Court Opinion

ID: 9525472
Source: CourtListenerOpinion
Date Created: 2023-08-07 03:04:03.928338+00
Date Added: 2024-06-11T13:14:56.369303
License: Public Domain

Mr. JUSTICE JIGANTI, specially concurring: The majority states that the threshold issue is whether the plaintiff, not described or identified in the letter of credit, is entitled to an injunction. In determining that it is not entitled to that injunction the majority concludes that it was error for the trial court to fail to join the partnership as an indispensable party and without the partnership there was not a proper, party plaintiff. An indispensable party was described in Hobbs v. Pinnell (1959), 17 Ill. 2d 535, 162 N.E.2d 361, as one so indispensable to a decision of a case upon its merits that a final decree cannot be made without affecting his interests. I do not see how enjoining Percy Wilson and State Bank from cashing letters of credit so affects the interest of the partnership. The partnership certainly had knowledge of the lawsuit and did not seek to intervene to protect its own interest. I do not believe the record supports the conclusion that the partnership was an indispensable party whose interest had to be protected. The majority states that the record does not support the conclusion that plaintiff is the customer under section 5—103(g). As the majority notes, plaintiff entered into the Completion Assurance Agreement with Percy Wilson and the trustee who held title to the property. That agreement provided plaintiff was required to deposit certain money as a fund. The letter of credit was secured at State Bank, by promissory notes of plaintiff which were guaranteed by Davis. State Bank also received as security the beneficial interest of a certain land trust which is not a party to these proceedings. From this evidence I conclude that plaintiff was a customer within the meaning of section 5—103(g). I do not believe that this finding affects the partnership who also may be a customer. I see no reason why there may not be more than one customer to a letter of credit. The majority concluded that the record clearly indicates the plaintiff has an adequate remedy at law and that it failed to establish an irreparable injury or any ground for equitable relief. In this proceeding for a preliminary injunction I believe the evidence was sufficient for the trial court to find that the status quo had to be maintained. I believe, however, that the court was in error for issuing the injunction because it did not meet the requirements of section 5—114(2) (b). Article 5 of the Uniform Commercial Code governs letters of credit. (Ill. Rev. Stat. 1973, ch. 26, par. 5—101 et seq.) The Draftsmen’s Comment to Article 5 (UCC Rep. Serv., Uniform Code (1964), par. 5—102, UCC art. 5, at 3) states that the article does not attempt to codify all of the law of letters of credit because that would tend to stultify further development of this rather useful financing device. Uniform Commercial Code, Section 1—102(1), provides that the Code is to be liberally construed and applied to promote its underlying purposes ánd policies. (Ill. Rev. Stat. 1973, ch. 26, par. 1—101(1).) The Uniform Commercial Code Comment to section 5—102 says that the liberal construction canon is particularly appropriate for letters of credit because the law is still developing. Ill. Ann. Stat., ch. 26, par. 5—102, Uniform Commercial Code Comment, at 566, 567 (Smith-Hurd 1963). A letter of credit is essentially a contract between the issuer of the credit, in this instance State Bank, and the beneficiary, in this instance Percy Wilson. This letter of credit contract is independent of the underlying agreement, in this instance Completion Assurance Agreement between the customer, Edgewater, and the beneficiary. (Barclay’s Bank D.C.O. v. Mercantile National Bank (5th Cir. 1973), 481 F.2d 1224, rehearing denied, (5th Cir. 1973), 481 F.2d 1403, cert. dismissed, 414 U.S. 1139, 39 L. Ed. 2d 96, 94 S. Ct. 888; Wichita Eagle & Beacon Publishing Co. v. Pacific National Bank (D. Cal. 1971), 343 F. Supp. 332; Fidelity Bank v. Lutheran Mutual Life Insurance Co. (10th Cir. 1972), 465 F.2d 211; but see also White and Summers, Handbook of the Law under the Uniform Commercial Code 607 (1972), regarding the legal nature of the letter of credit.) The relationship between the issuer and the customer is governed by Uniform Commercial Code section 5—109. (Ill. Rev. Stat. 1973, ch. 26, par. 5—109). Section 5—109(1)(a) restates one of the basic principles of the law of letters of credit: the issuing bank bears no responsibility for the performance of the underlying contract. (Ill. Ann. Stat., ch. 26, par. 5—109(1)(a), Illinois Code Comment, at 584 (Smith-Hurd 1963).) In view of the independent nature of the letter of credit the issuer is under a duty to honor drafts and demands for payment made under the letter of credit if in fact the demand complies with the terms of the letter of credit without reference to compliance with the terms of the underlying agreement. See 