Alhadeff v. Meridian

• Decision Date: 25 November 2009
• Docket Number: No. 81833-9.,81833-9.
• Citation: 220 P.3d 1214,167 Wash.2d 601
• Parties: N. Jack ALHADEFF, Respondent, v. The MERIDIAN ON BAINBRIDGE ISLAND, LLC, a Washington limited liability company; James W. Andresen and Virginia R. Andresen, husband and wife and the marital community composed thereof; John M. Erickson and Jane Doe Erickson, husband and wife and the marital community composed thereof; T. Dennis Kirkpatrick and Suzanne C. Andresen, husband and wife and the marital community composed thereof; and Bruce A. McCurdy and Connie M. McCurdy, husband and wife and the marital community composed thereof, Defendants, and Kitsap Community Federal Credit Union dba Kitsap Credit Union, a federally chartered credit union, Petitioner.
• Court: Washington Supreme Court

220 P.3d 1214

167 Wash.2d 601

N. Jack ALHADEFF, Respondent, v. The MERIDIAN ON BAINBRIDGE ISLAND, LLC, a Washington limited liability company; James W. Andresen and Virginia R. Andresen, husband and wife and the marital community composed thereof; John M. Erickson and Jane Doe Erickson, husband and wife and the marital community composed thereof; T. Dennis Kirkpatrick and Suzanne C. Andresen, husband and wife and the marital community composed thereof; and Bruce A. McCurdy and Connie M. McCurdy, husband and wife and the marital community composed thereof, Defendants, and Kitsap Community Federal Credit Union dba Kitsap Credit Union, a federally chartered credit union, Petitioner.

No. 81833-9.

Supreme Court of Washington, En Banc.

Argued September 24, 2009.

Decided November 25, 2009.

Frank Raymond Siderius, Brian Conroy Read, Siderius, Lonergan & Martin, LLP, Seattle, WA, for Petitioner.

Michael Daniel Ross, Ross Law Advisors PLLC, Bellevue, WA, John Joseph Mitchell, Attorney at Law, Bainbridge Island, WA, for Respondent.

J.M. JOHNSON, J.

¶ 1 Kitsap Credit Union (KCU) granted The Meridian on Bainbridge Island, LLC (Meridian) a loan to construct condominiums on Bainbridge Island. In order to satisfy a condition of the loan, Meridian persuaded N. Jack Alhadeff to authorize the issuance of a letter of credit (LOC) to KCU for the benefit of Meridian. The LOC required KCU to certify prior to drawing that the construction loan had been exhausted and that there were no events of default on the loan. Alhadeff and KCU exchanged a pair of letters confirming these certification requirements a few days prior to the issuance of the LOC. KCU drew on the LOC in May, June, and July 2004, making improper certifications each time and exhausting the LOC with the final draw.

¶ 2 Events of default occurred in April and May 2004 (a tax deficiency and a contractor's lien, respectively). KCU finally declared the entire loan to be in default in November 2006. In August 2006, Alhadeff brought suit against KCU, asserting breach of contract, tort, and equitable claims based on KCU's improper certifications when drawing on the LOC and failure to inform him of changed loan conditions.

¶ 3 The trial court granted summary judgment for KCU on the grounds that Alhadeff's claims arose under Article 5 of the Uniform Commercial Code (U.C.C.) (ch. 62A.5 RCW) and were time-barred by that provision's one-year statute of limitations. RCW 62A.5-110(1)(b), -115. The Court of Appeals reversed and remanded, holding that Alhadeff sought to enforce rights and obligations that did not arise under Article 5 and were thus not time-barred. We reverse the Court of Appeals, affirm the result and the greater part of the reasoning of the trial court, and remand for entry of summary judgment for KCU.

FACTS AND PROCEDURAL HISTORY

¶ 4 The factual background of the dispute in this appeal is significantly more complex than a typical LOC transaction because the case involves four parties, whereas most LOC transactions involve only three. See, e.g., 3 JAMES J. WHITE & ROBERT S. SUMMERS, UNIFORM COMMERCIAL CODE § 26-2 (5th ed.2008); 7A LARY LAWRENCE, LAWRENCE'S ANDERSON ON THE UNIFORM COMMERCIAL CODE §§ 5-102:5, -103:5 (3d rev. ed.2008).

¶ 5 The parties are (1) Meridian, which received a construction loan from (2) KCU. The loan required Meridian to obtain additional independent financing by means of an irrevocable LOC. Meridian arranged such an LOC from (3) Alhadeff in satisfaction of this requirement; Alhadeff authorized his bank, (4) Wells Fargo Bank, N.A. (Wells Fargo) to issue that LOC to KCU for the benefit of Meridian. Thus, in total, four parties are involved in this unusual LOC transaction: Meridian, KCU, Alhadeff, and Wells Fargo. The aspects of the transaction that are relevant to the present dispute are as follows.

