The opinion of the court was delivered by: MUIR
On October 15, 1973, Grant was substantially indebted to the Bank in connection with the financing of various construction projects. On or about October 17, 1973, Grant's President and Morton F. Hulse, acting at that particular time as an agent of the Wisconsin Surety Company, met with Gardner. Grant had been awarded a construction contract by the Swoyersville Municipal Authority and Hulse had undertaken the acquisition of performance and payment bonds for Grant to cover that contract. Gardner was informed that Wisconsin Surety would write those bonds if the Bank issued Letters of Credit in the total amount of $100,000 until such time as the surety company could complete its underwriting investigation. A form Letter of Credit to be used for this purpose was presented to Gardner by Hulse. Gardner was assured that the Letters of Credit would be returned to the Bank as soon as the underwriting procedures were consummated and Grant found credit-worthy.
On the following morning Gardner issued two $50,000 Letters of Credit on behalf of the Bank in favor of Wisconsin Surety and had them delivered to Hulse.
Gardner subsequently learned that the Swoyersville Municipal Authority had rejected Wisconsin Surety Company as surety on Grant's bonds but he took no action with respect to the two outstanding Letters of Credit. The matter lay dormant until the new year when American Empire was considered as the potential surety on Grant's performance and payment bonds for the Swoyersville Project. On February 11, Charles W. Schatzman, Jr., like Hulse an employee of Hul-Mar, Inc., insurance agency, requested from the Bank a $100,000 Letter of Credit for the benefit of American Empire similar to the ones already issued in favor of Wisconsin Surety Company by the Bank. The request was denied. American Empire, through its agents, continued to press for the $100,000 Letter of Credit. On March 27, 1974, the Bank issued a $100,000 Letter of Credit in favor of American Empire in exchange for the two outstanding $50,000 Letters of Credit which named Wisconsin Surety as beneficiary. The jury found by special verdict that Hulse represented to the Bank that if the $100,000 Letter of Credit were issued for the benefit of American Empire, it would be returned when American Empire had concluded its underwriting procedures with respect to Grant and found Grant credit-worthy. The jury further found that the Bank relied on Hulse's representation in the issuance of the Letter of Credit on March 27, 1974.
Counsel did not avail themselves of the opportunity to submit additional special verdict questions to the jury.
The bank's willingness to issue the three Letters of Credit was predicated on its desire to enable Grant, which was heavily indebted to the Bank, to begin work and complete its contract on time.
American Empire concluded its "underwriting procedures" and found Grant credit-worthy sometime prior to April 25, 1974. The Bank then insisted on the return of the $100,000 letter of credit. Hulse, apparently in agreement with the Bank's position that the letter should be returned, attempted to assist the Bank in acquiring its surrender from the insurance company. (See Defendant's Exhibit 17).
However, the home office of American Empire resisted the Bank's demands, disclaiming any authority on the part of Hulse to make the agreement with the Bank for the return of the Letter of Credit. The insurance company's position was not taken in bad faith. There is no indication that American Empire ever directly approved or had actual knowledge of Hulse's representations.
After a series of negotiations, the Bank and American Empire exchanged the $100,000 Letter of Credit for a $50,000 Letter of Credit on June 20, 1974, without any assurances from American Empire that the $50,000 Letter of Credit would be returned prior to its expiration date of October 15, 1974. Since Grant had been found credit-worthy, a condition relating to creditworthiness attached to the June 20, 1974 Letter of Credit would have been illogical.
On September 5, 1974, American Empire executed a sight draft on the Bank for $50,000 in accordance with the provisions of the irrevocable Letter of Credit issued June 20, 1974. It also certified, as required by the terms of the Letter, that it had incurred obligations in excess of $50,000 by reason of having executed, as surety, bonds in which Grant was the principal. Counsel stipulated at trial that American Empire actually did incur such obligations. The drafts and certification were properly submitted to the Bank which, on September 10, 1974, refused payment.
The first matter to be resolved is the Bank's contention that, as a national bank, it had no power to issue this type of Letter of Credit. It is long-established that no rights arise on an ultra vires contract, even if the contract is wholly performed. Texas & Pacific Railway Company v. Pottorff, 291 U.S. 245, 260, 54 S. Ct. 416, 420, 78 L. Ed. 777, 785 (1934); Buckley v. Southwestern National Bank, 88 F.2d 263 (3d Cir. 1937). American Empire does not challenge the proposition that a bank has no power to act as a guarantor or surety upon the obligation of another. It argues, rather, that since the Bank had a financial interest in Grant's ability to perform, the issuance of the Letter of Credit was within the scope of the Bank's "business interest" and thus enforceable. The sole question, therefore, is whether the document in question here, even though styled a "Letter of Credit", is in effect a surety contract and, consequently, unenforceable as an ultra vires obligation of a national bank.
The Bank originally undertook to pay to American Empire $100,000 in the event that (a) Grant defaulted in its performance of the Swoyersville Project, (b) American Empire was required to perform under its bond and (c) American Empire incurred losses in excess of $100,000 by reason of such performance. On the surface, this assurance by the Bank seems to cast it in the classic role of a surety or guarantor by its promise to answer for the performance of some obligation of another who is, in the first instance, liable for that performance. Cf. Asociacion de Azucareros de Gautemala v. United States National Bank of Oregon, 423 F.2d 638 (9th Cir. 1970). However, the one recent case which has analyzed in-depth the use of the Letter of Credit in this type of situation, Barclays Bank v. Mercantile National Bank, 481 F.2d 1224 (5th Cir. 1973), holds otherwise. There is no Third Circuit case on point. Thus, the question facing this Court is whether it agrees with the conclusion reached by Barclays Bank.
There are several factual differences between this case and Barclays Bank. However, none of them serves materially to distinguish the two situations. In Barclays Bank, the underlying obligation, failure of which would trigger the beneficiary's rights under the Letter of Credit, was the repayment of a loan rather than the performance of a construction contract. Also, the obligor bank, Mercantile National Bank, was not the original issuer of the Letter. Nevertheless, as a "confirming bank" it was held to be obligated as if it had itself issued the original Letter of Credit.
Although a large part of the opinion dealt with the question of the so-called confirming bank's status, Barclays Bank did address the contention that the Letter of Credit was ultra vires as the act of a surety or guarantor and rejected the argument under the facts of that case. Unlike the remainder of the opinion which is extensive and thorough, this conclusion is not explicated at length. Nevertheless, it is a clear holding that the action of a national bank in issuing a Letter of Credit identical in substance to the one now before this Court is valid and creates an enforceable contract. To demonstrate the nearly perfect parallelism between this case and Barclays Bank, it is possible to quote from ...