Federal Deposit Insurance Corporation v. Freudenfeld

Bernard Freudenfeld (defendant) applied for an irrevocable standby letter of credit in the amount of $10,000 from American City Bank & Trust Company (American City Bank). Freudenfeld named Miami National Bank as the beneficiary and indicated that 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 Freudenfeld agreed to reimburse American City Bank for any money withdrawn on the letter of credit. American City Bank issued the irrevocable standby letter of credit as agreed upon. Alas, the United States Comptroller of the Currency declared American City Bank insolvent before Miami National Bank drew funds on the letter of credit. The Federal Deposit Insurance Corporation (FDIC) (plaintiff) was appointed the receiver of American City Bank. Liability for the letter of credit passed to the FDIC. The FDIC refused to pay on the letter of credit and informed Miami National Bank and the Weinbergs that it was canceling the letter of credit because the letter was still contingent when American City Bank became insolvent. In response, Miami National Bank sent the FDIC a draft, or money order, for $10,000. Consistent with its previous stance, the FDIC refused to honor the draft. Miami National Bank sued the FDIC, seeking that the FDIC be required to fund the letter of credit. A similar case was pending at the time, so Miami National Bank and the FDIC agreed to stay the litigation and abide by the outcome in the similar case. The court in that case held that standby letters of credit that were still contingent at the time of a bank’s closing cannot be avoided by the FDIC. Consequently, the FDIC paid $10,000 plus interest to Miami National Bank. Subsequently, the FDIC sought reimbursement from Freudenfeld, but he refused. The FDIC sued Freudenfeld and moved for summary judgment. Freudenfeld argued that the standby letter of credit was an impermissible guaranty because American City Bank did not have legal authority to make guaranties.