Valleywood Sav. & Loan Ass'n, In re
| Decision Date | 12 July 1989 |
| Docket Number | No. C-880083,C-880083 |
| Citation | 573 N.E.2d 1193,60 Ohio App.3d 64 |
| Court | Ohio Court of Appeals |
| Parties | In re Liquidation of VALLEYWOOD SAVINGS & LOAN ASSOCIATION. |
Syllabus by the Court
1. Payment of the remaining funds available under a standby letter of credit does not render an appeal moot, when there exists a sufficient public interest in determining whether a state's liquidation powers over insolvent thrift institutions provided in R.C. 1157.02 are superior to the rights of parties to letters of credit provided in R.C. 1305.13.
2. In connection with the liquidation of an insolvent savings and loan, the Superintendent of Savings and Loan Associations is not entitled to take possession of a standby letter of credit pursuant to R.C. 1157.04 because it is not an asset of the insolvent institution; in this circumstance, the insolvent's pledged collateral is the asset subject to the Superintendent's possession.
3. Absent an express contingency in the underlying agreement, or presentment documents falsely certifying that the customer was in default or that a demand for payment was made, a claim of false or fraudulent presentment of documents is not available as a remedy under R.C. 1305.13(B)(2) to enjoin the issuing bank's payment to the beneficiary under a standby letter of credit.
Taft, Stettinius & Hollister, Lawrence D. Walker and Susan E. Wheatley, Cincinnati, for appellee First Nat. Bank of Louisville.
Frost & Jacobs and Gerald L. Baldwin, Cincinnati, for appellee Cent. Trust Co., N.A.
Porter, Wright, Morris & Arthur, Mark E. Elsener, Kathleen McDonald O'Malley and Sophia Papandreas Tjotjos, Columbus, for appellant Connie J. Harris, Superintendent.
The appellant, Connie J. Harris, is Superintendent of the Ohio Division of Savings and Loan Associations ("Superintendent") and liquidator of the insolvent Valleywood Savings and Loan Association ("Valleywood"). She appeals from an order of the trial court dissolving an injunction which prohibited the appellee, the Central Trust Company, N.A. ("Central Trust"), from making payment to First National Bank of Louisville ("FNB") under Central Trust's irrevocable standby letter of credit. In her single assignment of error the Superintendent contends that the trial court erroneously granted FNB's motion to dissolve the injunction against Central Trust by: (1) failing to consider her claim under R.C. 1305.13(B) (UCC 5-114) that FNB presented fraudulent documents for payment under the standby letter of credit, and (2) applying an incorrect standard of fraud to her action under R.C. 1305.13(B). This assignment is not well-taken.
In 1985, Valleywood, a chartered savings and loan association, purchased the stock of two Pennsylvania corporations from Thomas A. Evans and Aubrey W. Gladstone for $20,000,000. To secure a part of the performance under their agreement, Valleywood obtained an irrevocable standby letter of credit in the sum of $3,000,000 from Central Trust, naming Evans and Gladstone as the beneficiaries. As security for the letter of credit Valleywood pledged as collateral to Central Trust a certificate of deposit and certain commercial and residential mortgages.
On October 22, 1985, Valleywood entered into an amended agreement with Evans and Gladstone which called for the substitution of Valleywood's mortgage portfolio income with $3,000,000 in cash payments to Evans and Gladstone payable as follows:
February 3, 1986 $475,000
February 2, 1987 $975,000
February 1, 1988 $975,000
The irrevocable standby letter of credit was available to be drawn upon in the event Valleywood failed to pay any installment within twenty days after notice and upon presentation of the proper documents to Central Trust by the beneficiaries.
On the same date as their amended agreement with Valleywood, Evans and Gladstone assigned all rights under that agreement as well as the standby letter of credit to FNB as part of their own separate loan arrangement. After it made its first payment under the amended agreement, Valleywood and Central Trust agreed to substitute the pledged collateral securing the standby letter of credit. Pursuant to this agreement, Valleywood's mortgages were replaced with Valleywood certificates of deposit in the sum of $2,525,000.
On June 12, 1986, during the Ohio savings and loan crisis, the Superintendent took possession of Valleywood's business and property (as R.C. 1157.02 provides in the case of an insolvent savings and loan association). When Central Trust advised that FNB was about to draw on the standby letter of credit, the Superintendent obtained the injunction in question from the common pleas court. Upon FNB's motion to dissolve the injunction, Judge Kraft, in a well-reasoned memorandum decision, found that the standby letter of credit was neither an asset of Valleywood nor the subject of a fraudulent transaction or of fraud warranting the injunctive relief provided for in R.C. 1305.13(B)(2). Upon the trial court's refusal to reconsider its judgment, the Superintendent filed her notice of appeal. 1
Two days after oral argument FNB moved to dismiss this appeal as moot because it had drawn the remaining balance due under the standby letter of credit. Although payment ordinarily renders any issue moot and requires dismissal for lack of jurisdiction, an exception arises when the issue is one of sufficient public interest. State, ex rel. Rudes, v. Rofkar (1984), 15 Ohio St.3d 69, 15 OBR 163, 472 N.E.2d 354; Ruprecht v. Cincinnati (1979), 64 Ohio App.2d 90, 18 O.O.3d 60, 411 N.E.2d 504.
