket Number | No. 76-1984,76-1984 |
| Citation | 570 F.2d 202 |
| Parties | 23 UCC Rep.Serv. 715 BANK OF NORTH CAROLINA, N.A., Plaintiff-Appellant, v. The ROCK ISLAND BANK, an Illinois Corporation, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Robert J. Noe, Moline, Ill., for plaintiff-appellant.
Robert A. Helman, Chicago, Ill., Peter H. Lousberg, Rock Island, Ill., for defendant-appellee.
Before SWYGERT and BAUER, Circuit Judges, and JAMESON, Senior District Judge. 1
In this appeal we must determine whether an instrument executed by an Illinois-chartered bank is a letter of credit. If it is, and if it is proper in Illinois for a state bank to issue such a letter, we must reverse the district court's dismissal of the complaint for failure to state a claim.
The facts of this case are relatively simple. As this action is an appeal from a motion to dismiss, we are obliged to treat all of the factual allegations in the complaint as true. Parr v. Great Lakes Express Co., 484 F.2d 767, 769-70 (7th Cir. 1973). On June 5, 1969 William H. Kearney, then president of defendant Rock Island Bank, executed the following instrument to Lorraine Realty Company on the bank's letterhead:
Lorraine Realty Corporation
748 South Mississippi Boulevard
St. Paul, Minnesota 55116
Gentlemen:
We hereby issue to Lorraine Realty Corporation, 748 South Mississippi Boulevard, St. Paul, Minnesota, our irrevocable and unconditional commitment to purchase your Promissory Note of this date in the amount of $400,000.00, said Promissory Note to bear a maturity date of June 5, 1971.
We will purchase said Promissory Note from its holder in due course at maturity, provided the holder of such Promissory Note shall give us at least 60 days written notice of its intent to sell to us prior to delivery date, said delivery date not to be prior to maturity date of June 5, 1971.
We hereby agree with the drawers, endorsers, and bona fide holders that this credit will be duly honored on presentation in an amount not to exceed unpaid balance of principal and interest due upon presentation.
Very truly yours,
/s/ William H. Kearney
/s/ William H. Kearney
/s/ President
Attested:
/s/ B.T. Olson
On the same day that this letter was drafted Lorraine gave a promissory note in the amount of $400,000 to the Sumner Financial Corporation. Shortly thereafter, the Bank of North Carolina purchased the note from Sumner. The Bank of North Carolina, in compliance with all the terms of the letter, tendered the note at its maturity to the Bank of Rock Island for payment. The Bank of Rock Island refused to purchase the note.
On March 31, 1976 the Bank of North Carolina filed this diversity action against the Bank of Rock Island for the latter's refusal to honor the promissory note. North Carolina, alleging that it is a holder in due course, claims that the Bank of Rock Island was obligated to purchase the note because the instrument in question is a valid letter of credit. The district court found the letter to be a contract of guaranty and not a letter of credit. As a result, the court held the instrument facially void and unenforceable and, upon motion of the defendant, dismissed the complaint for failure to state a claim.
On appeal the Bank of North Carolina reasserts its contention that the instrument is a valid letter of credit and, as such, is enforceable regardless of whether it may function as a guaranty. For the reasons noted below, we agree with North Carolina and therefore reverse the order dismissing the complaint.
In holding Rock Island's letter to be a guaranty and therefore void and unenforceable, the district court relied on several decisions of the Illinois Supreme Court. People v. First State Bank & Trust Co., 364 Ill. 294, 4 N.E.2d 385 (1936); Hoffman v. Sears Community State Bank, 356 Ill. 598, 191 N.E. 280 (1934); Knass v. Madison & Kedzie State Bank, 354 Ill. 554, 188 N.E. 836 (1933). In these cases agreements by Illinois banks to repurchase bonds and securities at their face value were deemed to be guaranties and, as such, were held to constitute ultra vires acts by state-chartered banks. The holdings of these cases were based on policy considerations of protecting bank depositors and stockholders and on a statute prohibiting state banks from guarantying the debt of another. 3 Finding that the Rock Island letter was functionally indistinguishable from the repurchase agreements struck down in First State Bank, Hoffman, and Knass, the district court ruled that the letter was an unenforceable guaranty rather than a letter of credit.
