NOBEL INSURANCE CO. V. FIRST NAT’L BANK
821 So. 2d 210 (Ala. 2001)

HARWOOD, Justice.
Nobel Insurance Company (hereinafter referred to as “Nobel”) appeals the summary judgment for The First National Bank of Brundidge (hereinafter referred to as “the Bank”), J.T. Ramage III, Henry T. Strother, Jr., William F. Hamrick, and Palomar Insurance Corporation (hereinafter referred to as “Palomar”). * * * * We reverse and remand.
Nobel first sued the Bank in the United States District Court for the Middle District of Alabama to enforce certain letters of credit issued by the Bank. The letters of credit were issued by order of the Bank’s customers, Strother and Hamrick, both of whom were insurance brokers for Palomar. The letters of credit were signed by Ramage, the Bank’s president, and issued in favor of Western American Specialized Transportation Service, Inc. (hereinafter referred to as “Western American”), one of Hamrick’s clients who sought insurance coverage from Nobel. * * * *
[Nobel issued various insurance policies to Western American, which had large deductible amounts. The policies required that Nobel hold collateral to secure the obligation of Western American to pay those amounts. Western American satisfied that requirement by causing the Bank to issue the three letters of credit in issue. When Western American became indebted to Nobel for uncollected deductibles, Nobel drew on the letters of credit, but the Bank refused to pay.]
[The district court ruled in favor of the Bank, relying on “general principles of suretyship law, including [an Alabama statute that] provides]:
A surety upon any contract for the payment of money or for the delivery or payment of personal property may require the creditor or anyone having the beneficial interest in the contract, by notice in writing, to bring an action thereon against the principal debtor or against any cosurety to such contract.
(b) If an action is not brought thereon in three months after the receipt of such notice and prosecuted with diligence according to the ordinary course of law, the surety giving such notice is discharged from all liability as surety or his aliquot proportion of the debt, as the case may be.
(c) One surety may give notice in behalf of his cosureties.
[Ala. Code § 8-3-13.]
[The court noted that the applicants for the letters of credit sent such a notice and that Nobel did not dispute the receipt or the sufficiency of the notice.]
* * * *
Nobel argues that the trial court erred in applying suretyship law to the transaction underlying this lawsuit because, it argues, letters of credit are subject to a separate body of law. Under the law governing letters of credit, Nobel argues, the letters of credit in this case cannot be extinguished by application of § 8-3-13 even though they were arguably posted as collateral by Strother and Hamrick, as sureties, to answer for the debt of Western American.
The letters of credit at issue all state, in pertinent part:
We hereby agree with the drawers, endorsers and bona fide holders of drafts drawn under and in compliance with the terms of this credit that such drafts will be duly honored upon presentation to the drawee. The obligation of The First National Bank of Brundidge, under this Letter of Credit is the individual obligation of The First National Bank of Brundidge and is in no way contingent upon reimbursement with respect thereto.
Except as otherwise stated herein, this credit is subject to the Uniform Customs and Practice for Commercial Documentary Credits (1983 Revision) I.C.C. Publication No. 400. Notwithstanding Article 19 of said publication, if this credit expires during an interruption of business as described in Article 19, we agree to effect payment if the credit is drawn against within thirty (30) days after resumption of business.
(Emphasis added [by court].)
* * * *
[The court relied heavily on its explanation of the function of standby letters of credit in an earlier decision:]
Parties that enter into a credit arrangement do so to avail themselves of the benefits of that arrangement. Shifting litigation costs is one of the functions of a standby credit. In this situation, the parties negotiate their relationship while bearing in mind that litigation may occur. This cost-shifting function gives one party the benefit of the money in hand pending the outcome of any litigation. It is important to understand the functions of letters of credit in order to fully understand the consequences the fraud exception has on this commercial device. A demand for payment made upon a standby credit usually indicates that something has gone wrong in the contract. Indeed, this is the nature of the standby letter of credit. In contrast to the commercial credit, nonperformance that triggers payment in a standby credit situation usually indicates some form of financial weakness by the applicant. For this reason, parties choose this security arrangement over another so that they may have the benefit of prompt payment before any litigation occurs. We recognize that, as a general rule, letters of credit cannot exist without independence from the underlying transaction. Thus, when courts begin delving into the underlying contract, they are impeding the swift completion of the credit transaction. The certainty of payment is the most important aspect of a letter of credit transaction, and this certainty encourages hesitant parties to enter into transactions, by providing them with a secure source of credit. [Citations and quotation marks omitted.]
The extensive use of the fraud exception may operate to transform the credit transaction into a surety contract. A standby credit is essentially equivalent to a loan made by the issuing bank to the applicant. Like a surety contract, the standby credit ensures against the applicant’s nonperformance of an obligation. Unlike a surety contract, however, the beneficiary of the standby credit may receive its money first, regardless of pending litigation with the applicant. The applicant may then sue the beneficiary for breach of contract or breach of warranty, or may sue in tort, but without the money. Parties to standby credit transactions have bargained for a distinct and less expensive kind of credit transaction.
In light of the analysis above, we agree that the letters of credit issued by the Bank to Nobel are properly characterized as “standby” letters of credit. Because we also conclude that the letters of credit are properly viewed as distinct from the parties’ surety arrangements, we must also conclude that the trial court erred in applying the law of suretyship to extinguish the Bank’s responsibility to honor the letters of credit. The letters of credit are independent of the underlying transaction between Nobel and Western American.
[W]e reverse the trial court’s summary judgment in favor of the Bank, Ramage, Strother, Hamrick, and Palomar, and we remand the cause for further proceedings consistent with this opinion.