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National Surety Corp. v. Midland Bank

argued: January 14, 1977.

NATIONAL SURETY CORPORATION, A CORPORATION OF THE STATE OF NEW YORK, APPELLANT
v.
THE MIDLAND BANK, A CORPORATION OF NEW JERSEY, APPELLEE



APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY (D.C. Civil No. 80-72).

Gibbons and Garth, Circuit Judges, and Bechtle,*fn* District Judge.

Author: Garth

Opinion OF THE COURT

GARTH, Circuit Judge.

This diversity suit resulted from defendant Midland Bank & Trust Company's (Bank's) refusal to honor drafts submitted by plaintiff National Surety Corporation pursuant to so-called "standby" letters of credit issued by the Bank. The Bank justified its refusal to honor the drafts by claiming that the letters of credit were invalid, asserting that New Jersey law prohibited banks from issuing such standby letters of credit if they exceeded one year in duration.

The district court sustained the Bank's contention, 408 F. Supp. 684 (D. N.J. 1976), and held the letters of credit invalid. We reverse.

I.

On January 9, 1967, the Bank issued Irrevocable Letter of Credit No. 1549 in favor of National Surety. This letter of credit had issued at the behest of Astrorico Compania Naviera, S.A., which required collateral security to secure a release of libel bond which National Surety had executed for one of Astrorico's vessels. In its letter of credit, the Bank authorized National Surety

to draw on us at sight up to an aggregate amount of $10,250 available by your drafts at sight accompanied by your written certification that you have incurred liability, loss, costs or expense by reason of your having executed Bond of Indemnity or undertaking on behalf of ASTRORICO COMPANIA NAVIERA, S.A.

As to duration, the bank's letter stated:

It is a condition of this letter of credit that it shall be deemed automatically extended without amendment for one year from the present or any future expiration date hereof, unless thirty days prior to any such date we shall notify you by registered letter that we elect not to consider this letter of credit renewed for any such additional period.*fn1

As the district court noted,*fn2 the parties had thus executed a "standby" letter of credit. The undisputed facts underlying this dispute may be simply stated. The shipping company's vessel had been seized by United States Marshals pursuant to unrelated litigation. To obtain a release from such seizure, the shipping company required a "release of libel" bond, which it sought from National Surety. National Surety refused to post surety in the absence of collateral. To obtain collateral for the issuance of National Surety's bond, the shipping company arranged with the Bank to issue Irrevocable Letter of Credit No. 1549, described above, with National Surety named as beneficiary. Upon the execution of the Letter of Credit securing National Surety, National Surety issued its bond, and the vessel was released.

The Bank's conditional extension of credit was called into play by Astrorico's failure to satisfy a judgment rendered against it. As surety on the release of libel bond, National Surety became obligated to pay over the sum of $7,878.00, the aggregate of the judgment, interest and costs. National Surety tendered payment of this amount, and it then forwarded a sight draft, together with the required documents certifying loss, to the Bank. The Bank refused to honor the sight draft.*fn3

Meanwhile, on February 1, 1967, the Bank had issued its Irrevocable Letter of Credit No. 1553.*fn4 National Surety was again authorized to draw upon the Bank by sight draft (this time, to an amount not to exceed $50,000), although its release of libel bond was executed in this instance on behalf of Asopos Shipping Company, S.A. Like Letter of Credit No. 1549, Letter of Credit No. 1553 was to remain in effect for one year, subject to automatic renewal without amendment, unless, at least 30 days before expiration, the Bank notified National Surety that the Letter of Credit would not be renewed. Upon receipt of notice of non-renewal, National Surety was authorized to submit sight drafts to the amount of the release of libel bond, $50,000. The only proof required in such a case would be National Surety's certification that its release of libel bond was still outstanding.

On June 25, 1971, the Bank, through its counsel, repudiated Letter of Credit No. 1553.*fn5 National Surety treated the Bank's disavowal as an exercise of the Bank's option not to renew. Pursuant to its authorization under the Letter of Credit, National Surety on December 13, 1971 submitted a sight draft for the full amount of its outstanding release of Libel bond -$50,000.*fn6 The Bank refused to honor this draft.

