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February 17, 1976

NATIONAL SURETY CORPORATION, a Corporation of the State of New York, Plaintiff,
The MIDLAND BANK & TRUST COMPANY, a Corporation of New Jersey, Defendant

The opinion of the court was delivered by: COOLAHAN

 This is an action *fn1" based upon two irrevocable documentary letters of credit by their beneficiary, a New York surety company ("the surety company"), against their issuer, a New Jersey state bank ("the bank").

 I. The Issues Considered

 The principal legal question raised is whether the letters of credit are void and unenforceable more than a year after their issuance on the ground, asserted by the bank, that a New Jersey statute, N.J.S.A. 17:9A-25(3), withholds power from banks to issue a letter of credit valid for more than a year from its date of issuance.

 The Court holds that the cited statute does not authorize issuance of an irrevocable letter of credit valid for more than a year from the date of its issuance, and that this matter raised in defense is sufficient to defeat the surety company's claim as beneficiary under the letters. *fn2"

 In reaching this conclusion this Court has had to consider two issues: first, how the controverted statute should be construed, and second, whether the bank is estopped to raise a defense resting on the impropriety of its own acts in issuing the letters.

 A third, subsidiary, issue arises from the fact that the letters of credit in this case are by their terms not valid for longer than a year but, rather, automatically renewable from year to year, as explained below. For this reason it has been necessary to decide that an irrevocable letter of credit originally issued for a period not exceeding a year, but automatically renewable from year to year (except on terms of virtually unconditional payment by the issuing bank) throughout whatever period of time the beneficiary thereof may still be required to render the performance giving rise (indirectly, through documents) to its right to payment, is, at a time more than a year after the letter's issuance, subject to the strictures of the cited statute.

 A final issue, meriting some discussion but not necessary to the decision in view of this Court's disposition of the above issues, is whether the letters of credit are void and unenforceable on a second ground asserted by the defendant bank, namely, that the letters, although in form letters of credit, are in substance guaranties. (It is not controverted that a New Jersey Bank has no general power to make guaranties.) *fn3"

 II. The Facts of the Case

 The action was tried upon the facts before the Court without a jury. The facts stated herein, together with the appended findings, constitute the findings of fact required by Fed.R.Civ.P. 52(a). Most essential facts are not in dispute.

 The defendant, Midland Bank, issued to the plaintiff, National Surety Corporation, two letters of credit in 1967, the first dated January 9 and the second dated February 1.

 Each letter of credit was issued in order to induce the plaintiff to issue a bond to enable a vessel to be freed which was then detained (or about to be detained) in port under a writ of attachment in a suit in admiralty. (It is the usual practice in such an admiralty action to have a bond posted to enable the subject vessel to be released while the action continues.) Each letter of credit provided, in essence, that upon receipt by defendant of plaintiff's draft drawn thereunder, together with plaintiff's certification of its liability, loss, costs, or expense in the amount of the draft under the corresponding bond, the defendant would honor the draft. (Each letter was therefore a so-called "standby," or "guaranty" letter of credit. See part VI infra.)

 Each admiralty suit was eventually resolved by judgment, in each case several years after the institution of the suit, and the plaintiff paid to the obligee under each bond an amount in satisfaction of its obligation thereunder.

 Plaintiff drew and presented to defendant a draft and the called-for certification under each letter of credit. One draft was presented after payment under the bond named in the corresponding letter of credit, and the other, after the defendant's renunciation of the other letter of credit, which act plaintiff reasonably treated as an election by the bank not to renew the letter. Neither draft was honored. The surety company has accordingly brought the present action to recover the sums to which it claims to be entitled under the two letters of credit.

 III. Construction of the Statutory One-year Limitation

 The controverted statute provides in relevant part as follows:

"[Every] bank shall, subject to the provisions of this act, have the following powers, whether or not such powers are specifically set forth in its certificate of incorporation:
. . .
(3) to issue letters of credit authorizing holders thereof to draw drafts upon it or upon its correspondents at sight or on time not exceeding one year ; to guarantee, for a period not exceeding one year from the date of such guarantee, the payment by its customers of amounts due or to become due upon the purchase by such customers of real or personal property." N.J.S.A. 17:9A-25 (Banking Act of 1948, § 25, "Additional powers of banks") (emphasis added).

