## Facts

- Bernard Freudenfeld applied to American City Bank & Trust Company for an irrevocable standby letter of credit in the amount of $10,000.
- Freudenfeld named Miami National Bank as the beneficiary and indicated the letter of credit was for the account of James and Jill Weinberg d/b/a James Lee, Incorporated.
- Freudenfeld agreed to reimburse American City Bank for any funds drawn under the letter of credit.
- American City Bank issued the standby letter of credit as requested.
- Before Miami National Bank drew on the letter of credit, the Comptroller of the Currency declared American City Bank insolvent.
- The FDIC was appointed receiver of American City Bank, and the bank’s obligations and rights relating to the letter of credit passed to the FDIC.
- The FDIC took the position that the letter of credit could be canceled because it remained contingent at the time of the bank’s closing, and it notified Miami National Bank and the Weinbergs that it was canceling the letter of credit.
- Miami National Bank presented a $10,000 draft to the FDIC, and the FDIC refused to honor it based on its cancellation position.
- Miami National Bank sued the FDIC to require payment under the letter of credit; that litigation was stayed by agreement while a similar case addressing the FDIC’s “contingent letter of credit” theory proceeded.
- The court in the similar case held that the FDIC could not avoid standby letters of credit merely because they were contingent at the time of the bank’s closing, and the FDIC then paid Miami National Bank $10,000 plus interest.
- After paying the beneficiary, the FDIC sought reimbursement from Freudenfeld under his reimbursement agreement; Freudenfeld refused to pay.
- The FDIC sued Freudenfeld in the Eastern District of Wisconsin and moved for summary judgment. Freudenfeld defended primarily on the ground that the standby letter of credit was an unauthorized bank guaranty.

## Issues

1. Whether the standby letter of credit, and Freudenfeld’s related reimbursement obligation, were unenforceable because the letter of credit allegedly functioned as an ultra vires guaranty that American City Bank lacked authority to issue.
2. Whether, on the undisputed record, the FDIC was entitled to summary judgment enforcing Freudenfeld’s reimbursement agreement after the FDIC paid the beneficiary under the standby letter of credit.

## Decision

- The court granted the FDIC’s motion for summary judgment.
- The court rejected Freudenfeld’s contention that the standby letter of credit was an impermissible guaranty that defeated the FDIC’s claim.
- The court held that Freudenfeld was obligated to reimburse the FDIC, as receiver, for the amount the FDIC paid to the beneficiary under the letter of credit (plus interest as applicable).

## Legal Principles

- A standby letter of credit is treated as a letter-of-credit obligation rather than a traditional guaranty merely because it serves a credit-support function.
- When a bank issues a standby letter of credit and the applicant signs a reimbursement agreement, the issuer (and a receiver standing in the issuer’s place) may enforce the applicant’s reimbursement duty after payment is made under the credit.
- A receiver’s right to reimbursement does not fail solely because the applicant characterizes the letter-of-credit undertaking as a guaranty; courts look to the nature of the instrument as issued and the applicant’s contractual reimbursement promise.
- Summary judgment is proper when the issuance of the letter of credit, the applicant’s reimbursement agreement, the FDIC’s payment to the beneficiary, and the applicant’s nonpayment are not genuinely disputed, leaving only a legal objection that fails as a matter of law.

## Conclusion

The court held that the FDIC, acting as receiver for the failed issuing bank, could enforce Freudenfeld’s reimbursement agreement after the FDIC paid Miami National Bank on the irrevocable standby letter of credit, rejecting Freudenfeld’s argument that the transaction was an ultra vires guaranty and entering summary judgment for the FDIC.


Federal Deposit Insurance Corporation v. Freudenfeld, 492 F. Supp. 763 (1980)