The Bank of North Carolina reasserts on appeal its contention that these cases are no longer controlling because of the repeal of the statute which prohibited Illinois banks from guarantying the debt of another and because of a 1965 amendment to the Illinois Banking Act which authorizes Illinois banks to issue letters of credit. 4 North Carolina argues that as long as Rock Island's instrument falls within the definition of a letter of credit under the Illinois Commercial Code, 5 it must be deemed a valid obligation even though it might functionally secure the debt of another.
Rock Island maintains that First State Bank, Hoffman, and Knass remain controlling despite the subsequent statutory changes. According to Rock Island the holding of these cases was predicated less on the existence of the statute prohibiting Illinois banks from guarantying the debt of another than on the fact that guaranties are
contracts not within the powers conferred on banks and . . . so jeopardize the safety of bank deposits (so) as to result in its failure, tend to produce widespread injury to the public and may properly be held void though there be no specific statutory prohibition against them. Knass, supra, 354 Ill. at 567, 188 N.E. at 842.
This public policy remains viable, Rock Island argues, despite the repeal of the statute prohibiting banks from issuing guaranties. It says that we must therefore construe the amendment to the Illinois Banking Act authorizing issuance of letters of credit in a manner that is not inconsistent with that policy. Inasmuch as its instrument is no less a guaranty than the repurchase agreements struck down in First State Bank, Hoffman, and Knass, Rock Island contends that even though the instrument might fall within the liberal definition of a letter of credit under the Illinois Commercial Code, it nevertheless cannot be the type of letter of credit that the legislature intended to empower Illinois banks to issue. We disagree.
We cannot accept Rock Island's invitation to construe the amendment to the Illinois Banking Act authorizing issuance of letters of credit so as to prohibit Illinois banks from issuing letters of credit that guarantee the debt of another. As every letter of credit serves, in one sense or another, as a guaranty, 6 it makes little sense to deny enforcement of a letter of credit as ultra vires simply because it serves a guaranty function. 7 More important, the statute on its face does not admit of any distinction between letters of credit that function as guaranties and those that do not, and a commitment to honor a draft upon presentation of a promissory note is no less a letter of credit than a commitment to honor a draft upon presentation of documents of title to goods. 8
Nor do we believe that policy considerations dictate the construction urged by Rock Island. As the Illinois Supreme Court observed in Knass, the public policy of the State of Illinois is principally to be found in its constitution and statutory enactments. 354 Ill. at 567, 188 N.E. at 842. Now that the statute prohibiting Illinois banks from guarantying the debt of another has been repealed, no constitutional or statutory provision exists declarative of a public policy against the issuance of guaranties by Illinois banks. There is no need to torture the plain language of the Illinois Banking Act to harmonize it with any apparently inconsistent preexisting statutory policy. Moreover, to the extent that First State Bank, Hoffman, and Knass themselves embody an anti-guaranty policy, we cannot agree that it is applicable to letters of credit expressly authorized by the Illinois Banking Act. As such contracts are now within the powers of Illinois banks, they cannot be void.
In short, we agree with the Bank of North Carolina that by amending the Illinois Banking Act the General Assembly must have had in mind letters of credit as defined in the previously enacted Illinois Commercial Code. 9 We also agree that the outcome of this appeal turns simply on whether Rock Island's instrument is a letter of credit within the meaning of the Illinois Commercial Code. If it is, the Illinois Banking Act authorized Rock Island to issue it and the complaint here states a cause of action.
Article 5 of the Uniform Commercial Code as adopted in Illinois defines a letter of credit as
an engagement by a bank or other person made at the request of a customer and of a kind within the scope of this Article (Section 5-102) that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit. Ill.Rev.Stat. ch. 26, § 5-103(1)(a).
A letter of credit issued by a bank falls within the scope of the Article if it "requires a documentary draft or a documentary demand for payment," 10 or if it otherwise "conspicuously states that it is a letter of credit or is conspicuously so entitled." Sections 5-102(1)(a), (c). Moreover, it seems clear that a guaranty can be a letter of credit (or vice versa) for the Code's drafters deemed unnecessary to expressly exclude guaranties from the scope of Article 5 "(u)nless the engagement meets the requirements (specified above)." Section 5-102(2) (emphasis added). As long as the credit is in writing and is signed by the...
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