Wichita Eagle & B. Pub. Co., Inc. v. Pacific Nat. Bk., San Fran.

• Decision Date: 13 May 1974
• Docket Number: No. 71-1573,71-1849.,71-1573
• Citation: 493 F.2d 1285
• Parties: The WICHITA EAGLE AND BEACON PUBLISHING COMPANY, INC., Plaintiff-Appellant, v. PACIFIC NATIONAL BANK OF SAN FRANCISCO, Defendant-Appellee. The WICHITA EAGLE AND BEACON PUBLISHING COMPANY, INC., Plaintiff-Appellee, v. PACIFIC NATIONAL BANK OF SAN FRANCISCO, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

493 F.2d 1285 (1974)

The WICHITA EAGLE AND BEACON PUBLISHING COMPANY, INC., Plaintiff-Appellant, v. PACIFIC NATIONAL BANK OF SAN FRANCISCO, Defendant-Appellee.

The WICHITA EAGLE AND BEACON PUBLISHING COMPANY, INC., Plaintiff-Appellee, v. PACIFIC NATIONAL BANK OF SAN FRANCISCO, Defendant-Appellant.

Nos. 71-1573, 71-1849.

United States Court of Appeals, Ninth Circuit.

February 22, 1974.

Rehearing Denied May 13, 1974.

Gerrit H. Wormhoudt (argued), Fleeson, Gooing, Coulson & Kitch, Wichita, Kan., Bledsoe, Smith, Cathcart, Johnson & Rogers, San Francisco, Cal., for plaintiff-appellant.

Paul A. Renne (argued), Cooley, Crowley, Gaither, Godward, Castro & Huddleson, Jonas, Matthews, Pfotenhauer & King, San Francisco, Cal., Rockwell, Fulkerson & Clarke, San Rafael, Cal., for defendant-appellee.

Before CHAMBERS and BROWNING, Circuit Judges, and KING,^* District Judge.

OPINION

PER CURIAM:

The facts are summarized in the district court's opinion, 343 F.Supp. 332 (N.D.Cal.1971).

We do not agree with the district court that the instrument sued upon is a letter of credit, though it is so labeled. Rather, the instrument is an ordinary guaranty contract, obliging the defendant bank to pay whatever the lessee Circular Ramp Garages, Inc., owed on the underlying lease, up to the face amount of the guaranty. Since the underlying lease clearly contemplated the payment of $250,000 in case of default, and since this provision appears to be a valid liquidated damages clause, the judgment below must be modified to award the plaintiff $250,000 plus interest.

We do not base our holding that the instrument is not a letter of credit on the fact that payment was triggered by default rather than performance or on the fact that the instrument was written in a lease context, for we recognize that the commercial use of letters of credit has expanded far beyond the international sales context in which it originally developed. See, e. g., Fair Pavilions, Inc. v. First National Bank, 19 N.Y.2d 512, 281 N.Y.S.2d 23, 227 N.E.2d 839 (Ct.App.1967); Fidelity Bank v. Lutheran Mutual Life Insurance Co., 465 F. 2d 211 (10th Cir. 1972). See also Harfield, Code, Customs, and Conscience in Letter-of-Credit Law, 4 U.C.C.L.J. 7 (1971).

The instrument involved here strays too far from the basic purpose of letters of credit, namely, providing a means of assuring payment cheaply by eliminating the need for the issuer to police the underlying contract. Harfield, The Increasing Use of Domestic Letters of Credit, 4 U.C.C.L.J. 251, 257 (1972); Ward & Harfield, Bank Credits and Acceptances 46, 136-38 (1958). The instrument neither evidences an intent that payment be made merely on presentation on a draft nor specifies the documents required for termination or payment. To the contrary, it requires the actual existence in fact of most of the conditions specified: for termination or reduction, that the city have refused a building permit; for payment, that the lessee have failed to perform the terms of the lease and have failed to correct that default, in addition to an affidavit of notice.

True, in the text of the instrument itself the instrument is referred to as a "letter of credit," and we should, as the district court notes, "give effect wherever possible to the intent of the contracting parties." 343 F.Supp. at 338. But the relevant intent is manifested by the terms of the agreement, not by its label. Bekins v. Lindsay-Strathmore Irrigation District, 114 F.2d 680, 684 (9th Cir. 1940). And where, as here, the substantive provisions require the issuer to deal not simply in documents alone, but in facts relating to the performance of a separate contract (the lease, in this case), all distinction between a letter of credit and an ordinary guaranty contract would be obliterated by regarding the instrument as a letter of credit.

It would hamper rather than advance the extension of the letter of credit concept to new situations if an instrument such as this were held to be a letter of credit. The loose terms of this instrument invited the very evil that letters of credit are meant to avoid—protracted, expensive litigation. If the letter of credit concept is to have value in new situations, the instrument must be tightly drawn to strictly and clearly limit the responsibility of the issuer.

The bank contends that whatever the nature of the...