Tudor Development Group, Inc. v. U.S. Fidelity & Guar. Co.
| Decision Date | 23 July 1992 |
| Docket Number | No. 91-5773,91-5773 |
| Citation | 968 F.2d 357 |
| Parties | , 17 UCC Rep.Serv.2d 1212 TUDOR DEVELOPMENT GROUP, INC., a Pennsylvania Corp.; Sidney Cohen; Dorothy Cohen; Marc Cohen, trading as Green Hill Associates, v. UNITED STATES FIDELITY & GUARANTY COMPANY, Dauphin Deposit Bank and Trust Company; Green Hill Project Investors, Inc.; York Excavating Company, Inc., Intervenors, Dauphin Deposit Bank & Trust Company, Appellant. |
| Court | U.S. Court of Appeals — Third Circuit |
Timothy M. Anstine, Thomas A. French (argued), Rhoads & Sinon, Harrisburg, Pa., for appellant Dauphin Deposit.
Lewis S. Kunkel, Jr. (argued), Timothy B. Anderson, Pepper, Hamilton & Scheetz, Harrisburg, Pa., for appellee Green Hill Project Investors.
Thomas B. Rutter (argued), Rutter, Turner, Solomon & Dipiero, Philadelphia, Pa., for appellee Green Hill Associates.
Before: BECKER, COWEN and GARTH, Circuit Judges.
At issue in this case is which party is entitled to a fund of $594,000 paid into the district court. To settle this dispute we must determine whether a bank which has honored a letter of credit may be equitably subrogated to the rights of its customer vis-a-vis funds paid to the customer by a party unrelated to the original letter of credit. We conclude that because the issuing bank was satisfying its own primary liability rather than the liability of another when it made payment under the letter of credit, it may not avail itself of the common-law remedy of equitable subrogation. We will affirm the order of the district court granting summary judgment in favor of Green Hill Investors.
The $594,000 fund which is the subject of this diversity dispute was paid into the district court by United States Fidelity and Guaranty Company ("USF & G"). This lawsuit began when Green Hill Associates ("Associates") sued USF & G for the proceeds of performance bonds issued by USF & G. York Excavating Co. ("York"), Dauphin Deposit Bank and Trust Company ("Dauphin Deposit") and Green Hill Project Investors ("Investors") subsequently intervened in the action, claiming an interest in the bond proceeds. The action itself arises from the construction of a multi-family residential development in Susquehanna Township ("the Township"), Dauphin County, Pennsylvania. Dauphin Deposit appeals the district court's order granting summary judgment in favor of Investors.
Associates was the owner and developer of a subdivision construction project, known as the Green Hill Project ("the Project"). Susquehanna Construction Corporation ("SCC") was a general manager of the Project under a written agreement entered into with Associates and as such undertook to construct certain buildings and complete certain other improvements on the site. USF & G issued two performance bonds guaranteeing the faithful and timely performance of all of SCC's duties under the contract with Associates ("the USF & G bonds"). The aggregate amount of these bonds totalled $2,965,873.
Eastern Consolidated Utilities, Inc. ("ECU") also entered into a contract with Associates for certain work on the Project. Under that contract, ECU agreed to construct such improvements as internal roadways, parking areas and storm drainage systems. ECU's responsibilities under this contract were guaranteed by performance bonds issued by Employers Insurance of Wausau ("the Wausau bonds").
In order to begin work on the Project, Associates needed the approval of the Township. Therefore, Associates entered into an agreement with the Township ("the Subdivision Agreement") to complete various improvements on the site of the proposed subdivision. These improvements included the construction of grading, roads, driveways, and parking and recreation areas. The Subdivision Agreement required Associates to provide either a bond or a standby letter of credit guaranteeing the completion of the specified improvements.
Associates applied for an irrevocable standby letter of credit from Dauphin Deposit in order to satisfy the Subdivision Agreement. Dauphin Deposit accepted Associates' application and issued a letter of credit in favor of the Township for the account of Associates. The face amount of the letter was $1,088,646. The letter provided that it would be payable upon the Township's certification that the required site improvements had not been completed as required by the Subdivision Agreement. Dauphin Deposit received a fee of $75 plus 1.5% per annum of the face amount of the letter of credit. Associates also agreed to reimburse Dauphin Deposit if Dauphin honored the letter of credit ("the reimbursement agreement"). The reimbursement agreement did not include an assignment of Associates' rights in the USF & G bonds in the event of honor.