¶ 6 On March 10, 2003, KCU committed to lend Meridian $4,500,000 to build a condominium project located on Bainbridge Island known as The Meridian on Bainbridge Island (the Project). Clerk's Papers (CP) at 5, 17. The commitment contained the following three conditions: First, it required that Meridian secure the loan with a first position deed of trust against the Project. CP at 17. Second, it required that the parties subordinate to the KCU deed of trust another deed of trust against the Project.¹ CP at 17, 24. Lastly and most importantly, it required that Meridian contribute additional equity to the Project by means of an irrevocable LOC in the amount of $1,000,000. CP at 24. These conditions were satisfied, and the construction loan transaction between Meridian and KCU was consummated on June 27, 2003. Id.

¶ 7 In satisfaction of the third condition, Meridian entered into a "Letter of Credit Agreement" with Alhadeff, who authorized his bank, Wells Fargo, to issue an irrevocable LOC to KCU for the benefit of Meridian.² CP at 6. Per his authorization, Wells Fargo issued an LOC in the amount of $1,000,000 to KCU on July 2, 2003. CP at 6, 17, 41-42. The terms of the LOC required KCU to make several certifications, one of which was that all funds under the $4,500,000 construction loan had been advanced to Meridian by KCU prior to KCU drawing on the LOC. CP at 41. It also required KCU to certify that no event of default as defined in the underlying construction loan had occurred and that there was no known risk that such an event would occur with the passage of time.³ Id.

¶ 8 A few days before entering into the Letter of Credit Agreement, Alhadeff requested from KCU a letter setting forth the terms and conditions of the LOC. CP at 6, 18, 69. Alhadeff characterizes KCU's confirmation of the LOC terms and conditions as the "consideration" he was to receive from KCU in return for his agreement to fund the LOC.⁴ CP at 6. KCU disputes this characterization of the confirmation. CP at 18.

¶ 9 Pursuant to his request, Alhadeff submitted to KCU a "proposed side letter agreement" on June 27, 2003, five days before the LOC was issued.⁵ The letter contained, inter alia, the following two provisions 3. Kitsap Community Federal Credit Union shall not draw upon the Letter of Credit in the event the borrower is in default under the Construction Loan or an event exists that may, with the passage of time, constitute a default....

....

5. [T]en percent (10%) of the net proceeds from the sale of any portion of the Project shall be released to you in payment of the amount owed by the Borrower to you.

CP at 70.

¶ 10 Five days later, KCU sent Alhadeff a revised letter and excluded those two proposed paragraphs. CP at 74. KCU explained the exclusion in an accompanying e-mail, citing redundancy with the terms of the LOC as the reason for excluding paragraph three and suggesting a more efficient method for the allocation of net proceeds as referenced in paragraph five.⁶ Two of the three remaining paragraphs contain terms and conditions explicitly outlined in the LOC, neither of which the parties dispute. CP at 41, 74. The third paragraph relates to the manner in which KCU was to administer the disbursement to Meridian of the proceeds of its draws on the LOC and is not relevant to this appeal. CP at 74.

¶ 11 KCU drew on the LOC three times: on May 11, 2004, in the amount of $415,000; on June 11, 2004, in the amount of $474,850; and on July 8, 2004, in the amount of $110,150. CP at 36, 107-15. Together, these draws exhausted the entire $1,000,000 of the LOC. CP at 98. Each draft included the exact language of the certification required by the LOC. See supra note 3; CP at 36.

¶ 12 Despite KCU's assurances to the contrary in its certifications, events of default had occurred at the time that the drafts were submitted for honor. CP at 91, 95-97. The first of these events of default was a tax deficiency on the part of Meridian, which failed to pay its taxes on time for the first half of 2004.⁷ CP at 117. The second was the imposition of a lien on the Project in favor of Rain City Contractors, Inc.⁸ CP at 88. (Both obligations were later satisfied. CP at 91, 96-97.)

¶ 13 In addition to certifying that no events of default had occurred at the time of its draws on the LOC, KCU certified to Wells Fargo in conjunction with each draft that "no event exists that may, with the passage of time, constitute [an event of default]." CP at 41. However, KCU knew as early as April 2004 that Meridian had commenced work that was above budget. CP at 99. It further suspected at that time that Meridian would not be able to pay its construction costs going forward. CP at 100-01. This suspicion was confirmed when, after exhausting the construction loan and the LOC funds, Meridian applied to KCU in September 2004 for an additional loan of $1,350,000 to pay "unpaid invoices" and "additional costs" that Meridian had incurred in expanding the scope of the Project. CP at 118. In other words, prior to each of its draws, KCU had knowledge that events existed that may, with the passage of time, have constituted events of default. Id. KCU did not inform Alhadeff of these events, that is, of the additional loan application, the changes in the scope of the Project, or its uncertainty about Meridian's ability to pay construction costs. CP at 64.

¶ 14 KCU ultimately declared Meridian to be in default on the construction loan on November 29, 2006. CP at 77.

¶ 15 Alhadeff brought suit against KCU on August 30, 2006, alleging eight causes of action: (i) breach of contract for failure to make valid certifications upon drawing on the LOC, (ii) breach of contract for failure to pay Alhadeff 10 percent of the net proceeds from sales of the Project, (iii) negligent certification of the three draws, (iv) negligent misrepresentation in the confirmation letter, (v) negligence for failure to advise Alhadeff of changes in the financial circumstances and scope of the Project, (vi) conversion, (vii) promissory estoppel based on promises made by KCU in the confirmation letter, and (viii) money had and...