Opinion
No. 78-873 No. 79CA199
Decided May 18, 1979.
Recipients of an irrevocable letter of credit issued by a state bank to secure a supersedeas bond appealed a denial of their motion to approve the bond.
Reversed
1. BANKS AND BANKING — Letter of Credit — Secure Supersedeas Bond — Not Ultra Vires. A standby letter of credit issued by a bank to secure a supersedeas bond obligates the issuer to pay the beneficiary on documented demand and is not ultra vires as constituting a guaranty.
Appeal from the District Court of the City and County of Denver, Honorable Clifton A. Flowers, Judge.
Holme, Roberts Owen, Donald Bain, for plaintiff-appellee.
Cogswell, Chilson, Dominick Whitelaw, John H. Chilson, Susan D. Proctor, for defendants-appellants.
[1] Appellants have filed a "Motion to Approve Supersedeas Bond," pursuant to C.A.R. 8(a). The sole issue raised by the motion and the response thereto before this court is whether an irrevocable letter of credit issued by a state bank to secure a supersedeas bond is ultra vires as constituting a guaranty, contrary to § 11-6-101(4), C.R.S. 1973. The trial court held that the letter was ultra vires, and disapproved the bond. We hold that the letter of credit is not ultra vires, and is a valid obligation of the bank. A copy of the letter of credit with its Exhibit A is appended hereto as Appendix A.
The issuer of the letter of credit, Guaranty Bank, is a state bank as defined in § 11-1-102(21), C.R.S. 1973. Section 11-6-101(4), C.R.S. 1973, states:
" Except as expressly permitted in this code a state bank shall not assume liability as . . . a guarantor or endorser of any security instrument or obligation in which, or with respect to which, it has no property interest." (emphasis supplied)
Section 11-7-107(2), C.R.S. 1973, provides:
"A state bank may issue letters of credit, but . . . the amount of the credit outstanding at any one time shall be deemed to be a loan to the person for whose account the credit was issued."
The subject letter of credit is a "standby letter of credit" (also referred to as a "guaranty letter of credit," East Bank v. Dovenmuehle, Inc., 196 Colo. 422, 589 P.2d 1361 (1978)) as defined by the Comptroller of Currency, 12 C.F.R. § 7.1160(a) (1978):
"Any letter of credit . . . which represents an obligation to the beneficiary on the part of the issuer . . . (2) to make payment on account of any indebtedness undertaken by the account party, or (3) to make payment on account of any default by the account party in the performance of an obligation."
Similar definitions have been stated by the Federal Reserve Board, 12 C.F.R. § 208.8(d), and the F.D.I.C., Id. § 337.2(a) (1978).
Such letters may be issued, subject to the restrictions in the cited regulations, which provide that the credit, when combined with other extensions of credit, does not exceed the bank's lending limits or the lending limits to the customer. Our Supreme Court, in Dovenmuehle, supra, recognized the wide-spread use of standby letters, and held that a credit which requires a documentary demand and states conspicuously that it is letter of credit, as is the case here, falls within the ambit of the Uniform Commercial Code § 4-5-102(1), C.R.S. 1973.
The validity of standby letters of credit has been upheld in many jurisdictions where, as here, the letter creates a binding obligation on the issuer to pay the beneficiary on demand. New Jersey Bank v. Palladino, 77 N.J. 33, 389 A.2d 454 (1978); Republic National Bank v. Northwest National Bank, (Tex.) 578 S.W.2d 109 (1978).
The Guaranty Bank, by issuing the letter of credit, does not guarantee the performance of any obligation of appellants, but obligates itself to pay appellee (the beneficiary) on written demand under the terms set forth in the letter. See Dovenmuehle, Inc. v. East Bank, 38 Colo. App. 507, 563 P.2d 24 (1977). Such letters of credit, being authorized by § 11-7-107(2), C.R.S. 1973, and falling within the provisions of § 4-5-102(1), C.R.S. 1973, are binding, primary obligations dependent solely on presentation of conforming documents, and are, therefore, not ultra vires. See Barclay's Bank D.C.O. v. Mercantile National Bank, 481 F.2d 1224 (5th Cir. 1973).
The order of the trial court denying approval of the letter of credit as security for the supersedeas bond is reversed, and the cause is remanded for reconsideration of the motion to approve bond, in accordance with the views herein expressed.
JUDGE ENOCH and JUDGE VAN CISE concur. APPENDIX A GUARANTY BANK
March 30, 1979
IRREVOCABLE LETTER OF CREDIT NO. 379-7-123180
This Credit Expires December 31, 1980
United Bank of Denver 1740 Broadway Denver, CO
Gentlemen:
We hereby establish our Irrevocable Letter of Credit in your favor in the amount of $320,000.00. The purpose of this Letter of Credit is to secure a Supersedeas Bond dated _______________, 1979, and filed in Civil Action No. C-61262 in the District Court in and for the City and County of Denver captioned United Bank of Denver, N.A. v. Quadrangle, Ltd., et al.
You are hereby authorized to draw on sight on Guaranty Bank Trust Co., a Colorado Banking Corporation, by drafts, up to the aggregate amount of $320,000.00.
G. B. T. $320000 AND 00 CENTS
The conditions for payment of any draft drawn against this Letter of Credit are as follows:
1. The draft shall be attached to a letter substantially identical to Exhibit A attached, and properly completed with the required information. This letter shall be on the letterhead of the United Bank of Denver and shall be signed by the Vice President or President of the United Bank of Denver.
and
2. This Letter of Credit shall be endorsed on the reverse side by the words "Drawn by the United Bank of Denver in the amount of $ _____" and then signed by the United Bank of Denver, by its Vice President or President.
We hereby agree with drawers and endorsers, and bona fide holders of drafts negotiated under and in compliance with the terms of this Credit that the same shall be duly honored upon presentation and deliver of documents as specified above, if presented on or before December 31, 1980.
We acknowledge that we submit ourselves to the jurisdiction of the District Court in and for the City and County of Denver in Civil Action No. C-61262 and irrevocably appoint the Clerk of such District Court as our agent upon whom any papers affecting our liability on this Letter of Credit may be served. We acknowledge that our liability on this Letter of Credit may be enforced by motion in said District Court without the necessity of an independent action in accordance with Rule 8(b), Colorado Appellate Rules.
Cordially yours,
Gary G. Winter Senior Vice President
GGW:sla
April 2, 1979
Guaranty Bank Trust Co. 811 17th Street Denver, CO 80202
RE: Letter of Credit No. 379-7-123180 dated ______________, 1979
Gentlemen:
On March 30, 1979, you issued Irrevocable Letter of Credit No. 379-7-123180 on behalf of Robert Sanders, Lawrence Sanders, Roberta Sanders, Paul Sanders and Sharon Sanders, to the United Bank of Denver.
United Bank of Denver is hereby drawing on said Letter of Credit and demanding that you pay United Bank of Denver forthwith the amount of ($ )
DOLLARS
Enclosed is our draft and said Letter of Credit (and all amendments thereof, if any) with the amount of this draw endorsed on the back of said Letter of Credit.
UNITED BANK OF DENVER BY: ________________________________ President