Nobel Insurance Co. v. First National Bank

Henry Strother and William Hamrick were insurance brokers for Palomar Insurance Corporation. One of Hamrick’s clients, Western American Specialized Transportation Service, Inc., obtained high-deductible insurance policies from Nobel Insurance Company (plaintiff). The insurance policies required Nobel to hold collateral to secure Western American’s obligation to pay its deductibles. To satisfy the collateral requirement, Strother and Hamrick ordered standby letters of credit from First National Bank of Brundidge (defendant). The bank issued the letters of credit to Nobel. Western American subsequently failed to pay its deductibles to Nobel, but the bank refused to honor the letters of credit. Nobel sued the bank in federal district court to enforce the letters of credit. Hamrick then brought a declaratory-judgment action in Alabama state court seeking a declaration of the parties’ rights and liabilities with respect to the letters of credit. Nobel cross-claimed in that action seeking enforcement of the letters of credit. The federal court dismissed Nobel’s action, finding that it was entirely governed by state law. In the state-court action, Hamrick, Strother, Palomar, the bank, and the bank’s president jointly moved for summary judgment. Nobel opposed the motion. The trial court granted the summary-judgment motion after recognizing that under Alabama suretyship law, a surety on a contract is discharged from liability if the surety gave notice to the creditor that the surety was requiring the creditor to sue the debtor for recovery under the contract but the creditor failed to sue the debtor within three months of the notice. The court said that Strother, as surety for Western American, had sent notice to Nobel, but Nobel failed to bring an action against Western American within three months. The court thus concluded that Nobel could not receive payment under the letters because the sureties’ liability had been discharged. Nobel appealed to the Alabama Supreme Court, arguing that even if the letters of credit were collateral posted by Strother and Hamrick as sureties in the transaction between Western American and Nobel, the trial court erred by applying suretyship law to extinguish the bank’s responsibility to honor the letters of credit.