3 N.Y. State Law Revision Commission, 1955 Report at 1654, and the cases cited therein, hereinafter cited as Schlesinger Study; Ill. Rev. Stat. 1973, ch. 26, par. 5—114(1); Intraworld Industries, Inc. v. Girard Trust Bank (1975), 461 Pa. 343, 336 A.2d 316; Fair Pavilions, Inc. v. First National City Bank (1967), 19 N.Y. 2d 512, 281 N.Y.S.2d 23, 227 N.E.2d 839; Ando International, Ltd. v. Woolmaster Corp. (N.Y. S. Ct. 1966), 3 UCC Rep. Serv. 1071; Ufitec, S.A. v. Trade Bank & Trust Co. (1965), 21 App. Div. 2d 187, 249 N.Y.S. 2d 557, aff'd, 16 N.Y. 2d 698, 261 N.Y.S.2d 893, 209 N.E.2d 551; Frey & Son, Inc. v. Sherburne Co. (1921), 193 App. Div. 849, 184 N.Y.S. 661, rehearing denied, 194 App. Div. 960, 185 N.Y.S. 929; Maurice O’Meara Co. v. National Park Bank (1925), 239 N.Y. 386, 146 N.E. 636, 39 A.L.R. 747; American Steel Co. v. Irving National Bank (2d Cir. 1920), 266 F. 41, cert. denied, 258 U.S. 617, 42 S. Ct. 271, 66 L. Ed. 793. Uniform Commercial Code section 5—114(2)(a)1 governs the duty of the issuer of the letter of credit to holders who, because they are not original parties to the transaction, are alluded to in the Uniform Commercial Code Comment to that section as innocent third parties. (Ill. Ann. Stat., ch. 26, par. 5—114, Uniform Commercial Code Comment, at 601 (Smith-Hurd 1963).) The case at bar does not contemplate a proceeding under subsection (2)(a), because there are no third parties. This appeal arises under subsection (2)(b). That latter section affords protection to the issuer who has been notified that the certification of the beneficiary is fraudulent, forged or has another defect not apparent on the face of the instrument. The issuer may still honor the letter of credit if it does so in good faith. In the event the issuer does honor the letter then an action by the customer against the beneficiary will lie. (Ill. Ann. Stat., ch. 26, par. 5—114, Uniform Commercial Code Comments, at 601 (Smith-Hurd 1963).) Subsection (2)(b) further provides that a court of competent jurisdiction may enjoin honor under those circumstances. First to be considered is whether the trial court, a court of competent jurisdiction, may enjoin the issuer, State Bank, from honoring the letter of credit that it issued to Percy Wilson, the beneficiary. In doing so, an examination is necessary of that ill-defined area that exists between the principle previously mentioned, that the relationship between the beneficiary and the issuer is independent of the underlying contract between the beneficiary and the customer, and Uniform Commercial Code Section 114(2) (b) which says essentially that even though the relationship of those parties is independent of that underlying contract, the court will still look at that very contract if there is fraud, forgery or other defect. The only case interpreting section 5—114 in Illinois is Baker v. National Boulevard Bank (N.D. Ill. 1975), 399 F. Supp. 1021, and the facts therein make it inapropros to the case at bar. We must, therefore look to other jurisdictions and indeed plaintiff relies on the case of Dynamics Corporation of America v. Citizens National Bank (N.D. Ga. 1973), 356 F. Supp. 991, which interpreted that section. Before examining Dynamics we should note that section 5—114(2) (b) is a codification of the case of Sztejn v. J. Henry Schroder Banking Corp. (1941) 31 N.Y.S. 2d 631, 177 Misc. 719. (Ill. Ann. Stat., ch. 26, par. 5—114, Illinois Code Comment at 598 (Smith-Hurd 1963).) The plaintiff in Sztejn was a purchaser of a quantity of bristles from the defendant in India. In order to pay for the bristles the plaintiff caused an irrevocable letter of credit to be issued to the seller-beneficiary. The letter provided that the issuing bank would pay upon the presentation of an invoice and a bill of lading covering the shipment of bristles. When the letter of credit was presented to the issuer for payment, the plaintiff brought this action to enjoin the issuer from cashing the letter. The plaintiff alleged that while the bill of lading properly described the ordered bristles, the shipment actually contained cow hair, other worthless materials and rubbish which was intended to simulate genuine merchandise and to defraud the plaintiff-buyer. The court first commented that this matter was considered on a motion and the allegations of the complaint must be deemed as true. Therefore, it was assumed that the defendant was engaged in a scheme to defraud the plaintiff. The court noted: “It is well established that a letter of credit is independent of the primary contract of sale between the buyer and the seller. The issuing bank agrees to pay upon presentation of documents, not goods. This rule is necessary to preserve the efficiency of the letter of credit as an instrument for the financing of trade. One of the chief purposes of the letter of credit is to furnish the seller with a ready means of obtaining prompt payment for his merchandise. It would be a most unfortunate interference with business transactions if a bank before honoring