CENTURY FIRE AND MARINE INSURANCE CORPORATION vs. BANK OF NEW ENGLAND-BRISTOL COUNTY, N.A. [Note 1]

LYNCH, J. This is an appeal from an order allowing a motion for summary judgment by the defendant, Bank of New England-Bristol County, N.A. (bank), and denying a motion for summary judgment by the plaintiff, Century Fire and Marine Insurance Corporation (Century), in an action brought by Century against the bank for failure to honor a $25,000 letter of

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credit issued to Century as security for a bond issued by Century to Transtar, Inc. (Transtar). The issue before us [Note 2] is whether a letter of credit is a contract under Massachusetts law and therefore subject to the six-year statute of limitations for bringing an action of contract, or whether a letter of credit is not a contract and therefore subject to a longer period of limitations, so that Century's action is not time-barred. We transferred the case here on our own motion and now conclude that letters of credit are contracts for purposes of determining the applicable statute of limitations, and that the judge properly granted summary judgment for the bank.

The letter of credit was issued on November 26, 1974, and by its terms would expire at the latest on May 26, 1976. The judge found, and the record reflects, that Century made a timely demand for payment in January, 1976, which was not honored by the bank. The judge found that a second demand was made in December, 1982, which also was not honored. Century brought suit to recover on the letter of credit in July, 1987. Both parties moved for summary judgment. The judge determined that, when the bank dishonored the initial timely request for payment, the statute of limitations began to run. Relying on G. L. c. 260, Section 2 (1986 ed.), which provides a six-year limitation period for actions of contract, the judge ruled that the statute of limitations expired prior to Century's commencement of the suit in July, 1987. On appeal, Century argues that summary judgment for the bank was not proper because a letter of credit is not a contract and the appropriate statute of limitations is G. L. c. 260, Section 1 (1986 ed.), providing a twenty-year period for actions "upon bills, notes, or other evidences of indebtedness issued by a bank."

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It is clear, as Century suggests, that a letter of credit, defined by G. L. c. 106, Section 5-103 (1) (a) (1986 ed.), as "an engagement by a bank . . . [to] honor drafts or other demands for payment upon compliance with the conditions specified in the credit," is in some respects distinct from common law contract principles. See, e.g., Data Gen. Corp. v. Citizens Nat'l Bank, 502 F. Supp. 776, 784 (D. Conn. 1980). Nonetheless, and despite the fact that a bank's obligation to pay a beneficiary is independent of the underlying obligation existing between a customer (e.g., Transtar) and the beneficiary (see G. L. c. 106, Section 5-109), it is equally clear that the promise by the issuing bank to the beneficiary to honor drafts made upon the letter of credit is a contractual obligation. See Goodwin Bros. Leasing v. Citizens Bank, 587 F.2d 730, 734 (5th Cir. 1979); Data Gen. Corp. v. Citizens Nat'l Bank, supra at 780. In analyzing the nature of a letter of credit, one court has reasoned that three separate contracts are involved and that "[t]he letter of credit itself . . . is a contract between the issuing bank and the beneficiary . . . ." Bank of Newport v. First Nat'l Bank & Trust Co., 687 F.2d 1257, 1261 (8th Cir. 1982). The official comment to Section 5-114 of the Uniform Commercial Code states that a letter of credit is "essentially a contract between the issuer and the beneficiary." Comment to Section 5-114 of the Uniform Commercial Code, 2A U.L.A. 260 (Master ed. 1977 & 1989 Supp.). This is in accord with long-standing Massachusetts law. Moss v. Old Colony Trust Co., 246 Mass. 139, 151 (1923). We see nothing in the Uniform Commercial Code, or in cases decided under it, which requires us to conclude otherwise.

Judgment affirmed.