## Facts

- Nobel Insurance Company issued high-deductible insurance policies to Western American Specialized Transportation Service, Inc., requiring collateral to secure reimbursement of deductibles.
- Insurance brokers Henry T. Strother, Jr. and William F. Hamrick arranged three standby letters of credit from The First National Bank of Brundidge in favor of Nobel, signed by the bank president, J.T. Ramage III.
- The letters of credit obligated the bank to honor drafts drawn in compliance with the credits’ terms.
- Western American accrued unpaid deductible obligations to Nobel.
- Nobel presented drafts to draw on the letters of credit, and the Bank refused to honor them.
- In prior federal litigation, the bank prevailed on a theory that Alabama’s surety discharge statute (Ala. Code § 8-3-13) discharged the applicants’ surety obligations after written notice to Nobel and Nobel’s failure to sue Western American within three months.
- In a subsequent Alabama declaratory-judgment action, the state trial court granted summary judgment for the Bank and related defendants on the same suretyship rationale, and Nobel appealed.

## Issues

1. Whether Ala. Code § 8-3-13 (discharge of a surety upon timely written demand to sue the principal) can extinguish an issuing bank’s obligation to honor conforming drafts under a standby letter of credit.
2. Whether suretyship defenses from the underlying transaction may be asserted to defeat the independent obligation created by a letter of credit.

## Decision

- The Alabama Supreme Court reversed the summary judgment and remanded.
- The court held that Ala. Code § 8-3-13 applies to a surety’s liability as surety and does not discharge the independent obligation of an issuer under a standby letter of credit.
- The bank’s duty to honor a complying presentation could not be defeated by suretyship defenses arising from the underlying reimbursement or collateral arrangement.

## Legal Principles

- A letter of credit creates an independent undertaking by the issuer to the beneficiary; the issuer’s obligation is separate from underlying contracts and reimbursement arrangements.
- When the beneficiary presents documents that comply with the credit’s terms, the issuer generally may not refuse payment based on defenses from the underlying transaction (absent recognized exceptions such as fraud).
- Ala. Code § 8-3-13 discharges only the surety’s obligation after proper notice and a failure to sue the principal within three months; it does not extend to independent third-party payment obligations created by letters of credit.

## Conclusion

Because a standby letter of credit is an independent payment obligation, the statutory discharge of a surety under Ala. Code § 8-3-13 does not relieve the issuing bank of its duty to honor conforming drafts, and summary judgment for the bank and related defendants was reversed and remanded.


Nobel Ins. Co. v. First Nat'l Bank of Brundidge, 821 So. 2d 210 (Ala. 2001)