Fanslow v. Northern Trust Co.

FIRST DIVISION
August 31, 1998

No. 1-96-3136

RICHARD G. FANSLOW,

Plaintiff-Appellant,

v.

THE NORTHERN TRUST COMPANY,

Defendant-Appellee.)
)
)
)
)
)
)
)
)Appeal from the
Circuit Court of
Cook County.

No. 94 CH 9920

Honorable
Stephen A. Schiller,
Judge Presiding.

JUSTICE O'BRIEN delivered the opinion of the court:

Plaintiff, Richard G. Fanslow, filed a complaint against
defendant, The Northern Trust Company (Northern Trust), alleging
wrongful dishonor of a letter of credit (count I), nonpayment of a
sight draft after acceptance (count II), and breach of good faith
(count III). The trial court entered summary judgment in favor of
Northern Trust on counts I and II and dismissed count III.
Plaintiff appealed. We affirm.
In 1988, a corporation owned and controlled by Fanslow sold
its interest in Summit National Life Insurance Company (Summit) to
SNL Corporation which was controlled by Allen Stewart
(Stewart).[fn1] To partially finance the transaction, Stewart
gave Fanslow a "Promissory Note Secured by Letter of Credit." The
letter of credit was issued by Northern Trust for Fanslow's benefit
(the NTC L/C). The NTC L/C provided, in pertinent part:
WE HEREBY ISSUE THIS IRREVOCABLE STANDBY LETTER OF
CREDIT WHICH IS AVAILABLE BY YOUR DRAFT DRAWN AT SIGHT ON
US, BEARING THE CLAUSE DRAWN UNDER IRREVOCABLE STAND-BY
LETTER OF CREDIT NO. S253144 OF THE NORTHERN TRUST
COMPANY WHEN ACCOMPANIED BY:

1. A STATEMENT PURPORTEDLY SIGNED BY RICHARD G.
FANSLOW OR HIS AUTHORIZED REPRESENTATIVE STATING THAT:

(1) SNL CORPORATION HAS DEFAULTED IN ONE OR MORE OF
ITS OBLIGATIONS UNDER THE TERMS OF THE PROMISSORY NOTE IN
THE AMOUNT OF USD 6,400,000.00 PAYABLE TO THE ORDER OF
RICHARD G. FANSLOW AND DATED OCTOBER 5, 1988 (THE
NOTE ), THEREFORE IMMEDIATE PAYMENT OF USD (INSERT
AMOUNT OF DRAFT) IS NOW DUE AND OWING UNDER THE NOTE.

* * *

WE HEREBY ENGAGE WITH YOU THAT ALL DOCUMENTS
PRESENTED IN COMPLIANCE WITH THE TERMS OF THIS LETTER OF
CREDIT WILL BE DULY HONORED BY US WITHIN THREE WORKING
DAYS IF DELIVERED TO THE NORTHERN TRUST COMPANY, 802 S.
CANAL STREET, CHICAGO, ILLINOIS, 60675 PRIOR TO 3 PM ON
OR BEFORE THE EXPIRATION DATE."