National Surety then initiated this action in the United States District Court for the District of New Jersey. Its complaint initially sought (1) a declaration of the rights and duties of the parties under Letter of Credit No. 1553, and a declaration that this Letter was valid and binding upon the Bank, and (2) judgment against the Bank for $50,000 under the Letter's terms. A third count, added by supplemental complaint and involving Letter of Credit No. 1549, alleged that National Surety had satisfied a judgment against Astrorico, that it had submitted a draft for the amount paid ($7,878.00) under Letter of Credit No. 1549 and that the Bank had refused to honor this demand. National Surety under this count sought compensatory and punitive damages for this alleged breach of the Bank's obligations under Letter of Credit No. 1549.

The Bank asserted the same defenses to both the complaint and supplemental complaint. Its first defense was that the respective Letters of Credit were "illegal and void at [their] inception;" its second defense, that the respective Letters of Credit had expired prior to the drawing of the drafts in question; and its third defense, that the Letters of Credit were issued without authority.*fn7 National Surety served interrogatories upon the Bank, and the Bank's answer focused the dispute between the parties:

ANSWER: Midland Bank Letter[s] of Credit . . . [were, by their] terms, drawn to be automatically extended indefinitely in time and N.J.S.A. 17:9A-25(3) limits Letters of Credit to a one year term.*fn8

With these submissions before the district court, both parties moved for summary judgment. After hearing argument, on May 28, 1974, the court denied both motions, as it found that the motions revealed "genuine issues of material fact."*fn9

Thereafter, on October 7, 1974, the case was tried. National Surety established that judgment had been entered against Astrorico, the principal on its release of libel bond; that National Surety had presented a sight draft to the Bank with certification of loss pursuant to Letter of Credit No. 1549; and that this draft had been dishonored.

Through its single witness,*fn10 National Surety also established that the Bank's counsel had advised by letter that any drafts drawn on Letter of Credit No. 1553 would not be honored, and that National Surety had responded to this communication by immediately submitting a sight draft for $50,000, as it was empowered to do upon notice of nonrenewal. (See pp. 23-24 supra.)

The Bank called but one witness - Thomas Stagnitti, its president and chief executive officer. His testimony bulwarked the Bank's contention that the Letters of Credit were void and unenforceable. His interpretation of the applicable banking law in New Jersey was that New Jersey state banks were denied the power to issue letters of credit exceeding one year's duration. He testified regarding State Department of Banking Examiners' reports which indicated that the New Jersey Department of Banking considered letters of credit with automatic renewal provisions (such as contained in Nos. 1549 and 1553) to violate the statute. See Finding of Fact #13, 408 F. Supp. at 695.

The conclusion of the one-day trial did not signal an end to the court's quest for information concerning interpretation of New Jersey banking law. New Jersey's Deputy Commissioner of Banking, writing in response to an apparent sua sponte inquiry by the district court, gave his opinion that the Banking Department would read the relevant New Jersey statute as barring letters of credit, as well as drafts drawn upon such letters of credit, if either exceeded one year in duration.*fn11

On February 17, 1976 the district court filed its opinion which included its findings of fact and conclusions of law. The court held

that [N.J.S.A. 17:9A-25(3), containing the one-year limitation,] does not authorize issuance of an irrevocable letter of credit valid for more than a year from the date of its issuance, and that this matter raised in defense is sufficient to defeat the surety company's claim as beneficiary under the letters.

408 F. Supp. at 686. On March 23, 1976 judgment was entered in favor of the defendant on all claims. This appeal followed.*fn12

While not taking issue with the district court's findings of fact, National Surety does dispute the district court's conclusion that New Jersey's banking laws render nugatory letters of credit effective for more than one year.*fn13 Notwithstanding the district court's analysis, we are left unpersuaded that New Jersey requires the result reached by the district court. Indeed, under our analysis a different conclusion is required. We conclude that the statute in question, N.J.S.A. 17:9A-25(3), imposes its one-year limitation not on letters of credit, but only on drafts which are drawn upon letters of credit. This conclusion results in our upholding the validity of these Letters of Credit, and mandates that we reverse the district court judgment.

II.

Under Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188 (1938), we must ascertain and apply New Jersey law in this diversity case. The relevant statutory law here is found in N.J.S.A. 17:9A-25:

In addition to the powers specified in section 24, every bank shall, subject to the provisions of this act, have the following powers, whether or not such powers are specially ...


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