Republic Nat. Bank of Dallas v. Northwest Nat. Bank of Fort Worth

• Decision Date: 29 December 1978
• Docket Number: No. B-7731,B-7731
• Citation: 578 S.W.2d 109
• Court: Texas Supreme Court
• Parties: 25 UCC Rep.Serv. 832 The REPUBLIC NATIONAL BANK OF DALLAS, Petitioner, v. NORTHWEST NATIONAL BANK OF FORT WORTH, Respondent.

Page 109

578 S.W.2d 109

25 UCC Rep.Serv. 832

The REPUBLIC NATIONAL BANK OF DALLAS, Petitioner, v. NORTHWEST NATIONAL BANK OF FORT WORTH, Respondent.

No. B-7731.

Supreme Court of Texas.

Dec. 29, 1978.

On Rehearing March 7, 1979.

Rehearing Denied April 4, 1979.

Green, Gilmore, Rothpletz & Hyden, Frank B. Rynd, Gardere, Parker & Dehay, Arthur Blanchard, Dallas, for petitioner.

Farris & Thompson, Thomas L. Farris, Fort Worth, for respondent.

McGEE, Justice.

The Republic National Bank of Dallas sued Northwest National Bank of Fort Worth on an instrument entitled "IRREVOCABLE LETTER OF CREDIT." The disposition of this appeal hinges on the enforceability of that instrument.

The facts of the case are virtually undisputed. In December of 1968 Ronald Hughes, Dudley Hughes, Sr., and Dudley Hughes, Jr., became interested in purchasing the stock of Crown Hill Memorial Park, Inc., corporate owner of a north Dallas cemetery. As required by the law of this state, Crown Hill had a perpetual care fund held in trust for the purpose of maintaining and caring for the grounds and physical plant of the park. American Cities Trust Company was the trustee of the fund at that time. Among the assets, and constituting a major portion of the fund, was a $50,000 promissory note made payable to the fund's trustee in five equal installments by B&H Amusement Rides, Inc. The prospective purchasers of Crown Hill were wary of this particular

note and refused to close the sale as long as it was a fund asset. Consequently, on February 28, 1969 B&H caused Northwest National Bank to issue an instrument in favor of the trustee which provided:

THE NORTHWEST NATIONAL BANK

7820 White Settlement Road

Fort Worth, Texas

Speegle Berry

President

IRREVOCABLE LETTER OF CREDIT

Non-Transferable

February 28, 1969

American Cities Trust Company

1815 South Montclair, Oak Cliff

Dallas, Texas,

and/or its successor as Trustee

of the Perpetual Care Fund of

Crown Hill Memorial Park,

a Perpetual Care Cemetery.

Gentlemen:

We hereby open our irrevocable credit in your favor, available in the following manner and on the following terms:

1. Transferability. The credit is nontransferable.

2. Drafts. Your single draft drawn on Northwest National Bank of Fort Worth, at ten (10) days' sight, in the amount of the unpaid principal, interest and attorneys' fees then due and payable after default, pursuant to the terms of a certain Promissory Note executed January 12, 1968, by B&H Amusement Rides, Inc., payable to the order of American Cities Trust Company, which draft must state upon its face: "Drawn under Letter of Credit of the Northwest National Bank of Fort Worth, Texas, dated February 21, 1969."

3. Total. The draft must not exceed Fifty Thousand and no/100 Dollars ($50,000.00).

4. Purpose. To be applied to the balance remaining on a certain loan evidenced by a certain Promissory Note executed January 12, 1968, by B&H Amusement Rides, Inc., payable to the order of American Cities Trust Company, secured by a security interest in and upon the inventory of B&H Amusement Rides, Inc.

5. DOCUMENTS. The required documents are:

(a) Original Promissory Note, executed January 12, 1968, by B&H Amusement Rides, Inc., payable to the order of American Cities Trust Company.

(b) Copy of letter advising B&H Amusement Rides, Inc. of default in the payment of the said note executed January 12, 1968, said advice letter being addressed to B&H Amusement Rides, Inc., showing receipt and being dated not less than twenty (20) days in advance of the date of Sight Draft.

(c) Copy of letter advising E. L. Baker, Jr., Jerome I. Weiner, and Henry W. Simon, Jr. of default in the payment of the said Note executed January 12, 1968, said advice letter being addressed in care of Simon & Simon, attorneys, 816 First National Building, Fort Worth, Texas, and being dated not less than twenty (20) days in advance of the date of Sight Draft.

(d) Copy of letter which advised owners of B&H Amusement Rides, Inc. property of default in payment and resulting acceleration of the said Promissory Note dated January 12, 1968, said letter being dated not less than twenty (20) days prior to the date of Sight Draft.

