New York Life Ins. Co. v. Hartford National Bank & Trust Co.

• Decision Date: 20 September 1977
• Citation: 378 A.2d 562,173 Conn. 492
• Court: Connecticut Supreme Court
• Parties: , 22 UCC Rep.Serv. 761 NEW YORK LIFE INSURANCE COMPANY v. HARTFORD NATIONAL BANK & TRUST COMPANY.

Page 562

378 A.2d 562

173 Conn. 492, 22 UCC Rep.Serv. 761

NEW YORK LIFE INSURANCE COMPANY v. HARTFORD NATIONAL BANK & TRUST COMPANY.

Supreme Court of Connecticut.

Argued May 4, 1977.

Decided Sept. 20, 1977.

John B. Nolan, Hartford, with whom, on the brief, were Americo R. Cinquegrana and Jon E. Hayden, Hartford, for appellant-appellee (plaintiff).

Elliott B. Pollack, Hartford, with whom was Howard L. Siegel, Hartford, for appellee-appellant (defendant).

Before HOUSE, C. J., and LOISELLE, BOGDANSKI, LONGO and SPEZIALE, JJ.

SPEZIALE, Associate Justice.

Both parties have appealed from the judgment rendered in an action brought pursuant to General Statutes § 42a-5-115. ¹ The plaintiff sought damages for an alleged wrongful dishonor of a draft in the face amount of $180,000 drawn against a letter of credit which had been issued by the defendant in favor of the plaintiff. The plaintiff is appealing the court's award of only nominal damages; the defendant has cross appealed from the summary judgment as to its liability and from the denial of its setoff.

The business transaction giving rise to the present litigation involved the following facts: On May 12, 1972, the defendant, Hartford National Bank & Trust Company, hereinafter Hartford National, issued its irrevocable letter of credit to the plaintiff, New York Life Insurance Company, hereinafter New York Life, as beneficiary. It did so on behalf of its customers James Minges and Richard Gordon, who did business under the trade name Talcott Village Company, hereinafter TVC. TVC was the developer of a real estate project in Farmington known as Talcott Village. The development consisted of several parcels of land which were being improved and financed separately. One of these parcels, known as The Exchange, was to be a combination retail/office complex, financed in a two-step procedure conventionally used in the real estate development industry. For the actual construction of The Exchange, TVC borrowed funds on a short-term basis from a real estate investment trust, Wachovia Realty Investments, hereinafter Wachovia. When construction was completed and the complex occupied, New York Life was to have loaned TVC sufficient funds to retire the indebtedness from Wachovia's short-term construction loan, in return for which New York Life was to receive a permanent first mortgage on The Exchange. TVC paid New York Life a total of $90,000 in consideration for the issuance of a permanent mortgage loan commitment of $9,000,000 at an interest rate of 85/8 percent for a term of twenty-eight years. By subsequent amendment, the interest rate was increased to 9 percent and the commitment's expiration date was extended.

One of the conditions of the mortgage loan commitment was the requirement that $180,000 in cash be deposited with the plaintiff to satisfy a liquidated damages provision of the agreement. New York Life and TVC had agreed that in the event TVC did not take up the loan in question, the damages incurred by New York Life would be difficult to ascertain and such damages should be liquidated in the amount of $180,000. In lieu of the cash deposit in that amount required by the terms of the commitment, New York Life agreed to accept an irrevocable letter of credit issued in its favor by Hartford National at the request of TVC, Hartford National's customer. Under the terms of the letter of credit, Hartford National irrevocably promised to honor drafts drawn by New York Life on the sole condition that such drafts be accompanied by a "signed statement of the New York Life Insurance Company that the liquidated damages deposit is due to them under the provisions of this Letter of Credit."

TVC failed to meet the conditions of the mortgage loan commitment before the commitment's expiration date, and the loan was therefore never made. On July 15, 1974, New York Life, through The Chase Manhattan Bank, presented Hartford National with its sight draft in the amount of $180,000, accompanied by the statement required by the terms of the letter of credit. ² Nevertheless, despite this demand, Hartford National dishonored the draft of New York Life on July 23, 1974.

