Court Opinion

ID: 9711077
Source: CourtListenerOpinion
Date Created: 2023-08-26 04:24:03.562612+00
Date Added: 2024-06-11T18:23:02.078606
License: Public Domain

Conford, P. J. A. D.
(temporarily assigned), dissenting. As argued to the Court, this case apparently projected the question whether the long-standing general statutory policy against banks entering into agreements of guaranty or indemnification, N. J. S. A. 17:9A-213.1, should be breached without express legislative authorization under the aegis of so-called “standby letters of credit” — a device increasingly coming into general banking practice. See Arnold and Bransilver, “The Standing Letter of Credit — The Controversy Continues,” 10 U. C. C. L. J. 272 (1978). The controversy referred to is that between those who are concerned about the threat to solvency of banks in the expanded practice of standby letters of credit and those who believe such credit arrangements are a salutary development in banking practice. Compare Harfield, “The Increasing Domestic Use of the Letter of Credit,” 4 U. C. C. L. J. 251 (1972), with Yerkuil, “Bank Solvency and Guaranty letters of Credit,” 25 Stan. L. Rev. 716 (1973).
Whether or not the letter in litigation here is as a matter of form classifiable as a standby letter of credit, its substantial identity with a guarantee as commonly understood is so obvious that one would desire more explicit legislative *49approval of its validity as a bank obligation than was evident in 1972 when the instant transaction took place. I do not favor erosion of an apparently salutary statutory policy against bank guaranties through judicial ratification of a contrary commercial practice. It may well be that a new emerging policy of commercial convenience should swing the law in a new direction. But I should hope for a clear legislative signal to that effect.
The difference between conventional letters of credit and the standby variety in terms of threat to bank solvency is clear. In the former, typically used to finance sales of goods, the issuing bank’s obligation arises only on the delivery of shipping documents evidencing title to the goods. The bank is therefore secure. In the standby letter of credit situation, by the time the bank is called upon to meet the demand of the beneficiary there has typically been a default of the bank customer to the beneficiary and there is no practicable recourse by the bank because of the insolvency of the customer. See Verkuil, op. cit. supra, 25 Stan. L. Rev. at 727-728; Note, “Guaranty Letters of Credit: Problems and Possibilities,” 16 Ariz. L. Rev. 822, 832, n. 71 (1974). Coupled with the fact that letters of credit are contingent liabilities not appearing on the bank’s balance sheet, Ver-kuil, op. cit. supra, 25 Stan. L. Rev. at 727 (and see Court’s opinion pp. 47-48), the potential for danger to the public interest of an uncontrolled practice of dealing in standby letters of credit is manifest. The insolvency of the defendant bank before us may have some significance in this regard.
Prior to the adoption of the Uniform Commercial Code in this State in 1961 the only statutory reference to powers of banks to issue letters of credit was N. J. S. A. 17:9A-25(3) (L. 1948, c. 67), empowering banks “to issue letters of credit authorizing holders thereof. to draw drafts upon it * * This language is typically adapted to the traditional commercial letter of credit. The “standby” variety was in 1948 neither known nor within statutory contemplation. That a letter of credit was not then conceived as a *50potential exception to the general prohibition, by the same 1948 statute, of guaranties or indemnities by banks, see § 313.1 thereof (N. J. S. A. 17-9A-313.1), is evidenced by the remainder of N. J. S. A. 17:9A-35(3), mentioned above. In addition to authorizing issuance of letters of credit, that .section permits a bank “to guarantee, for a period not exceeding one year from the date of such guarantee, the payment by its customers of amounts due nr to be- ■ come due upon the purchase by such customers of real or personal property.” Thus the 1948 Legislature made clear the very limited extent to which it was willing to allow banks to make guaranties, while couching its authorization of letters of credit in terms of the conventional commercial financing device then well known.