A separate $8 million letter of credit was issued by Merrill Lynch
International Bank (London) (MLIB) to secure the NTC L/C (the MLIB
L/C). In turn, Stewart pledged some $8 million on deposit with
MLIB in London to secure the MLIB L/C.
Shortly after the sale and purchase of Summit, the insurance
company experienced severe financial difficulties and filed a
petition for rehabilitation with the Commonwealth Court of
Pennsylvania (the Pennsylvania lawsuit). In its effort to preserve
the assets of the rehabilitation estate, the Pennsylvania Insurance
Commissioner applied to the Commonwealth Court for an injunction
against Fanslow, Northern Trust and MLIB to prevent them from
exercising their rights and obligations under the NTC L/C and the
MLIB L/C. The Pennsylvania Insurance Commissioner alleged that the
$8 million on deposit with MLIB in London which secured the MLIB
L/C (and by extension the NTC L/C) also secured another and later-
created obligation owed to Summit by Stewart and thus the funds
belonged to the Summit rehabilitation estate rather than to
Fanslow. The nature of the Pennsylvania Insurance Commissioner's
request notwithstanding, the application failed to name either
Fanslow or Northern Trust as a party. Consequently neither was
formally served with process, although Fanslow (but not Northern
Trust) was informed of a hearing scheduled for September 29, 1994.
At the September 29, 1994, hearing, both MLIB and Fanslow
appeared specially to contest jurisdiction. Northern Trust did not
appear. The Pennsylvania court nevertheless enjoined MLIB from
paying on the MLIB L/C. It did not, however, enjoin Fanslow from
drawing upon or Northern Trust from paying upon the NTC L/C. The
court's supplemental memorandum issued in relation to this decision
states:
In seeking this relief, the [Pennsylvania Insurance
Commissioner] asked us to take action over Fanslow which
would ineluctably affect the legal and substantive rights
of Northern Trust. However, Northern Trust was not named
as a party, not mentioned in the pleading and was not
served or otherwise notified.

Although all counsel agreed at hearing on the
rehabilitator's emergency request that Northern Trust had
an obligation to Fanslow by virtue of the letter of
credit, no evidence was produced to establish this
obligation. * * *

Thus, the court is in no position to take action to
interdict a banking relationship in another jurisdiction
involving a letter of credit, without the least
notification to the issuing bank, which it appears, is
putatively a real party in interest in these
proceedings.

On October 1, 1994, Stewart failed to make a scheduled
interest payment on the note secured by the NTC L/C. Consequently,
on the morning of October 3, 1994, Fanslow presented certain
documents to Northern Trust to draw upon the NTC L/C. Later that
same day, the Pennsylvania Insurance Commissioner amended its
application to the Pennsylvania court for an injunction to name
Northern Trust as a "party in interest." Also, Northern Trust
notified Fanslow that the tendered draw documents were not
acceptable.
In response, Fanslow delivered additional documents to
Northern Trust the next morning. Among the additional documents
was a sight draft for $8 million. The sight draft was date-stamped
and signed or initialed by an authorized representative of the
international banking department of Northern Trust. Later that
same day, without further hearing and despite lack of process or an
attempt at service or any other notice, the Pennsylvania court
issued an ex parte order enjoining Fanslow from drawing on the NTC
L/C, enjoining Northern Trust from paying under the NTC L/C, and
enjoining MLIB from paying under the MLIB L/C. The same order
required the "parties" to file a memorandum of law "on the question
of this court's jurisdiction to enter injunctive relief." Citing
the Pennsylvania court order, Northern Trust refused to pay on the
previously tendered draw documents although it acknowledged that
they were complete and complied in all respects with the NTC L/C's
requirements.
The hearing on the Pennsylvania court's jurisdiction to enter
injunctive relief continued on October 12, 1994. As of that date,
Northern Trust had not been served with any summons or process nor
had it appeared at any hearing. However, the Pennsylvania court
received a copy of an unsworn letter written by Northern Trust to
counsel for MLIB and Fanslow dated, October 7, 1994. The letter
states:
"that Northern Trust does not at this time intend to file
any briefs or other papers or make any appearance in the
above-referenced proceeding ***.

Northern Trust has an office in Pennsylvania, a division
called Trust Rite System Group, in Wayne, Pennsylvania.
It does not accept deposits or make loans it is a trust-
related data processing operation, and is not in
technical terms a branch . Please do not serve any
papers at that office."