The plaintiff, New York Life, began the present action on July 30, 1974, claiming the face amount of the dishonored draft ($180,000) plus interest from the date of dishonor. ³ See General Statutes § 42a-5-115. The defendant, Hartford National, by its answer, admitted the issuance of the letter of credit but denied that it had wrongfully dishonored New York Life's draft. Hartford National also raised five special defenses and claimed setoff. By these special defenses Hartford National claimed that it had no duty to honor the demand for payment because (1) the document accompanying New York Life's draft was ambiguous and insufficient; (2) the liquidated damages clause of the mortgage loan commitment between New York Life and TVC was illegal; (3) Hartford National, as surety, could assert all defenses available to its customer (TVC) against New York Life, including the illegality of the liquidated damages clause; (4) in demanding payment, New York Life had breached its warranty that it had complied with all the necessary conditions of the letter of credit; and (5) New York Life knew or should have known that it could not enforce the liquidated damages clause because it had suffered no actual damage from TVC's failure to take up the mortgage commitment.

An interlocutory summary judgment was granted New York Life as to the liability of Hartford National for wrongful dishonor of the demand for payment. The court (McCarthy, J.) stated that there was no material factual dispute as to liability because (1) the documents submitted by New York Life with its draft were in facial compliance with the terms of the letter of credit, and (2) the special defenses, even if proved, would not excuse Hartford National from its duty to honor the demand for payment. The court then ordered a hearing to determine the amount of damages.

After a hearing as to damages, the court (Mulvey, J.) rendered judgment finalizing the interlocutory judgment in favor of New York Life as to liability, but awarding it only nominal damages. The court also denied Hartford National's setoff, and both parties appealed.

I

"Historically, a Letter of Credit is an assurance of payment upon certain terms and conditions, substituting the acceptable credit standing of a bank or other person for the unknown or doubtful standing of a borrower. It differs from the classical surety undertaking in that it is a primary obligation between the issuer and the beneficiary . . ., and for this reason, the recipient of the Letter is isolated from the arrangement between the issuer and the borrower. In construing the terms of a Letter of Credit, the same general principles apply which govern other written contracts. . . . Except insofar as expressly incorporated therein, the bank's contract with its customer for the Letter of Credit is separate and distinct from the contract which exists between the creditor and the customer/borrower." Chase Manhattan Bank v. Equibank, 394 F.Supp. 352, 355 (W.D.Pa.) "Originally conceived as a method of reducing the uncertainties such as doubt as to the buyer's intentions, reliability, or good faith, and difficulties of foreign litigation that occur when someone sells goods and services to a buyer in a foreign land, the letter of credit has become a basic tool of a fully developed bank business." Verkuil, "Bank Solvency and Guaranty Letters of Credit," 25 Stanford L.Rev. 716.

Article 5 of the Uniform Commercial Code governs letters of credit in this state. General Statutes §§ 42a-5-101-42a-5-117. A letter of credit which is within the scope of the code is defined as an engagement by a bank or other person, made at the request of a customer, that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit. General Statutes § 42a-5-103(1)(a); see, generally, 50 Am.Jur.2d, Letters of Credit, §§ 1-3; 6 Michie, Banks & Banking, c. 12 §§ 28-35; White & Summers, Uniform Commercial Code §§ 18-1-18-3. A letter of credit is not to be confused with a contract of guaranty or suretyship, because "(u)nder a letter of credit . . . the issuer becomes bound in the first instance (primarily liable) to pay the beneficiary, and the beneficiary may look immediately to the issuer for payment of drafts presented. Again, the beneficiary is not subject to the various technical and nontechnical defenses that a guarantor or surety may set up." (Italics in original.) White & Summers, op. cit., p. 608; see Chase Manhattan Bank v. Equibank, supra. Accordingly, it is important to stress that the letter of credit arrangement is completely independent of the underlying contract between the beneficiary of the letter of credit and the issuing bank's customer who has procured the letter of credit. ⁴ Because of this independence, the issuing bank has a duty to honor drafts or demands for payment where there is factual compliance with the terms of the letter of credit without reference to the terms of the underlying contract. See 19 Connecticut General Statutes, Annotated (West Ed.) § 42a-5-114(1), comment.

"The isolation of the issuer of a credit from the underlying sales contract has made it possible for the letter of credit to remain an economical and practical financing device, since the issuer's receipt, examination, and payment of the documents accompanying a draft can be achieved in a standardized and inexpensive manner." Annot., 35 A.L.R.3d 1404, 1406. Thus, one of the expected advantages and essential purposes of a letter of credit is that the beneficiary will be able to rely on assured, prompt payment from a solvent party; necessarily, a part of this expectation of ready payment is that there will be a minimum of litigation and judicial interference, and this is one of the reasons for the value of the...