As security in the event of honor, Dauphin Deposit received a collateral note executed by the Tudor Development Group ("Tudor"), Associates' general partner on the project, and an assignment of the proceeds of the Wausau performance bonds. As noted, Dauphin Deposit did not obtain an assignment of the USF & G bonds nor did it file financing statements perfecting its security interest in any of the collateral it did obtain in connection with the issuance of the letter of credit.
Sometime in May, 1987, SCC defaulted under its contract with Associates. Subsequently, Associates was declared in default of its obligations to build the site improvements under the subdivision agreement with the Township. As a result, on April 6, 1988, the Township issued its draft in the amount of $800,202 against the Dauphin Deposit letter of credit. Dauphin Deposit paid on the Township's draft. To date, Dauphin Deposit has not been reimbursed by Associates for its payment under the letter of credit.
Following SCC's default, Associates submitted a claim to USF & G for payment under the USF & G performance bonds. On September 14, 1989, Associates' bond claims against USF & G were settled, with USF & G agreeing to make a payment totalling $609,000. In exchange for this payment, Associates executed a release and assignment under which USF & G was freed from any and all claims arising from the Project. Of this settlement, $594,000 was paid into the district court to be held pending resolution of the various parties' claims to the fund.
Associates presently asserts a claim against the fund as obligee under the USF & G bonds. As a part of its settlement with USF & G, Associates assigned a portion of its rights in the bonds to Investors. Thus Investors now claims the proceeds of the fund based on Associates' partial assignment of the bond proceeds. Dauphin Deposit contends that it is equitably subrogated to Associates' interest in the fund by reason of its payment to the Township under the letter of credit, for which it has not been reimbursed. Furthermore, Dauphin Deposit claims that the partial assignment by Associates to Investors could not divest Dauphin Deposit of its rights to the fund because its right to be equitably subrogated attached at the time it honored the letter, which was prior to the time of Associates' partial assignment to Investors.
Dauphin Deposit obtained a judgment against Tudor under the collateral note which it obtained as security but has not executed that judgment. Dauphin Deposit has neither sought nor obtained a judgment against Associates.
The district court, on cross-motions for summary judgment by Investors and Dauphin Deposit, concluded that there were no disputed issues of material fact and granted summary judgment in favor of Investors. 1 The district court concluded that a bank which issues a standby letter of credit cannot accede to the rights of its customer on a theory of equitable subrogation and that even if such relief were available, the undisputed facts did not support granting Dauphin Deposit an equitable interest in the USF & G bond proceeds. This appeal followed.
Our review of the district court's determination of a question of law is plenary. Carter v. Rafferty, 826 F.2d 1299, 1304 (3d Cir.1987), cert. denied, 484 U.S. 1011, 108 S.Ct. 711, 98 L.Ed.2d 661 (1988). The clearly erroneous standard of review is applied to findings of fact. Id. When an action is decided on motion for summary judgment, this court must apply the same test that the district court was required to apply pursuant to Federal Rule of Civil Procedure 56(c): summary judgment is properly granted only if there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Id.
Before addressing the substantive legal questions raised by this appeal, we think it useful to provide a brief overview of letters of credit law and the relationships among the parties to letter of credit transactions. In short, a letter of credit is an engagement by an issuer, usually a bank, made at the request of a customer for a fee, to honor a beneficiary's drafts or other demands for payment upon satisfaction of the conditions set forth in the letter of credit. 13 Pa.Cons.Stat.Ann. § 5103(a) (1984).
There are two types of letters of credit: commercial and standby. A commercial letter of credit is used in a sales situation where the seller is unfamiliar with the creditworthiness of the buyer. American Ins. Ass'n v. Clarke, 865 F.2d 278, 282 (D.C.Cir.1988). To assure the seller that he will receive the benefits of his performance, the buyer obtains a letter of credit naming the seller as beneficiary. Wood v. R.R. Donnelley & Sons Co., 888 F.2d 313, 317 (3d Cir.1989). Under the terms of the letter, the issuer undertakes to purchase documents presented by the beneficiary (the seller) that conform to the terms set forth in the letter. Id.
Standby letters of credit differ from commercial letters in some respects. The beneficiary of a commercial letter of credit may draw upon the letter simply by presenting the requisite documents...
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