On that letter and Northern Trust's absence, the Pennsylvania
court exercised jurisdiction over Northern Trust, and on October
13, 1994, the Pennsylvania court entered a preliminary injunction
against the same entities on substantially the same terms as
contained in the October 4 order. In a subsequent memorandum
opinion filed October 31, 1994, the Pennsylvania court ruled that
Fanslow was amenable to "specific" in personam jurisdiction in
Pennsylvania in the Summit case, but the court did not consider or
determine whether Fanslow had been served with summons or process.
Fanslow appealed the Pennsylvania court's decision and the appeal
remained pending until the preliminary injunction was dissolved
under circumstances next discussed.
In another proceeding, approximately two years before Summit
was placed into rehabilitation, the Pennsylvania authorities filed
a similar proceeding against Life Assurance Company of Pennsylvania
(LACOP), with which Fanslow was also affiliated. The Pennsylvania
Insurance Commissioner sued Fanslow and others regarding their
management of LACOP and that suit was still pending when Northern
Trust dishonored the NTC L/C during the Summit case.
In July 1994, the parties to the LACOP action entered into a
settlement, funded in large measure with the proceeds of the NTC
L/C at issue here. Neither Northern Trust nor MLIB was a party to
the settlement agreement, and the dispute being settled was totally
independent of the allegations purportedly supporting the
preliminary injunction in the Summit case.
To consummate the settlement in the LACOP case, Fanslow and
the Pennsylvania Insurance Commissioner (the same person in both
the LACOP and Summit cases) issued a letter to Northern Trust dated
August 3, 1995, in which they jointly authorized and directed
Northern Trust to honor the draw documents and pay Fanslow. The
letter states in part:
Notwithstanding this letter, the payment of the Draw as
requested herein will not release, impair or otherwise
diminish any claims that Richard Fanslow may have against
you by reason of your failure to pay the Draw as and when
it was made in October 1994. Richard Fanslow reserves
the right to pursue all such claims and does not by the
request herein mean or intend that the payment of the
Draw will release any such claims except to the extent of
the amount of the payment.

