Republic Nat. Bank of Dallas v. Northwest Nat. Bank of Fort Worth, 17995

Decision Date04 May 1978
Docket NumberNo. 17995,17995
Citation566 S.W.2d 358
Parties24 UCC Rep.Serv. 939 The REPUBLIC NATIONAL BANK OF DALLAS, Appellant, v. NORTHWEST NATIONAL BANK OF FORT WORTH, Appellee.
CourtTexas Court of Appeals
OPINION

MASSEY, Chief Justice.

By this opinion we affirm the judgment of the trial court denying Republic National Bank of Dallas, as Trustee, any right of enforcement of an instrument called an Irrevocable Letter of Credit issued by Northwest National Bank of Fort Worth. The trial court denied enforcement upon a conclusion of law that "The letter of credit in question is a contract of guaranty to answer for the default of B & H Amusement Rides, Inc. and not a true letter of credit."

The instrument read as follows:

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

The face of the instrument discloses that the liability of the Northwest Bank was to come into existence only in the event of the default of B & H Amusement Rides upon its note of January 12, 1968 and as applied to the balance upon notice of such default with resulting acceleration of the note, etc., coupled with proofs relative thereto attached to the draft for the amount owing on the note in question (up to $50,000.00) presented to such bank in the prescribed form. In other words the instrument constituted a guaranty by the bank to the beneficiary that if and in the event the note obligor defaulted upon the obligation the bank would, in the place and stead of the obligor, make the beneficiary whole. (Default did occur, following which there was full compliance by Republic Bank, successor Trustee; with refusal of Northwest Bank for stated reason that because the instrument was a guaranty and not a letter of credit it was not liable thereon.)

In 3 R.C.L. 425, § 53, "Loan of Credit or Underwriting Securities" (1914), it was well stated that "A banking corporation cannot lend its credit to another by becoming a surety, indorser, or guarantor for him. It cannot for the accommodation of another indorse his note or guarantee the performance of obligations in which it has no interest. Such an act is an adventure beyond the confines of the banking business, and, when its true character is known no rights grow out of it, though it has taken on in part the garb of a lawful transaction; and this applies to national banks. . . ." The text continues in excellent explanation of the reasons why it is that when a bank is found to have so acted its action is ultra vires and void.

On the other hand the issuance of a true letter of credit by a banking corporation constitutes...

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1 cases
  • Republic Nat. Bank of Dallas v. Northwest Nat. Bank of Fort Worth
    • United States
    • Texas Supreme Court
    • December 29, 1978
    ...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 The central issue presented is whether the instrument issued by Northwest is a valid an......

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