The foregoing observations gain added pertinence from the very limited use of letters of credit in New Jersey, particularly prior to the adoption of the Uniform Commercial Code. The Introductory Comment to Chapter 5 (“Letters of Credit”) by the chairman of the New Jersey Commission which studied the Code prior to its adoption states:
Before the Uniform Commercial Code there was no statutory regulation of Letters of Credit. This chapter has no prior legislative history. Such letters are used primarily to finance international trade. Only about 100 United States banks write Letters of Credit and 25 banks write 75% of them. Very few an-e written by New Jersey banks. Letters of credit should gain wide acceptance in domestic use and the clarification of the law respecting their issuance and the rights of all parties taking them should do much to advance their wider use by New Jersey banks.
(emphasis added).
In the light of this background it is difficult to perceive any actual intent by the New Jersey Legislature, in adopting the Code, to wipe out the strong preexisting statutory policy against guaranties and indemnities by banks. The standard letter of credit, as theretofore known in this State, and a guarantee by a bank are seen to be poles apart in nature and function.
*51It must be conceded, however, that Sees. N. J. S. A. 12A:5-102 and 103, read literally, would seem to validate what is technically within the definition of a standby letter of credit. A documentary demand, within the requirement of Sec. 12A:5-102 (1) (a), can consist of a notice of default. Sec. 12A:5-103 (l)(b). Thus a simple letter from a bank to a lender of money to the bank customer that within a stated period the bank will advance a stated sum to the lender upon receipt of a written notice of a default in the loan would seem, facially, to constitute a letter of-credit within the Code. I am, however, relieved of the necessity of deciding whether such an engagement would be enforcible against an issuing bank, as against the statutory prohibition of guaranties by banks, by the circumstance that the letter in suit here does not meet the hypothetical case stated nor the intent of the statute even if conceived as authorizing standby letters of credit.
Eir-st, and most obvious, the letter in question does not call for the presentation of a document. It requires notice of default, but not a written notice, and it could hardly be denied that if the question of compliance with the Code or the prohibition of bank guaranties were not issues here the letter would be enforcible as between the parties on oral as well as written notice of default. The majority’s attempt to bootstrap the validity of the document by resort to the maxim that the law will imply an intent by the parties that the writing be construed in a manner such as to lend validity to it must fail as otherwise the essence of the letter of credit — an undertaking by an issuer to pay upon the presentation of specified documents — is subverted. This is not a mere tcchnism. It goes to the heart of the nature of a letter of credit. See Uniform Commercial Code Comment to N. J. S. A. 12A:5-102, p. 550.
Second, the letter is not limited to an unequivocal undertaking to pay up to a specified sum on presentation of specified documents, but rather injects the bank squarely into the underlying relationship between the bank- cus*52tomer, Palladino, and the beneficiary plaintiff. It does this in the first paragraph of the letter, stating that the defendant “will assume the obligations arising from” the underlying $50,000 note given plaintiff by Palladino. While that assumption is made subject to the condition subsequent of receiving notice of default, it is nevertheless otherwise the acceptance by the bank of the status of accommodation co-debtor to the plaintiff for the $50,000 plus interest. Under such an assumption of liability the defendant w'ould be creditable with any payment on account made by the debtor. See Totowa v. American Surety Co. of N. Y., 39 N. J. 332, 339 (1963); Restatement, Security § 115(1) at 303 (1941). The unqualified absolutism of an undertaking to pay a specified sum of money on a stated proffer of documents, as requisite in a letter of credit, does not exist. Under the letter in question the bank’s liability is subject to diminution or discharge depending upon later transactions between the bank customer and the beneficiary, and also to any uncertainty consequent upon disputes between the two as to the amount of the “obligation assumed” owing at any given time.
All of the authorities on letters of credit agree that a situation such as the foregoing defeats the basic intent of a letter of credit. As instructively stated in a recent article:
A fundamental legal principle with respect to letters of credit, embodied in * * * the UCC * * is that the letter of credit is a contract separate from the underlying agreement, and consequently the rights of the issuer and the beneficiary under the letter of credit are determined only by the terms of the letter of credit itself (i. e., the presentation of the requisite documents), and are not affected by the performance or nonperformance by the applicant, issuer, or the beneficiary of their respective obligations under the underlying agreement and the application.
Arnold and Bransilver, op. oit., supra, 10 U.C.C. L.J. at 274.