drafts drawn upon it was obliged or even allowed to go behind the documents, at the request of the buyer and enter into controversies between the buyer and the seller regarding the quality of the merchandise shipped. ° # "‘however, I believe that a different situation is presented in the instant action. This is not a controversy between the buyer and the seller concerning a mere breach of warranty regarding the quality of the merchandise; on the present motion it must be assumed that the seller has intentionally failed to ship any goods ordered by the buyer. In such a situation, where the seller’s fraud has been called to the bank’s attention before the drafts and documents have been presented for payment, the principle of the independence of the bank’s obligation under the letter of credit should not be extended to protect the unscrupulous seller. "* ** * no hardship will be caused by permitting the bank to refuse payment where fraud is claimed, where the merchandise is not merely inferior in quality but consists of worthless rubbish, where the draft and accompanying documents are in the hands of one who stands in the same position as the fraudulent seller, where the bank has been given notice of the fraud before being presented with drafts and documents for payment, and where the bank itself does not wish to pay pending an adjudication of the rights and obligations of the other parties.” The Dynamics case is somewhat unusual in that the person to be secured was not the seller, but the buyer of certain armaments, the nation of India. The seller, Dynamics, was the customer who caused the bank to issue the letter of credit. The letter of credit provided that the issuer would pay out on a certification by the beneficiary, India, that “in the exercise of reasonable discretion and in good faith that the Dynamics Corporation of America [had] failed to carry out certain obligations of theirs under the ° ° ° agreement ° ° Dynamics sought and received a preliminary injunction enjoining the bank from honoring the letter of credit which contained the proper certification. India intervened and sought to dissolve the temporary restraining order. Their motion was denied. Dynamics’ claim was that they had completed their portion of the contract and provided the goods under the contract f.o.b. its plant and it was India’s responsibility to get the equipment from the plant to an Indian port. Because India had declared war against Bangladesch, the President of the United States had declared a partial arms embargo which covered the goods here and prevented the goods from being shipped. Dynamics claimed that any certification by India that Dynamics had failed to carry out its obligations must be fraudulent. The Federal Court in Georgia, using the very broad definition of fraud in equity cases under Federal law, found that there was fraud and upheld the injunction. The court considered its function and stated its task was to merely guaranty that “India not be allowed to take unconscientious advantage of the situation and run off with the plaintiff’s money on a pro forma declaration which has absolutely no basis in fact.” Edgewater urges that the parallels between the Dynamics case and the instant case are obvious. Like Dynamics, Edgewater deposited its letter of credit not to insure prompt payment to a seller of goods but to provide security for the performance of contractual obligations. Like India, Percy Wilson was required to present a certificate as a prerequisite to cashing the letter of credit. Like Dynamics, Edgewater claims simply that the underlying agreement had already been formed; the required certificate, therefore, could not be properly made. In another often cited case, NMC Enterprises, Inc. v. Columbia Broadcasting System, Inc. (N.Y. S.Ct. 1974), 14 UCC Rep. Serv. 1427, the court issued a preliminary injunction because of a showing of fraud in the inducement. The court also found that if the injunction were not issued there was a likelihood that the plaintiff would be forced into bankruptcy. The court characterized the transaction as tainted with intentional fraud. In Intraworld Industries, Inc., v. Girard Trust Bank (1975), 461 Pa. 343, 336 A. 2d 316, the trial court refused to issue a preliminary injunction and the appellate court affirmed. The facts are inapposite to the case at bar, but the court cited both Sztejn and Dynamics and commented: “In light of the basic rule of independence of the issuer’s engagement and the importance of this rule to the effectuation of the purposes of the letter of credit, we think that the circumstances which will justify an injunction against honor must be narrowly limited to situations of fraud in which the wrongdoing of the beneficiary has so vitiated the entire transaction that the legitimate purposes of the independence of the issuer’s obligation would no longer be served.” 