Payment of $8 million under the NTC L/C was made on October 10,
1995, but the payment did not include any interest, damages, costs
or attorney fees.
In this proceeding, Fanslow sued Northern Trust seeking a
declaration that the October 4 and October 13 orders did not afford
Northern Trust a valid defense to payment on the draw documents.
An amended complaint was filed one month later seeking similar
relief.
After the trial court denied Northern Trust's motion to
dismiss based on its claim of a prior pending action (the
Pennsylvania lawsuit) between the same "parties," both parties
filed motions for summary judgment. The motions remained pending
until after the settlement in the LACOP case, whereupon Fanslow
filed a four-count second amended verified complaint on November 7,
1995. Count I prayed for damages for wrongful dishonor of the NTC
L/C; count II sought damages for wrongful dishonor of the sight
draft; count III alleged breach of good faith based on Northern
Trust's role in bringing about the October 4 and October 13 orders;
and count IV prayed for damages for Northern Trust's unjust
enrichment at Fanslow's expense.
On December 29, 1995, the trial court denied Fanslow's motion
for summary judgment and granted Northern Trust's motion for
summary judgment on counts I and II. The trial court ruled that
count I constituted a collateral attack on the Pennsylvania
injunctions and that it was "without authority" to disturb those
orders. With respect to count II, the trial court ruled that the
stamping of the sight draft, together with the representative's
initials or signature, was not acceptance, and that the injunction
enjoining payment of the NTC L/C also enjoined payment of the sight
draft because the sight draft was tendered pursuant to the NTC L/C.
On March 6, 1996, the trial court dismissed count III, holding
that an implied covenant of good faith is not actionable as an
independent tort. The trial court ruled that interest is not
payable on a dishonored letter of credit and struck count IV with
leave to replead, which Fanslow did on March 20, 1996. The trial
court dismissed count IV on August 7, 1996. Fanslow appeals the
summary judgment on counts I and II and the dismissal of count III
of his second amended complaint.
We consider (1) whether the Pennsylvania court orders are
subject to collateral attack on jurisdictional grounds, (2) whether
summary judgment was proper as to plaintiff's wrongful dishonor
claims (counts I and II), and (3) whether judgment on the pleadings
was proper as to plaintiff's breach of good faith claim (count
III).
I
First, Fanslow argues that the Pennsylvania court orders are
subject to collateral attack because they had only a "frivolous
pretense to validity" (Celotex Corp. v. Edwards, 514 U.S. 300,
306, 131 L. Ed. 2d 403, 410, 115 S. Ct. 1493, 1498 (1995), quoting
GTE Sylvania, Inc. v. Consumers Union of the United States, Inc.,
445 U.S. 375, 386, 63 L. Ed. 2d 467, 477, 100 S. Ct. 1194, 1202
(1980)) because the Pennsylvania court lacked personal jurisdiction
over Northern Trust and Fanslow and also lacked jurisdiction over
the res. State Bank v. Thill, 113 Ill. 2d 294, 497 N.E.2d 1156
(1986); Levy v. Dickstein, 70 Ill. App. 3d 180, 187, 388 N.E.2d 97,
102 (1979).
A Pennsylvania court may exercise jurisdiction over
nonresidents "to the fullest extent allowed under the Constitution
of the United States" pursuant to Pennsylvania's long-arm statute.
42 Pa. Cons. Stat. Ann. 5322(b) (West 1981). Where the
Pennsylvania court's exercise of personal jurisdiction does not
offend due process, its orders are to be respected until reversed
for error by orderly review either by itself or by a higher court.
Walker v. City of Birmingham, 388 U.S. 307, 314, 18 L. Ed. 2d 1210, 1216, 87 S. Ct. 1824, 1828 (1967). Accordingly, we consider
whether the Pennsylvania court's exercise of personal jurisdiction
over Fanslow comports with due process.
Due process requires that a court's exercise of jurisdiction
over a party comport with "traditional notions of fair play and
substantial justice." International Shoe Co. v. Washington, 326 U.S. 310, 319, 66 S. Ct. 154, 158, 159-60, 90 L. Ed. 95, 102, 103-
04 (1945). The relevant considerations in determining whether
sufficient minimum contacts exist to justify the exercise of
limited personal jurisdiction over a nonresident are: (1) the
individual must have purposefully availed himself of the privilege
of conducting activities in Pennsylvania, (2) the cause of action
must arise from those activities, and (3) the exercise of
jurisdiction must be reasonable. International Shoe Co. v.
Washington, 326 U.S. 310, 316, 319, 66 S. Ct. 154, 158, 159-60, 90 L. Ed. 95, 102, 103-04 (1945).
Here, the Pennsylvania court conducted hearings on its
jurisdiction over Fanslow and issued a memorandum opinion applying
