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
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
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 function, and second, the significant public interest in the stability of banking institutions.
By far the most important function of letters of credit is to finance sales of goods, a fact which should be kept in mind in considering legislation on the subject. Only rarely need a sale of goods take longer than a year to complete, and so a statutory one-year limitation on letters of credit does little to interfere with their use
for their traditional and principal purpose. A limit on the duration of letters of credit does, however, significantly reduce the risk to a bank that can arise from its having to honor an unsecured commitment made years earlier, when the credit standing of the bank's customer (the party to which the bank must look for reimbursement) may have been much different from what it is at the time the bank is required to pay the beneficiary under the credit.
Such changes in the financial situations of the bank's customers appear, indeed, to underlie the case at bar. This case, then, illustrates the need for a statute to limit the power of banks to issue letters of credit, as the Court finds the legislature to have intended.
"The stability of banks is a matter of public concern," 4 Michie on Banks and Banking 104, ch. 7, § 54 (perm. ed. 1971), and banking is closely regulated by statutes, which the Commissioner of Banking has broad powers to enforce, e.g., N.J.S.A. 17:9A-267, 268, 269, subd. A. To regulate letters of credit by statute may be seen as in keeping with this regulatory scheme. Cf. 7 P.S. § 315 (Purdon's Penn. Bank. Code), Comment (no statutory limitation on the power of a bank to issue letters of credit, but banking department has authority to prohibit the continuance of unsound practices).
That the controverted statute limits the duration of credit is the interpretation of the state Department of Banking,
a fact which the Court deems significant.
"The principle is well established that practical interpretation by an administrative agency is entitled to great weight in construing statutes in order to ascertain their meaning, to explain a doubtful phrase or to illuminate any obscurity." State v. Le Vien, 44 N.J. 323, 330 n. 5, 209 A.2d 97, 101 (1965).
IV. Application of the One-year Limitation to Automatically Renewable Letters of Credit
One of plaintiff's contentions is that the statute under consideration, however it may be construed, makes no mention of renewals of letters of credit, and so does not apply to the ones at issue in this case, which were by their terms not valid for longer than a year but, rather, automatically renewable from year to year.
This argument fails, however, from the fact that under these letters of credit any election by the bank not to renew gave the beneficiary a virtually unconditional right to draw against the credit before its expiration. In substance, then, each letter of credit provided that the bank could escape its obligation only by performing it. If such a disingenuous evasion of the statute were to succeed, the statute would be totally defeated: banks could undertake the very kinds of obligations which the statute is designed to prohibit. For this reason alone the letters of credit at issue in this case must be deemed violative
of the statute.
There is another, much more technical reason: under the terms of each letter of credit in the case at bar the bank remained irrevocably obligated throughout the month following each automatic renewal date (each December 1) and throughout the next twelve months as well, so that for one month each year the duration of the letter of credit exceeded a year.
V. The Estoppel Issue
Plaintiff argues that even assuming the issuance of the letters of credit to have been ultra vires, the bank is estopped to assert such a defense. To be sure, if the bank's actions were merely ultra vires (beyond its powers) and nothing more, plaintiff's point would have much to recommend it. Eastern Speedways, Inc. v. Hamilton, 123 N.J.L. 257, 8 A.2d 297 (E. & A. 1939) (where bank had agreed with corporation to accept responsibility for carrying funds to bank, the bank was liable for money stolen from teller so carrying it, and could not rely on defense that to receive deposits other than at banking house was ultra vires, since such a defense would defeat the ends of justice and work a legal wrong). In the present case, however, the bank's issuances of letters of credit were contrary to a statute promoting the strong public policy of maintaining stability of banks. The bank is not estopped to assert this illegality in defense to a legal claim. 7 Fletcher Cyclopedia of Corporations § 3580 et seq. (rev. ed. 1964); Strickland v. National Salt Co., 79 N.J.Eq. 182, 192, 81 A. 828 (E. & A. 1911).
VI. The Guaranty Issue
"[Banks] generally lack the statutory power to guarantee the indebtedness of other parties." Comment, "Recent Extensions in the Use of Commercial Letters of Credit," 66 Yale L.J. 902, 911 (1957); Verkuil, supra note 5, 25 Stan.L.Rev. at 725 (both citing authorities); 4 Michie on Banks and Banking 77, ch. 7, § 44 (perm. ed. 1971); see 12 C.F.R. § 7.7010(a) (1975). It is for this reason that the question arises whether it is not ultra vires or illegal for a bank to issue a letter of credit which functions like a guaranty. Comment, supra ; Verkuil, supra note 5.
A decision on this question is not necessary to the holding of this case. However, a brief discussion of the issue and of pertinent regulations of the federal banking regulatory agencies may serve to illuminate the conclusion that the issuance of letters of credit is subject to abuses, and requires regulation.
The documentary letter of credit is in its origins and principal use a device to facilitate and finance commerce in goods. But as the case at bar illustrates, letters of credit can be used for other purposes, too.
"The letter of credit is an almost infinitely adaptable device for insuring the obligation to pay money. . . .