Amwest Sur. Ins. Co. v. Republic Nat. Bank

• Decision Date: 01 October 1992
• Docket Number: No. 91-2713,91-2713
• Citation: 977 F.2d 122
• Parties: 18 UCC Rep.Serv.2d 843 AMWEST SURETY INSURANCE COMPANY, Plaintiff-Appellant, v. REPUBLIC NATIONAL BANK, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 122

977 F.2d 122

18 UCC Rep.Serv.2d 843

AMWEST SURETY INSURANCE COMPANY, Plaintiff-Appellant, v. REPUBLIC NATIONAL BANK, Defendant-Appellee.

No. 91-2713.

United States Court of Appeals, Fourth Circuit.

Argued June 1, 1992.

Decided Oct. 1, 1992.

Jeff B. Slagle, Thompson & Slagle, Norcross, Ga., argued, for plaintiff-appellant.

Harry Augustus Swagart, III, Law Offices--Harry A. Swagart, III, P.A., Columbia, S.C., argued, for defendant-appellee.

Before WIDENER and NIEMEYER, Circuit Judges, and LEGG, United States District Judge for the District of Maryland, sitting by designation.

OPINION

NIEMEYER, Circuit Judge:

In this diversity case Amwest Surety Insurance Company seeks to recover from Republic National Bank, of Columbia, South Carolina, funds that Amwest erroneously overdrew under a letter of credit and then returned with directions to "put [them] back into the ... Letter of Credit." Amwest claims that when Republic National accepted the returned funds but refused to honor a subsequent draft on them, it breached its obligations under the letter, committed fraud, or was unjustly enriched. As a defense Republic National asserts that Amwest had breached its statutory presentment warranty. See S.C.Code Ann. § 36-5-111(1).

On cross-motions for summary judgment, the district court ruled that Republic National had discharged its obligations under the letter of credit when it honored the first draft in the full amount of the credit, and that the bank did not need to refund the $122,000 which Amwest had returned to the bank attempting partial reestablishment of the letter of credit.

While we agree with the district court's conclusion that the bank properly discharged its obligations under the letter of credit and did not defraud Amwest, we reverse its order denying Amwest's claim for the $122,000 and direct summary judgment for Amwest on its claim of unjust enrichment.

I

To withstand a motion for summary judgment supported by affidavits, the nonmoving party may not rest upon mere allegations or denials but must, by its "own affidavits, or by the 'depositions, answers to interrogatories, and admissions on file,' designate 'specific facts showing that there is a genuine issue for trial.' " Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986) (quoting Fed.R.Civ.P. 56(c) & (e)). The following facts are either expressly conceded by both parties or supported by affidavits or depositions submitted by one party without similarly supported rebuttal by the other party.

In the Spring of 1988, B & F Contractors, Inc., of Hilton Head, South Carolina, submitted the winning bid to perform excavation and land grading work on a highway which The Hardaway Company, of Savannah, Georgia, was constructing for the Georgia Department of Transportation. As a part of the agreement between B & F Contractors and The Hardaway Company, B & F Contractors agreed to obtain a payment and performance bond for the benefit of The Hardaway Company. Amwest was willing to provide the requested bond, but required, along with other conditions, that B & F Contractors obtain a letter of credit for the benefit of Amwest.

With the assistance of First Sun South Corporation, whose relationship to B & F Contractors is unclear from the record, B & F Contractors had Republic National issue an irrevocable letter of credit in the amount of $160,000, naming Amwest as the beneficiary. Dated July 21, 1988, the letter of credit provided,

We hereby authorize you [Amwest] to draw on Republic National Bank of Columbia, South Carolina up to an aggregate amount of $160,000 U.S. Dollars available by your drafts at sight in the event you deem it necessary by reason of your having executed bond(s) on behalf of B & F Contra[c]tors, Inc.

* * * * * *

We engage with you that all drafts drawn under and in compliance with the terms of this credit will be duly honored if presented at this office on or before 2/15/89 or any automatically extended date, as hereinbefore set forth. We confirm credit and hereby undertake that all drafts drawn and presented will be duly honored by us.

To fund the letter of credit, B & F Contractors executed a demand note for $160,000 payable to Republic National, guaranteed by First Sun South, and secured by an assignment of the proceeds of B & F Contractors' contract with The Hardaway Company. Following receipt of the letter of credit, Amwest issued the payment and performance bond to The Hardaway Company.

