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4000 - Advisory Opinions

Bank Guaranty of Obligations of Others is Not Standby Letter of Credit


August 26, 1981

Rae Schupack, Regional Counsel

***, bank examiner, asked me to write you concerning the Guaranty described above. The execution by *** of this Guaranty was scheduled as an apparent violation of Part 332 of FDIC Regulations.

For reasons explained below, I agree with *** that the Guaranty is in fact a guarantee prohibited under section 332.1(d) and is not a standby letter of credit described under section 337.2 of FDIC regulations. In addition, I have suggested how the violation may be corrected.

Under section 332.1(d), a bank may not guarantee the obligations of others. The regulation does provide exceptions, however: section 332.1, footnote 1, provides that the limitations in section 332.1(d) do not apply to letters of credit issued in the ordinary course of business.

Section 337.2(a) defines a standby letter of credit as:

"any letter of credit, or similar arrangement however named or described, which represents an obligation to the beneficiary on the part of the issuer (1) to repay money borrowed by or advanced to or for the account of the account party, or (2) to account party, or (3) to make payment on account of any default (including any statement of default) by the account party in the performance of an obligation."

The bank's Guaranty on behalf of the *** to *** is broader and more far-reaching than a standby letter of credit, and therefore is in fact a guarantee. The Guaranty does not merely guarantee payment of *** accounts with *** as would a standby letter of credit. Nor does it just guarantee payment of drafts validly and properly executed by ***, as would an ordinary commercial letter of credit. The bank's Guaranty guarantees payment "of all indebtedness and other obligations of every kind and nature," "direct or indirect, absolute or contingent, due or to become due, now or hereafter existing." This goes well beyond mere liability for unpaid accounts, and actually guarantees tort and any other possible liabilities of the *** as well. As such, the Guaranty covers liabilities which are not the proper subject of a standby letter of credit.

I assume that what the bank and *** intended was in fact to enter into a standby letter of credit arrangement. In examining the Guaranty, I found the bank has the right to discontinue the Guaranty upon proper notice to ***. To cure the violation for the future, I suggest you contact *** and propose to substitute a true standby letter of credit for the Guaranty. The bank would then execute the standby letter of credit and send it to *** along with proper notice of the discontinuance of the Guaranty. The substitute standby letter of credit must include the January 18, 1982 termination date mentioned in the bank's letter to Mr. ***.

If you have any questions concerning this matter, please give me a call.

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