461 Pa. 343,_, 336 A.2d 316, 324-25. In the case at bar, plaintiff says that although it “has not employed the epithet ‘fraudulent’ ” to Percy Wilson’s conduct, it was as improper as the conduct of India in the Dynamics case. Indeed, there is no fraud in this case under any standard. Further, questions of bankruptcy and problems of foreign jurisdiction which seemed to weigh heavily with the courts in Dynamics and NMC are not present here. The parties are subject to the jurisdiction of this court and this dispute,'and any other disputes they may have in their series of dealings, can be adequately treated in an action between the customer and beneficiary. As in the Intraworld case, I believe that an injunction against honor must be narrowly limited and that to allow an injunction here would be an unfortunate interference with a business transaction that was freely negotiated between the parties. The injunction against State Bank should be reversed. The next point on appeal concerns the injunction against the beneficiary of the letter of credit, Percy Wilson. There is no separate provision of article 5 of the Uniform Commercial Code that specifically treats the relationship between the beneficiary and the customer who are the parties to the agreement underlying the letter of credit. Although that relationship is not defined, section 5—114(2) (b) still governs the issuance of the injunction. Case law on injunctions sought against the beneficiary by the customer is sparse. There are no cases in Illinois. The essential issue is, does the rationale that narrowly limits the issuance of an injunction because it unduly interferes with commerce pertain between the original contracting parties? I believe the answer is yes. The reason is that the beneficiary may have issued drafts .to third parties against the letter the beneficiary holds. The most significant case in this field dates back to 1921, Frey & Son, Inc., v. Sherburne Co. (1921), 193 App. Div. 849, 184 N.Y.S. 661, rehearing denied, 194 App. Div. 960, 185 N.Y.S. 929. In that case, under circumstances that may not be quite analogous to the ones in the case at bar, the court refused to issue a temporary injunction against the beneficiary and also against the bank. The court in doing so made the following statement for which the case is frequently cited: “Interest of innocent parties who may hold drafts upon the Letter of Credit should not be made to suffer by reason of rights that may exist between the parties to the contract of sale in reference to which the Letter of Credit was issued. It would be a calamity to the business world if for every breach of contract between buyer and seller a party may come into a court of equity and enjoin payment on drafts drawn upon a Letter of Credit issued by a bank which owed no duty to the buyer in respect to the breach.” There is nothing in that opinion that would indicate that in. fact the beneficiary had issued drafts against the letter of credit which it held. It appears as though the court was announcing a policy that it was more important that an irrevocable letter of credit once issued, be viable in the commercial world and that if anyone was to bear the risk of loss it was to be the person who caused the issuance of the letter of credit. Schlesinger Study at 1661; Ill. Ann. Stat., ch. 26, par. 5—114, Uniform Commercial Code Comment, at 601 (Smith-Hurd 1963). I would reverse the preliminary injunctions against State Bank and Percy Wilson for the reasons stated.   Ill. Rev. Stat. 1973, ch. 26, par. 5—114. Issuer’s Duty and Privilege to Honor; Right to Reimbursement. “(1) An issuer must honor a draft or demand for payment which complies with the terms of the relevant credit regardless of whether the goods or documents conform to the underlying contract for sale or other contract between the customer and the beneficiary. The issuer is not excused from honor of such a draft or demand by reason of an additional general term that all documents must be satisfactory to the issuer, but an issuer may require that specified documents must be satisfactory to it. (2) Unless otherwise agreed when documents appear on their face to comply with the terms of a credit but a required document does not in fact conform to the warranties made on negotiation or transfer of a document of title (Section 7—507) or of a security (Section 8—306) or is forged or fraudulent or there is fraud in the transaction (a) the issuer must honor the draft or demand for payment if honor is demanded by a negotiating bank or other holder of the draft or demand which has taken the draft or demand under the credit and under circumstances which would make it a holder in due course (Section 3—302) and in an appropriate case would make it a person to whom a document of title has been duly negotiated (Section 7—502) or a bona fide purchaser of a security (Section 8—302); and (b) in all other cases as against its customer, an issuer acting in good faith may honor the draft or demand for payment despite notification from the customer of fraud, forgery or other defect not apparent on the face of the documents but a court of appropriate jurisdiction may enjoin such honor.”