In March 1989, The Hardaway Company informed Amwest that B & F Contractors was behind in paying its suppliers, a situation that was threatening its ability to continue performance of its bonded contract. After an investigation disclosed that B & F Contractors owed approximately $100,000 to its suppliers, Amwest determined that it would need to pay $38,000 immediately to certain suppliers to assure continued performance of the contract. It paid the $38,000 and looked to the letter of credit for reimbursement.

Mistakenly believing that the letter of credit authorized only drafts for its full amount, Amwest submitted the required documentation, including the original letter of credit, to Republic National on May 8, 1989, for the full $160,000. On the same day, the bank honored the draft, sending Amwest a check for the full amount. The next day, however, First Sun South, a guarantor of B & F Contractors' note, complained to Amwest that it had expected the draw to be only $38,000. Amwest called Republic National in an effort to reduce the amount of its draw, but the call was not returned. Amwest then sent Republic National a letter dated May 31, 1989, accompanied by a check in the amount of $122,000, explaining that the check was "to be put back into the ... Letter of Credit," because the claims against the bond had "so far not exceeded the amount of $38,000."

First Sun South, meanwhile, told Republic National that Amwest was returning the $122,000 to reduce the amount due on B & F Contractors' note to the bank. When the check arrived, the bank cashed it and, without Amwest's knowledge, applied the funds to the outstanding balance on the note. Several months later, on August 2, 1989, when B & F Contractors' defaults had continued, Amwest submitted documentation for a second draw under the letter of credit for $122,000, but Republic National refused to honor it, asserting that the letter of credit had been extinguished when the bank honored the first draft in May for the full value of the credit.

Amwest sued Republic National, claiming breach of express and implied contracts, fraud, unjust enrichment, and bad-faith litigiousness. The district court dismissed the counts of fraud and bad-faith litigiousness for failure to state a claim, and, ruling on cross-motions for summary judgment on the remaining counts, it rejected Amwest's other claims, directing judgment for Republic National. Amwest appealed, but abandoned its claim for bad-faith litigiousness.

II

Amwest's contractual arguments are based upon the letter of credit established by B & F Contractors and issued by Republic National in Amwest's favor. It contends that Republic National breached its obligations under the letter of credit when it refused to honor Amwest's August draft. The bank contends that its obligations under the letter of credit had been fully discharged when Amwest drew down the full amount of the credit in May.

Letters of credit have long been used to facilitate the financing of commercial transactions between buyers and sellers by providing a certain and reliable means to ensure payment for goods delivered or services rendered. As elsewhere, in South Carolina, whose law governs this diversity case, a letter of credit is a tripartite arrangement under which one party establishes a credit, usually at a bank, on which it authorizes a third party to draw, provided certain conditions are met. The bank, as a mere stakeholder of the credit, issues a letter to the third party (known as the beneficiary) confirming the credit and stating the conditions for any draw to be made against it. In essence, the bank's promise to pay the beneficiary upon the beneficiary's timely presentation to the bank of documents conforming to the conditions delimited in the letter replaces the promise of the party which established the credit. See Airline Reporting Corp. v. First Nat'l Bank, 832 F.2d 823, 826 (4th Cir.1987).

The virtues of letters of credit are their simplicity, reliability, and predictability, all of which depend upon the limitation of the issuer's duties to the ministerial application of a letter's terms. See Philadelphia Gear Corp. v. Central Bank, 717 F.2d 230, 236 (5th Cir.1983); see also Courtaulds North America, Inc. v. North Carolina Nat'l Bank, 528 F.2d 802, 805 (4th Cir.1975) (issuer's "duties and liability are governed exclusively by the terms of the letter"). Thus under the Uniform Commercial Code, which South Carolina has adopted, in addition to the ordinary duties of a bank, an issuer is only obliged (1) to examine carefully documents presented by the beneficiary for compliance with the terms of the letter of credit and, absent a facial defect, (2) to honor the draft if the documents do comply--regardless of whether the underlying contract between beneficiary and customer has, in fact, been performed, and without assuming any liability if the documents wrongly assert that it has. S.C.Code Ann. §§ 36-5-109(2) & 36-5-114(1). Correspondingly, duly honoring a draft discharges the issuer's obligations "pro tanto," S.C.Code Ann. § 36-5-108(3)(a), and, unless otherwise agreed, entitles the issuer to "immediate reimbursement" by the customer of funds paid. S.C.Code Ann. § 36-5-114(3) & South Carolina Reporter's Comment.

A strict application of the South Carolina Code to the undisputed facts of this case reveals that Republic National met its obligations to Amwest under the letter of credit established by B & F Contractors for...