the International Shoe criteria. The Pennsylvania court concluded
that "Fanslow's contacts with Pennsylvania residents were not
random, fortuitous, or attenuated, " but that Fanslow had
" reach[ed] out beyond one state and created[d] continuing
relationships and obligations with citizens of [Pennsylvania]. "
The Pennsylvania court further found that Fanslow's "intentional
communications" with Summit's subsidiaries "initiated a series of
transactions that created and maintained continuing obligations
which [gave] rise to the underlying suit. " Finally, the
Pennsylvania court ruled its jurisdiction over Fanslow was
reasonable in light of Fanslow "having previously engaged in the
insurance business in this state and having had an attorney here,
as well as having until quite recently enjoyed performance on a
promised payment of interest."
Even assuming without deciding that the Pennsylvania court
orders are subject to collateral attack on jurisdictional grounds,
we agree with the Pennsylvania court's jurisdictional analysis.
Fanslow contends the Pennsylvania court lacked jurisdiction
over Northern Trust. A party may object to personal jurisdiction
or improper service of process only on behalf of himself or
herself, since the objection may be waived. 42 Pa. Cons. Stat.
Ann. Rs. 1028(a), 1032 (West 1989). Accordingly, Fanslow lacks
standing to object to the Pennsylvania court's exercise of
jurisdiction over Northern Trust.
Fanslow further contends the Pennsylvania court lacked
jurisdiction because neither he nor Northern Trust was served with
summons. Pennsylvania Rule of Civil Procedure No. 1531 provides
that written notice to parties in interest is not required where
"immediate and irreparable injury will be sustained before notice
could be given or hearing held." 42 Pa. Cons. Stat. Ann. R. 1531
(West 1987). Rather, any method of service reasonably calculated
to bring the matter to the attention of the adverse party is
ordinarily sufficient. Rothman v. Rothman, 425 Pa. 406, 228 A.2d 899 (1967). Fanslow admits that he was informed of the hearing
scheduled for September 29, 1994. Thus, as to himself, Fanslow's
argument is without merit. As to Northern Trust, as previously
noted, a party may object to improper service of process only on
behalf of himself or herself, since the objection may be waived.
42 Pa. Cons. Stat. Ann. Rs. 1028(a), 1032 (West 1987).
Accordingly, Fanslow lacks standing to object to the Pennsylvania
court's jurisdiction over Northern Trust.
Next, Fanslow contends the injunction is unenforceable because
the Pennsylvania court lacked jurisdiction over the res. We
disagree. The $8 million on deposit with MLIB securing the MLIB
L/C is considered property of the liquidation estate. See In re
Val Decker Packing Co., 61 B.R. 831 (S.D. Ohio 1986). The
Pennsylvania Insurance Code provides that a Pennsylvania court "may
grant[] such restraining orders, preliminary and permanent
injunctions, and other orders as may be deemed necessary and proper
to prevent: *** (ii) the transfer of property; *** (v) dissipation
and transfer of bank accounts." 40 Pa. Stat. Ann. 221.5 (West
1992).
Admittedly, Fanslow's attempt to collect upon the NTC L/C does
not directly involve the $8 million on deposit with MLIB in London
to which the Pennsylvania Insurance Commissioner lays claim on
behalf of Summit's liquidation estate. However, to induce Northern
Trust to issue the NTC L/C Stewart arranged to have MLIB guarantee
repayment of the funds with the MLIB L/C which was in turn
guaranteed by the $8 million on deposit with MLIB in London.
Because the outcome of the dispute over the NTC L/C could impact
upon Summit's liquidation estate by depleting its assets, there was
a sufficient nexus between the NTC L/C issued to Fanslow and the
liquidation of Summit to convey jurisdiction upon the Pennsylvania
court to issue an injunction. See Muir v. Transportation Mutual
Insurance Co., 107 Pa. Commw. 638, 642, 529 A.2d 534, 538 (1987).
Finally, while the Pennsylvania court's injunction may have
interfered with a business transaction freely negotiated between
the parties (see Stringer Construction Co. v. American Insurance
Co., 102 Ill. App. 3d 919, 430 N.E.2d 1 (1981)), until the
Pennsylvania court's decision is reversed for error by orderly
review, either by itself or by a higher court, the injunction is to
be respected (see Celotex Corp. v. Edwards, 514 U.S. 300, 313, 131 L. Ed. 2d 403, 407, 115 S. Ct. 1493, 1496 (1995); Walker v. City of
Birmingham, 388 U.S. 307, 314, 18 L. Ed. 2d 1210, 1216, 87 S. Ct. 1824, 1828 (1967)). Accordingly, Fanslow's collateral attack upon
the injunction in the Illinois courts is without merit.
II
Second, Fanslow argues the trial court improperly granted
summary judgment in favor of Northern Trust on count II of his
complaint alleging wrongful dishonor of his sight draft.