The insolvency of Valleywood as a deposit guaranty association resulted from the collapse of the Ohio Deposit Guarantee Fund ("ODGF"), which itself was triggered by the failure of Home State Savings Bank. On March 13, 1985, by Am.Sub.H.B. No. 492, the legislature, declaring an emergency, amended R.C. 1157.01(A) and 1157.02 authorizing appointment of a conservator and procedures for the liquidation of insolvent deposit guaranty associations. State, ex rel. Celeste, v. Smith (1985), 17 Ohio St.3d 163, 17 OBR 364, 478 N.E.2d 763; Roberts Dev. Corp. v. Harris (1987), 36 Ohio App.3d 111, 521 N.E.2d 517.
The legislature's decision to protect the deposit guaranty association as well as its depositors and creditors, and the state's commitment to assume certain losses of ODGF are indicative of a public interest and the need to determine if the Superintendent's liquidation powers provided in R.C. 1157.02 are superior to the rights of parties to letters of credit provided in R.C. 1305.13 (UCC 5-114). Therefore, FNB's motion to dismiss is overruled.
As a preface, the nature and purpose of letters of credit and the source of the Superintendent's power are crucial to the issue. The subject has been discussed frequently by many scholars and judges. Of note are Cromwell v. Commerce & Energy Bank (La.App.1984), 450 So.2d 1, affirmed in part and reversed in part (La.1985), 464 So.2d 721; Colorado Natl. Bank v. Bd. of Cty. Commrs. (Colo.1981), 634 P.2d 32; Note, Letters of Credit and "Fraud in the Transaction" (1986), 60 Tul.L.Rev. 1088; Note, Letters of Credit: Injunction as a Remedy for Fraud in U.C.C. Section 5-114 (1979), 63 Minn.L.Rev. 487; Squillante, Letter of Credit: A Discourse (1980), 85 Comm.L.J. 220; Annotation (1971), 35 A.L.R.3d 1404; Annotation (1983), 25 A.L.R.4th 239.
The commercial letter of credit evolved as a means to finance the sale of goods in international trade. The typical commercial letter of credit is a bank's (the issuer's, R.C. 1305.01[A] ) written promise upon request of its customer (R.C. 1305.01[A] ) to honor a draft or other demand for payment if the person drawing the draft or making demand (beneficiary, R.C. 1305.01[A] ) complies with the written conditions expressed therein (R.C. 1305.01[A], UCC 5-103[a] ). In return the bank's customer secures the letter of credit by pledging collateral and promising to reimburse the issuing bank. The issuing bank's promise to pay is independent of the buyer's payment or the seller's performance pursuant to their underlying agreement. Therefore, in the case of a letter of credit, the issuing bank's credit is substituted for the undetermined or uncertain credit of the bank's customer. R.C. 1305.13 (Official Comment 1 to UCC 5-114); See Richards Elec. Supply Co., Inc. v. First Natl. Bank of Harrison (1981), 2 Ohio App.3d 325, 441 N.E.2d 1130.
Widely used in today's banking business is the standby letter of credit--also governed by R.C. 1305.01 et seq. and Article Five of the Uniform Commercial Code. Cromwell v. Commerce & Energy Bank, supra, at 729. It differs from a commercial letter of credit in that the beneficiary cannot draw on the standby letter of credit unless the customer defaults on its underlying agreement with the beneficiary. It is similar to a guarantee, but unlike a guarantor who is secondarily liable, the obligation of an issuer of a standby letter of credit is primary. Accordingly, the issuer cannot rely on its customer's defenses against the beneficiary. R.C. 1305.13 (Official Comment 1 to UCC 5-114).
The standby letter of credit assumes three separate agreements: (1) the business arrangement reflected in the underlying agreement between the bank's customer and the beneficiary; (2) the agreement between the issuing bank and its customer in which the bank agrees to issue the letter of credit and the customer agrees to reimburse the bank for any payments thereunder; and (3) the agreement between the issuing bank and the beneficiary set forth in writing in the letter of credit in which the bank is obligated to honor any drafts or demands that comply. Colorado Natl. Bank v. Bd. of Cty. Commrs., supra, at 36.
The Superintendent's powers have been conferred because Ohio exercised its power to preempt the Bankruptcy Code by establishing an exclusive method for the possession and liquidation of insolvent...
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