 A. Ambiguity of the Statute

 The quoted clause on letters of credit was apparently patterned after New York Banking Law § 96(2) (McKinney 1975), *fn4" from which it differs only in immaterial detail.

 Plaintiff, relying partly on the grammar and punctuation of the statute, claims that the words "on time not exceeding one year," like the words "at sight," define the forms of the drafts which banks are authorized to agree to honor and do not relate to the phrase "letter of credit." ("Sight drafts" and "time drafts" are, of course, commonly used phrases in the banking industry.) Plaintiff argues that the words "not exceeding one year" modify the word "time," citing the rule that a limiting clause or phrase modifies the last antecedent unless the subject matter requires a different construction. *fn6" U.S. ex rel. Santarelli v. Hughes, 116 F.2d 613 (3d Cir. 1940). The Court concludes, however, as discussed below, that the subject matter of this statute does require a different construction, and so the "last antecedent" rule is not applicable here.

 Finally, plaintiff cites in support of its construction of the statute the prevailing rule that a draft under a letter of credit is valid if drawn "within a reasonable time" from the issuance of the letter of credit, Lamborn v. National Park Bank, supra note 5; 9 C.J.S. "Banks and Banking" § 176, p. 385, see id., §§ 177, 173. This rule, however, is a statement of the common law, which is superseded insofar as a regulatory statute governs the same subject matter; and the Court concludes (part III-B infra) that the legislature did choose to regulate bank practices regarding letters of credit.

 Defendant makes two main arguments on the one-year limitation issue. First, defendant argues that it would be idle for a legislature to limit the duration of time drafts drawn under letters of credit but to allow banks to have contingent obligations under letters of credit outstanding for lengthy periods of time. Defendant's conclusion is that the statute must have been intended to limit the period during which a letter of credit may be valid.

 Second, defendant relies upon evidence that its interpretation of the statute is shared by the State Department of Banking, which is charged with administering the statute in the course of its regulatory supervision of state banks.

 It is the Court's conclusion that the controverted statute is not clear on its face, and that it is therefore necessary to look, as defendant asks, beyond the words of the statute in order to ascertain its meaning.

 B. Considerations in Construction of the Statute

 "In modern parlance, a commercial bank credit is a promise by a bank to pay or to accept the draft of a named beneficiary provided he complies with the terms and conditions set forth in the instrument conveying the promise." H. Harfield, "The National Bank Act and Foreign Trade Practices," 61 Harv.L.Rev. 782, 793 (1948). (The similar Uniform Commercial Code definition is contained in U.C.C. 5-103(1)(a), N.J.S.A. 12A:5-103(1)(a).)

 The rules are well established *fn7" which govern the rights and duties of the parties to a typical letter of credit transaction (one involving the sale of goods) -- issuer's customer, issuer, confirming bank (frequently), and beneficiary. The law has been much less settled, however, on the question of what (or which) lending and credit restrictions *fn8" banks are subject to with respect to these documents.

 A partial explanation for the paucity of detailed statutory regulation lies in the fact that the use of letters of credit by banks has rarely been a subject of abuse. Letters of credit are ordinarily *fn9" used in sales transactions, where the risk to the issuing bank is minimal: not only does the bank engage its credit for a relatively short period of time, but it also acquires a security interest in the goods. Ward & Harfield, supra note 7 at 59.

 Nevertheless, considerable potential for abuse does exist. Letters of credit are usually deemed to create only contingent liabilities, and there are no fixed statutory limitations on the amount of contingent liabilities which a bank may incur. A bank which issued inadequately secured letters of credit for very large sums of money might find itself obligated to make acceptances or payments *fn10" under them which could dangerously exceed the lawful limits for bank acceptances or loans.

 It is against this background of banking law and practice that the controverted statute must be viewed. In enacting a banking statute to govern letters of credit or drafts drawn thereunder, the Legislature doubtless had foremost in mind two considerations: first, the ability of state banks to fulfill legitimate commercial needs in the performance of their banking ...

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