Specifically, Fanslow contends that when the sight draft was
received, date stamped and initialed, it was "accepted," rendering
the injunction a nullity and Northern Trust's decision to obey the
injunction a wrongful dishonor. Alternatively, Fanslow contends
that an issue of fact existed as to whether Northern Trust had
"accepted" the sight draft precluding summary judgment. We
disagree.
Summary judgment is appropriate where there is no genuine
issue of material fact and the moving party is entitled to judgment
as a matter of law. 735 ILCS 5/2-1005(c) (West 1996). Here it is
undisputed that a representative received, date stamped and
initialed Fanslow's sight draft before Northern Trust was notified
of the injunction. The legal effect of the representative's action
is a question of law, not a question of fact, and appropriate for
summary judgment.
The Uniform Commercial Code in effect at the time provided: "A
bank to which a documentary draft or demand for payment is
presented under a credit may without dishonor of the draft, demand
or credit (a) defer honor until the close of the third banking day
following receipt of the documents." (Emphasis added). Uniform
Commercial Code 5-112 2B U.L.A. 608 (1991).[fn2] The three-day
delay was provided so the bank could examine the documents and
determine whether they conformed to the requirements of the
applicable letter of credit and should be accepted. Uniform
Customs and Practices for Documentary Credits, 1983 Revision, arts.
14, 16c, I.C.C. Pub. No. 400. This determination was important to
the bank because once the draft was accepted, the bank would become
primarily and unconditionally obligated to pay. First Commercial
Bank v. Gotham Originals, Inc., 64 N.Y.2d 287, 475 N.E.2d 1255, 486 N.Y.S.2d 715 (1985). "Acceptance" is the point after which the
bank cannot be restrained from paying on such letter of credit and
the beneficiary cannot be restrained from demanding or receiving
the proceeds. (Tranag, C.A. v. Banca Commerciale Italiana, 901
Misc. 2d 929, 396 N.Y.S.2d 761 (1977); Union Export Co. v. N.I.B.
Intermarket, A.B., 786 S.W.2d 628 (Tenn. 1990)).
The distinction between "receipt" of documents (triggering the
running of the three-day period), and "acceptance" of a draft
(triggering the bank's duty to pay), suggests that when, in the
ordinary course of business, a bank employee date stamps and
initials documentary drafts (i) to acknowledge their receipt and
(ii) to note the time at which the running of the three-day period
begins to run, that action is not "acceptance" of those drafts
within the meaning of Article 5. The Pennsylvania court's
injunction, learned of shortly after the representative
acknowledged receipt of Fanslow's sight draft, was not too late to
enjoin payment. Thus, Northern Trust, which abided by the
injunction, cannot be held liable for "wrongful" dishonor of
Fanslow's draw documents. Kelley v. First Westroads Bank, 840 F.2d 554 (8th Cir. 1988).
III
Third, Fanslow contends the trial court erred in dismissing
count III of his complaint. Count III alleges that Northern Trust
violated its duty of good faith by informing MLIB's counsel about
Trust Rite System Group, a Northern Trust data processing office
located in Pennsylvania, and thus facilitated the Pennsylvania
court's assertion of jurisdiction. Trust Rite Group was situated
in Pennsylvania and subjected Northern Trust to the jurisdiction of
the Pennsylvania court whether or not Northern Trust informed the
court of the existence of Trust Rite Group. Accordingly, Northern
Trust's letter, its submission to the jurisdiction of the
Pennsylvania court, and its obedience to the injunction are
insufficient to sustain a cause of action of breach of good faith
against Fanslow.
We affirm the summary judgment in favor of Northern Trust on
counts I and II and affirm the dismissal of count III.
Affirmed.
GALLAGHER, J., and O. FROSSARD, J., concur.
[fn1] During the pendency of this appeal, Stewart became
the subject of a 63- count federal indictment issued on December 4,
1996, alleging insurance fraud in relation to his business dealings
with Summit and another insurance company.
[fn2] Article 5 of the Uniform Commercial Code has since
been amended. The amended version provides that "[a]n issuer has
a reasonable time after presentation, but not beyond the end of the
seventh business day of the issuer after the day of its receipt of
documents: (1) to honor ***, or (3) to give notice to the presenter
of discrepancies in the presentation. Uniform Commercial Code 5-108(b), 2B
U.L.A. 139 (Supp. 1998). Moreover, the amended version provides that " Dishonor
of a letter of credit means failure timely to honor or to take an interim action,
such as acceptance of a draft, that may be required by the letter of credit."
(Emphasis added.) Uniform Commercial Code 5-102(a)(5) 2B U.L.A. 130 (Supp.
1998).