6. OBLIGATION OF ISSUER. The Northwest National Bank of Fort Worth, Texas, agrees with American Cities Trust Company, and/or its successor as Trustee of the Perpetual Care Fund of Crown Hill Memorial Park, a Perpetual Care Cemetery, to duly honor a proper draft drawn and negotiated in compliance with the terms of this Letter of Credit upon presentation to the office of the bank.

7. RULES APPLICABLE. The Credit, except as otherwise provided, is to be governed by the Uniform Commercial Code in force in the State of Texas on the date of its issuance.

Yours very truly,

NORTHWEST NATIONAL BANK

By: /s/ Speegle Berry

By: (Authorized Signature)

By: President.

After consulting with legal counsel and the Commissioner of the Texas State Banking Department, the purchasers accepted the letter of credit and closed the sale of Crown Hill.

After making a few payments, B&H defaulted on the note. The successor trustee, Republic National Bank, thereupon presented all the required documents along with a draft in the amount of $45,104.75 to Northwest National Bank. It is undisputed that this presentment was in full compliance with the letter of credit terms, but Northwest nonetheless refused to honor the draft. Republic then filed suit to recover damages, alleging its demand and Northwest's dishonor. After a trial before the court, the trial judge rendered judgment for Northwest, concluding that the instrument was an ultra vires contract of guaranty and consequently unenforceable against a national bank. The court of civil appeals affirmed. 566 S.W.2d 358. We reverse the judgments below and render judgment for Republic.

The central issue presented is whether the instrument issued by Northwest is a valid and intra vires letter of credit or an ultra vires guaranty agreement. Since we have been unable to locate any Texas case law pertinent to this particular question, we will freely consult decisional authority from other jurisdictions in addition to the guidance provided by Chapter 5 of the Texas Business and Commerce Code.

Republic National Bank, as our petitioner, contends that the instrument is a valid and intra vires letter of credit, and that, even if it should be found that the instrument is a guaranty, it nonetheless should be enforced against Northwest. Northwest National Bank replies that the instrument is unenforceable as a guaranty because paragraph 4 essentially provides that the purpose of the credit is to guarantee an existing note and to protect payment in the event of default. As such, Northwest reasons that the issuance of the instrument was an ultra vires act since traditional thought has been that national banks are without authority to act as a guarantor or surety for the performance of contracts made by others. See Border National Bank v. American National Bank, 282 F. 73, 77-78 (5th Cir. 1922); Harfield, The National Bank Act and Foreign Trade Practice, 61 Harv.L.Rev. 782, 788 (1948) (collected authorities). Inasmuch as we hold that the instrument in question qualifies as an enforceable and intra vires letter of credit, we deem it unnecessary to express a further opinion as to whether a guaranty made by a national bank may be enforced against it.

Generally, a true letter of credit is the third contract in a complex of three independent contracts. The first contract is the agreement between parties to the underlying obligation; typically, this is the contract between the obligor and obligee. The second contract is ordinarily between the bank or other person (the issuer) and the obligor (the account party), which precipitates the issuance of the letter of credit. The third contract, or the letter of credit, is between the issuer and the obligee (the beneficiary), which provides that the issuer will make payment to the beneficiary upon presentation of a draft and certain documents (a documentary draft) or simply upon the presentation of a draft (a clean letter). See Venizelos, S. A. v. Chase Manhattan Bank, 425 F.2d 461, 464-65 (2d Cir. 1970); R. Braucher & R. Riegert, Introduction to Commercial Transactions 360 (1977).

Chapter 5 of the Texas Business and Commerce Code recognizes that a bank may issue a letter of credit. ¹ Section 5.102(a)(1) " 'Credit' or 'Letter of Credit' means an engagement by a Bank or other person made at the request of a customer and of the kind within the scope of this chapter (section 5.102) that the issuer will honor drafts or other demands for payment upon compliance with conditions specified in the credit. . . ." Id. (Emphasis added).

specifically provides that the scope of the chapter encompasses "a credit issued by a bank if the credit requires a documentary draft or a documentary demand for payment." Furthermore, section 5.103(a)(1) provides in pertinent part:

By some estimates the "traditional credit" or "commercial credit" has been in use in one form or another since 1100 A.D., finding its impetus in the insecurity surrounding international sales of tangible goods. See Verkuil, Bank Solvency and Guaranty Letters of Credit, 25 Stan.L.Rev. 716, 716 n. 1 (1973). Since its genesis, however, the use of letters of credit has expanded far beyond this tangible-goods-in-sales context. One particular development has been the "standby credit" or "guaranty credit" whereby the issuer agrees to pay the beneficiary upon presentment of documentation indicating that the account party has defaulted on a payment obligation. Distinguished from the traditional credit, the standby credit is used primarily to finance or secure an underlying intangible or money indebtedness undertaken by the account party such as a promissory note. ² Although recognizing that there is no express statutory foundation, most courts and commentators have predicated their approval of standby...