Cf. Prudential Insurance Co. v. Marquette National Bank, 419 F. Supp. 734 (D. Minn. 1976); Chase Manhattan Bank v. Equibank, 550 F. 2d 882 (3 Cir. 1977).
*53The present circumstances, moreover, fix the character of the letter here involved as a true guarantee rather than a standby letter of credit. As explained by the same writers:
It is important to note, that despite their similarities, the standby letter of credit is not a guarantee. Recovery under a guarantee is predicated upon the primary obligor’s nonperformance in fact of its guaranteed obligations. The guarantor is therefore only secondarily liable with respect to the same obligation of the primary obligor. Recovery under a standby letter of credit, on the other hand, requires only the presentation of the requisite documents (whether or not the applicant has in fact performed or even may legally perform, its obligations under the underlying agreement), and the issuer is primarily liable with respect to its obligations under the letter of credit (which obligations, needless to say, are different from those of the applicant under the underlying agreement), (emphasis in original).
Arnold and Bransilver, op. cit. supra, 10 U.C.C. L.J. at 279-280.
Under the analysis above of the letter-instrument before us, it is clear that the defendant bank’s obligation is predicated on Palladino’s nonperformance of Ms obligation to plaintiff since in the event of performance there would no longer exist the “obligation” which defendant “assume [d]” under the letter. Thus the letter is truly a guarantee, not a letter of credit, even of the standby variety.
Eor the reasons stated, I am in agreement with the Appellate Division that the letter in question is an illegál guarantee and cannot be enforced in this action because ultra vires.1
In reference to the alternative holding of the Appellate Division that the letter, if considered a letter of credit, exceeded the one-year limitation of N. J. S. A. 17:9A-25(3), *54146 N. J. Super, at 12, plaintiff cites the decision in National Surely Corp. v. Midland Bank, 551 F. 2d 21 (3 Cir. 1977), as authority contra. I agree with the majority that the Circuit Court of Appeals correctly decided that the one-year limitation in the section cited qualifies only time drafts drawn on a letter of credit and not letters of credit themselves. This conclusion is impelled not only by the most natural grammatical construction of thq verbiage but by the circumstance that in the very next clause of the same provision a time limitation of one year for certain kinds of guaranties is phrased in terminology which is explicit and jvhich. could have been used in the provision as to letters of .credit had it been the intent that the time limitation was to be applicable to letters of credit themselves rather than to time drafts.
And capping the case for the indicated result is the fact that in the same 1948 statute (c. 67) which was the precursor of N. J. S. A. 17:9A-25(3) the Legislature also fixed a óne-year period as the measure of staleness of a check. L. Í948, c. 67, § 229 (later N. J. S. A. 17:9A-229). Although the subsequent enactment of the Uniform Commercial Code changed the staleness period to six months, N. J. S. A. 12A:4^404, and see New Jersey Study Comment thereto, p. 523, the co-enactment in 1948 of the one-year limitation periods mentioned strongly indicates the time limitation in the letters-of-credit provision applied to drafts, not to letters of credit per se.2
Despite my views as to the one-year limitation I would affirm the judgment of the Appellate Division for the reasons already stated. In view thereof I do not reach the question whether the letter of credit was illegal because *55resulting in total liabilities of the bank to one person exceeding 10% of the capital funds of the bank.
Justice Clifford joins in this opinion.
For modification and reinstatement — Chief Justice Hughes and Justices Pashman, Schreibbr and Handler
For affirmance — Justice Clifford and Judge Conford —2.

The departmental regulations defining a standby letter of credit quoted in the majority opinion (p. 43) are not here pertinent as they were adopted in 1976, long after the transaction in question. Moreover I doubt the authority of the Commissioner to promulgate them, as they do not require submission to the issuing bank of a document, as required by the Uniform Commercial Code.

Contrast the 1976 regulations of the Department of Banking with respect to standby letters of credit requiring that “the bank’s undertaking contains a specified expiration date or be for a definite term; * * * .” N. J. A. C. 3:ll-9.3(a)l.