Barclays Bank DCO v. Mercantile National Bank
| Decision Date | 13 August 1973 |
| Docket Number | No. 72-1913.,72-1913. |
| Citation | 481 F.2d 1224 |
| Parties | BARCLAYS BANK D. C. O., Plaintiff-Appellee, v. MERCANTILE NATIONAL BANK, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Fifth Circuit |
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Hugh W. Gibert, Atlanta, Ga., for defendant-appellant.
Robert D. Feagin, III, Atlanta, Ga., Robert M. McCulloch, Jr., New York City, for plaintiff-appellee.
Before MORGAN, CLARK and INGRAHAM, Circuit Judges.
Rehearing and Rehearing En Banc Denied August 13, 1973.
This appeal has its birth in an action against Mercantile National Bank for dishonor of a draft drawn under a letter of credit issued by Allied Mortgage Consultants, Inc., in favor of Barclays Bank D.C.O. Mercantile's liability is premised on the theory that it confirmed Allied's credit, thereby becoming directly liable on the credit under § 5-107(2) of the Uniform Commercial Code as adopted in Georgia.1 The broad legal issue, and a question of first impression, presented by this Georgia diversity case is whether under the Uniform Commercial Code a bank can attain the status of a "confirming bank" on the credit of a non-bank issuer. Even though this question is not explicitly answered by the Code, we hold that under §§ 5-103(1)(f) and 5-102(3) a bank may confirm a credit issued by a non-bank, thus becoming primarily liable on the credit under § 5-107(2). The remaining issue is whether the appellant, Mercantile National Bank, did in fact confirm the credit issued by Allied Mortgage Consultants. We hold that Mercantile's letter of June 1, 1970, to Barclays was a confirmation of Allied's letter of credit. Because there are no factual issues which are required to be submitted to a jury, we affirm the lower court's decision, 339 F.Supp. 457 (N.D. Ga., 1972),2 granting summary judgment to Barclays Bank.
In the spring of 1970 Bay Holding Company Ltd., of Trinidad, W.I., began negotiations with Barclays Bank D.C.O. of New York for a loan of about $400,000 to help finance a real estate development in the Caribbean. Barclays apparently was reluctant to rely solely on the security furnished by Bay Holding because in late May of 1970 Allied Mortgage Consultants, Inc., an Atlanta mortgage broker, issued to Barclays its irrevocable letter of credit in a sum not to exceed $400,000 for the account of Bay Holding. This letter of credit was to expire on June 15, 1971. Allied was at that time (May 1970) a customer of Mercantile National Bank of Atlanta. At Allied's insistence Mercantile simultaneously wrote the letter which underlies this litigation. The full text of this letter is set out in the margin,3 but the third paragraph — on which this appeal turns — provides:
This paragraph was not a part of the first letter which Mercantile sent to Barclays. It was added by Mr. Harris, the Executive Vice President of Mercantile, after Allied's first letter of credit and Mercantile's accompanying letter were not accepted by Barclays, allegedly because neither conformed to standard banking practice.
Barclays subsequently received a demand note executed by Bay Holding for $350,000 and thereafter transferred this sum to Bay's checking account at Barclays. On August 4, 1970, Allied wrote a letter to Barclays concerning an earlier telephone conversation in which Allied told Barclays that Bay had failed to comply with its agreement with Allied relative to the underlying real estate transaction. This letter "instructed" Barclays "that no further funds are to be drawn against the letter of credit without the written authorization from Allied Mortgage Consultants." Because it had previously transferred the entire $350,000 to Bay's account and believing that no action on its part was necessary, Barclays did nothing with respect to this letter.
There were no further developments until March 3, 1971, when Barclays notified Allied, pursuant to the terms of Allied's letter of credit, that it intended after ninety days to present its draft to Allied for any unpaid indebtedness of Bay Holding on its previously executed promissory note. On May 31, 1971, Barclays presented this note to Bay and demanded payment; it was dishonored and protested. Barclays then exercised its right of set-off by applying funds of Bay Holding on deposit with Barclays against the amount of the note. The resulting unpaid balance was $280,011.65. Thereafter Barclays timely presented its draft for the unpaid amount to Allied under the letter of credit, but this draft was dishonored. Barclays then presented the draft to Mercantile, demanding payment on the theory that Mercantile was a confirming bank on Allied's letter of credit by virtue of its June 1, 1970 letter to Barclays. Mercantile denied liability and this law suit followed.
The district court reasoned that Mercantile's letter was an unambiguous confirmation of Allied's letter of credit, the result of which left Mercantile, after Bay's default and Allied's dishonor, primarily liable for the full $280,011.65 under § 5-107(2) of the U.C.C. as adopted in Georgia. As an alternative holding, the court opined that the letter also made Mercantile an issuer of credit under § 5-103(1)(a), which would also render Mercantile primarily liable.4 Judgment was entered accordingly and Mercantile appeals.
We turn initially to the question whether a bank can incur the obligations of a confirming bank under the U.C.C. on a credit issued by one other than a bank. Before reaching this question however, we must make certain that the letter of credit issued by Allied in favor of Barclays is a letter of credit under the Code. This may seem an unnecessarily simplistic starting point, but if Allied's letter is not within the Code it would be unnecessary to even consider whether Mercantile can write a letter of confirmation under the Code.
One of the most important sections in each of the nine Articles of the U.C.C. is the section, or sections, which set out the scope of that particular Article. It is here that a court must look to determine whether the Code is even arguably applicable to a given transaction. While it might be concluded, after a complete analysis, that the Code does not apply to a transaction, that analysis should not begin without first determining that the transaction is of a kind generally governed by the U.C.C. Section 5-102, the scope section of Article 5, reads as follows:
Allied's letter, set out in the margin,5 "conspicuously states that it is a letter of credit," thus compelling the conclusion that it is within the scope of Article 5 by virtue of § 5-102(1)(c).
For analytical purposes it is also necessary to ascertain whether Allied's letter comes within the Code definition of a letter of credit. Section 5-103(1)(a) provides this definition as follows:
Allied's letter is an "engagement by a person other than a bank made at the request of a customer and of a kind within the scope of this Article (§ 5-102) that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit." It is therefore apparent that Allied's letter to Barclays is a letter of credit within the definition and scope of Article 5.
With this preliminary determination aside, we are now in a position to confront the central legal issue — whether Mercantile can confirm this credit which was issued by a non-bank. This issue arises as a result of the definition of a confirming bank in § 5-103(1)(f).
"A `confirming bank\' is a bank which engages either that it will itself honor a credit already issued by another bank or that such a credit will be honored by the issuer or a third bank."
Mercantile argues that by the terms of this definition it cannot become a confirming bank under the U.C.C. This definition is read as precluding the conclusion that a bank can confirm a credit issued by a non-bank; the corollary is, of course, that a bank can only confirm a credit issued by another bank. Mercantile reaches its position by the following analysis which we paraphrase from Mercantile's appellate brief. (A) Section 5-103(1)(f) is divided into two parts: the first part precedes the conjunction "or" and the second part follows it. Mercantile is not within the first part because Allied issued the only letter of credit involved in this case, and Allied is obviously not a bank. Therefore, Mercantile did not engage that it would honor a...
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