Opinion ID: 354160
Heading Depth: 2
Heading Rank: 1

Heading: Nature of Letters of Credit

Text: 19 Preliminarily a word should be said with respect to the nature of the standby letter of credit the commercial instrument upon which appellants' claims are based. 20 The Receiver has acknowledged that some letters of credit issued by USNB did create provable claims and included these letters in the obligations assumed by Crocker in the purchase and assumption agreement. These were primarily traditional or commercial letters of credit. 2 This type of instrument developed as a means of facilitating international trade between distant buyers and sellers not commercially acquainted with each other. 21 Stripped to its essentials, the transaction runs as follows: the buyer arranges for a bank whose credit the seller will accept to issue a letter of credit in which the bank agrees to pay drafts drawn on it by the seller if, but only if, such drafts are accompanied by specified documents, such as bills of lading or air freight receipts, representing title to the goods that are the subject matter of the transaction between buyer and seller. The bank undertakes this obligation for a specified period of time. 22 Verkuil, Bank Solvency and Guaranty Letters of Credit, 25 Stan.L.Rev. 716, 718 (1973) (hereinafter Verkuil). 23 This letter of credit creates an absolute, independent obligation and payment must be made upon presentation of the proper documents regardless of any dispute between the buyer and seller concerning their agreement, such as a dispute over the quality of the goods delivered. See, Battaile, Guaranty Letters of Credit: Problems and Possibilities, 16 Ariz.L.Rev. 823, 825 (1974) (hereinafter Battaile); Association de Azucareros de Guatemala v. United States Nat'l Bank of Oregon, 423 F.2d 638, 641 (9th Cir. 1970). 24 In recent years instruments operating as letters of credit (in that they operate to create an absolute obligation upon presentation of specified documents) and termed standby to distinguish them from the traditional letters of credit have been used as security devices in a variety of contexts outside the traditional area of the international sale of goods. They have been used to insure construction loans, as quasi-performance bonds, to support the issuance of commercial paper and to secure the performance of purely monetary obligations such as those involved in this case. See Battaile, supra at 822-26; Verkuil, supra at 717, 721-22. Standby letters are convenient and inexpensive and are being adapted to many uses at this time. See Verkuil, supra at 717. The principal difference between the traditional letter of credit and these newer standby letters is that whereas in the classical setting, the letter of credit contemplates payment upon performance, 'the standby credit,'    'contemplates payment upon failure to perform.'  Katskee, The Standby Letter of Credit Debate the Case for Congressional Resolution, 92 Banking L.J. 697, 699 (1975) (hereinafter Katskee). 25 This has created an awkward situation for national banks, since the standby letter of credit possesses more of the characteristics of a guarantee and national banks are not authorized to enter into guarantees. See Katskee, supra at 712-14; Harfield, The Standby Letter of Credit Debate, 94 Banking L.J. 293, 301-03 (1977). No contention is made here, however, that issuance of the letters of credit in question was ultra vires. The Receiver has not asserted that defense and the Comptroller appears to have chosen instead to recognize the widespread bank use and commercial usefulness of the instrument and to attempt, by regulation, to eliminate the abuses which the failure of USNB has demonstrated can result from unregulated and excessive use. FDIC Reply Brief at 5-6; see, e. g., 12 C.F.R. § 7.7016 (1977).