Amusing Judgment 1 - Letter of Credit
Court judgments can sometimes be quite humorous and sometimes quite harsh. For some reason, this particular judgment fell into both categories for me.
Quick bit of information for the uninitiated: A “letter of credit” is a specialized document that is essentially a guarantee by a bank to immediately pay a certain amount of money to a beneficiary when the beneficiary presents the bank with certain specific documents (often within a specified deadline). It is imperative a letter of credit specify the terms upon which it is payable. In other words, for example, Party A and Party B enter into an agreement whereby Party A sells something to Party B. Party B says that he will pay Party A the purchase price as soon as Party A shows proof that the goods have been shipped. Party A insists that Party B’s bank should guarantee the payment. So, Party B’s bank issues a letter of credit requiring the payment of money upon receipt of shipping document. So thebank must pay the purchase price to Party A as soon as Party A gives the bank the documents proving that the goods have been shipped to B.
The bank doesn’t care about any of the details of the agreement between Party A and Party B. The bank’s only concern is whether the proper documents have been submitted. If the proper documents are submitted, the bank must pay under the letter of credt. If the proper documents are not submitted, then the bank can refuse to pay under the letter of credit.
In the case of Transparent Products Corp. v. Paysaver Credit Union, 7U.C.C. Rep. Serv.2d 832 (7th Cir. 1988), the credit union issed a document titled Letter of Credit. The document stated simply, “We hereby establish our letter of credit at the request of [the customer] up to the aggregate amount of $50,000.”
The holder of the letter of credit went to the credit union and tried to receive money under the letter of credit. The credit union refused and said that it had no obligation to give money to the party.
The court sided with the credit union and held that the credit union did not have any obligation to pay anything to the party because the so-called letter or credit did not meet the strict requirements of a letter of credit. The court pointed out that without any explicit indication of when or under what circumstances the amount must be paid the document was not a letter of credit. In the humorous (at least to me) and rather harshly worded judgment, the court held, “calling a pumpkin a ‘letter of credit’ will not make it one,” and this document “engaging to do nothing and mentioning no events is simply a stray piece of paper.”
Thus, one man’s document guaranteeing his receipt of $50,000 is nothing more than “a stray piece of paper.”