Eakin v. Continental Illinois Nat. Bank and Trust Co. of Chicago, 88-2728

• Decision Date: 20 June 1989
• Docket Number: No. 88-2728,88-2728
• Parties: 8 UCC Rep.Serv.2d 422 Harry E. EAKIN, Indiana Insurance Commissioner, Liquidator of Allied Fidelity Insurance Company, Plaintiff-Appellee, v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY of CHICAGO, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 114

875 F.2d 114

8 UCC Rep.Serv.2d 422

Harry E. EAKIN, Indiana Insurance Commissioner, Liquidator of Allied Fidelity Insurance Company, Plaintiff-Appellee, v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY of

CHICAGO, Defendant-Appellant.

No. 88-2728.

United States Court of Appeals, Seventh Circuit.

Argued April 11, 1989.

Decided May 11, 1989.

Rehearing Denied June 20, 1989.

David M. Meister, Katten Muchin Zavis Pearl & Galler, Chicago, Ill., for defendant-appellant.

Monica L. Thompson, Keck Mahin & Cate, Chicago, Ill., for plaintiff-appellee.

Before BAUER, Chief Judge, and FLAUM and EASTERBROOK, Circuit Judges.

EASTERBROOK, Circuit Judge.

Letters of credit assure swift and reliable payment in commercial transactions. That promise was frustrated by Continental Illinois National Bank, which used flimsy pretexts to renege on a standby letter of credit supporting a construction contractor's bond.

Continental issued an irrevocable letter of credit in December 1984 at the request of Bill's Coal Co., so that Allied Fidelity Insurance Co. would issue a surety bond promising to stand behind Bill's performance of a reclamation project in Kansas. Continental promised to pay Allied $805,000 on presentation of a sight draft and documents showing that Bill's had defaulted, causing Allied to incur liability. The letter required Allied to segregate the $805,000 and promise to return any portion not used to satisfy Bill's debts. Bill's became insolvent, and claims approximating $1.5 million were filed with Allied, which early in July 1986 drew on the letter of credit. Continental put off paying, on the stated ground that the papers contained typographical errors.

Allied is an Indiana insurance company, and under Indiana law the Insurance Commissioner takes over a failed insurer as "liquidator". Ind.Code Sec. 27-9-3-7. The Circuit Court of Marion County appointed the Commissioner as Allied's liquidator on July 15, 1986. Ind.Code Sec. 27-9-3-7(b) provides that the "liquidator shall be vested by operation of law with the title to all of the property, contracts, and rights of action" of the insurer. On assuming control of Allied, Harry E. Eakin, the Commissioner, demanded that Continental fork over the $805,000. Continental has refused to honor that draw or any other.

Continental, which issued the letter to assure payment to Bill's creditors, seized on the adventitious fact that Allied too had failed. An attorney for Continental sent Eakin a letter saying that the creditors of Bill's Coal should be treated as unsecured creditors of Allied, and that their claims should be written down accordingly; Continental proposed to fund only the entitlements that remained after that process. The letter implied that if Eakin was unwilling to defer receiving payment until after Allied's affairs were wrapped up then Continental was not going to pay anything. Continental relied exclusively on Fidelity & Deposit Co. v. Pink, 302 U.S. 224, 58 S.Ct. 162, 82 L.Ed. 213 (1937), which is spectacularly irrelevant. Decided under federal common law during the reign of Swift v. Tyson, 41 U.S. 1, 10 L.Ed. 865 (1842), Fidelity & Deposit held that the reinsurer of a bankrupt insurance company was liable only for the portion of the debt that the original insurer must pay after apportionment in bankruptcy, given the language of the contract between them. Indiana has a statute disapproving the result of this case, Ind.Code Sec. 27-9-3-30, and even before Erie R.R. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), state statutes (as opposed to common law) had been applied to diversity cases under the Rules of Decision Act, 28 U.S.C. Sec. 1652. The letter of credit Continental issued does not contain anything like the language of the contract at issue in Fidelity & Deposit and is not "reinsurance" anyway. Letters of credit are governed by Article 5 of the Uniform Commercial Code. Continental pledged to pay $805,000 on presentation of conforming papers. Letters of credit are designed to avoid complex disputes about how much the beneficiaries "really" owe. The promise and premise are "pay now, argue later". Continental had no colorable ground for saying that Fidelity & Deposit allowed it to sit out Allied's liquidation and decide at the end how much it was willing to pay. It had to pay $805,000 immediately on tender of conforming papers. Under the Illinois version of the UCC, which governs Continental's letter of credit, the issuer must pay without regard to rights and defenses available on the underlying contract. E.g., Pastor v. National Republic Bank of Chicago, 76 Ill.2d 139, 28 Ill.Dec. 535, 390 N.E.2d 894 (1979). See also James J. White & Robert S. Summers, Uniform Commercial Code Secs. 19-2, 19-5 (3d ed.1988).

Continental has dropped the insistence that it is entitled to pay less than $805,000 because Allied is kaput. Nonetheless, it still refuses to pay. It is almost three years since Allied demanded payment; Continental has yet to surrender a nickel. It has instead litigated with so much fervor, and so little support, that the district court awarded Eakin sanctions under Fed.R.Civ.P. 11. Proceedings to fix the amount are under way in the district court. We have for decision in this diversity action Continental's latest defense to payment, no more persuasive to us than to the district judge, who found it silly. 121 F.R.D. 363 (N.D.Ill.1988).

Here is Continental's current ground for balking: Eakin signed the papers "Allied Fidelity Insurance Company By: [signature] Harry E. Eakin, Indiana Insurance Commissioner, as Liquidator of Allied Fidelity Insurance Company." Continental protests that "Allied Fidelity Insurance Co." no longer exists. It wants Eakin to "provide appropriate clarification that the certifications made in the draw, including the certification to return funds, is [sic] being made by the Liquidator in its [sic] individual capacity." Why Eakin should be personally responsible for Allied's debts--which individual-capacity certification would make him-Continental has never explained. Allied's managers would not have been personally liable before its insolvency. Issuers of letters of credit take the risk of insolvency. Standby letters of credit are especially designed to deal with insolvency, and the fact that this risk came to pass with both Bill's and Allied does not afford Continental a good reason for balking. It is entitled to no more than it would have had if Allied were still afloat, and it would not have had the personal guaranty of Allied's managers.

Still, Continental is entitled to Allied's assurance (as much as it would have had outside of bankruptcy) that Allied will segregate the money and repay anything left over. Eakin insists that he gave Continental this assurance; Continental denies receiving it. Whether the draws contained the contractually-required assurance is a question of Indiana law. Section 27-9-3-7(b) provides that the "liquidator shall be vested by operation of law with the...