Business Law Study Set 13

Business

Quiz 32 :
Nature of the Debtor-Creditor Relationship

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Quiz 32 :
Nature of the Debtor-Creditor Relationship

Refer to the case Comdata Network v First Interstate Bank of Fort Dodge Case Issue The creditor (plaintiff), is a beneficiary of the bank that issued a letter of credit to a payor. Payor of the letter of credit defaulted, the creditor wants to enforce the letter of credit terms and have bank pay (defendant) pay for the default. The issue is whether the bank can relieve itself to pay the creditor by claiming to have signed the letter of credit due to fraud of the payor. District court held for the creditor, bank appealed. The appeal affirmed, the case reached the State Supreme Court. Relevant Terms, Laws, and Cases Letter of Credit - is a contract where an issuer, such as a bank, provides payment to a creditor for a payor. This serves as a guarantee of payment to the creditor for a contract between creditor and payor. Opinion State Supreme Court affirmed the decision. The court argued that the letter of credit enforces payments to the beneficiary even in instances that the payor defrauded the bank into entering such contract. It is the purpose of a letter of credit such that it guarantees security to the creditor. Hence, the bank is liable for payment to creditor despite being defrauded by the payor.

Case summary: LB Pipe and Steel Company agreed to sell 30 inch pipe worth of $143,613 to PV provided that PV obtains a letter of credit from bank for $144,000. This letter of credit entitles that if PV fails to make payment within 30 days then the money would be recovered from bank. As per this agreement, PV obtained letter of credit from F Bank and received a fax copy of the same and submitted it to LB. PV failed to make payments within 30 days and to recover the money, LB asked F Bank to issue him money on the basis of the letter of credit. F Bank denied the request of this payment because for getting money over letter of credit original copy has to be submitted in the bank. Over this LB filed a case against F Bank stating that PV failed to make the payment as per contract and thus F Bank has to make that payment on the letter of credit. Conclusion: F Bank's rights to LB could be explained by stating that bank institutions too work on policies, procedures and systems. And when F Bank states that for issuing of money to LB on the basis of letter of credit given to it by PV, the bank requires original copy of the letter of credit. LB failed to submit the original copy because it was given a faxed copy of the same by PV. Thus the F Bank cannot be sued by BL and held by the court as it has no liability in this case and LB has to procure the original copy of that letter of credit from PV.

Refer to the case Faber Industries v Dori Leeds Witek Case Issue • D is a previous owner of a company (defendant) signed a credit guarantee (surety), that she will pay the amount owed by " D dba 'Company name'" • D sold her businesses to a couple still doing business under the same name • The issue is whether, D owes money to the creditor (plaintiff) of the credit guarantee, when she had sold her business. District court held for D , creditor appealed. Relevant Terms, Laws, and Cases Surety ship -is a contract between a surety, in this case D , a person or entity who guarantees the debt of another the principle debtor ( D 's company), to pay the creditor (plaintiff). However, the surety is only responsible for terms stated in the surety ship and nothing more. Opinion Appeals court affirmed the decision. The court argued that: • D is only responsible as to the terms stated in the contract. • The contract stated that D will pay the amount owed by " D dba 'Company name'" • This meant that D only owed money when the business is owned by her and not other people Hence, the court held for D as she is not responsible for the debt owed by subsequent owners of her business.

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