Colonial Courts Apartment Co. v. Proc Associates, Inc.

• Decision Date: 03 May 1995
• Docket Number: No. 94-2106,94-2106
• Citation: 57 F.3d 119
• Parties: , 26 UCC Rep.Serv.2d 1207 ., Plaintiffs, Appellants, v. PROC ASSOCIATES, INC., et al., Defendants, Appellees. United States Court of Appeals, First Circuit. Heard
• Court: U.S. Court of Appeals — First Circuit

Page 119

57 F.3d 119

64 USLW 2002, 26 UCC Rep.Serv.2d 1207

COLONIAL COURTS APARTMENT COMPANY, et al., Plaintiffs, Appellants, v. PROC ASSOCIATES, INC., et al., Defendants, Appellees.

No. 94-2106.

United States Court of Appeals First Circuit.

Heard May 3, 1995.

Decided June 21, 1995.

Joseph V. Cavanagh, Jr., with whom Michael DiBiase and Blish & Cavanagh, Providence, were on brief, for appellants.

Richard W. MacAdams with whom MacAdams & Wieck Incorporated, Providence, was on brief, for appellees.

Before BOUDIN, Circuit Judge, COFFIN, Senior Circuit Judge, and STAHL, Circuit Judge.

STAHL, Circuit Judge.

This case requires us to determine whether letter-of-credit beneficiaries may recover the value of the letters from the issuer's customer or the customer's guarantors after the issuer dishonored the letters and became insolvent. Interpreting applicable law and the various agreements between the parties, we conclude that the beneficiaries may not so recover. Thus, we affirm the district court's grant of summary judgment for defendants-appellees.

I. FACTUAL AND PROCEDURAL BACKGROUND

Resolving the issues in this case requires a detailed recital of its somewhat complex factual background. The magistrate's report is exceptionally helpful in delineating the facts and we draw from it liberally.

Plaintiffs-appellants are four individuals and two Ohio general partnerships (collectively, "appellants") who owned, or whose assignors owned, three apartment complexes in East Cleveland, Ohio. Appellants sold the apartments to defendant-appellee Proc Associates, Inc. ("Proc Associates"), ¹ which in turn assigned its interest as purchaser to Euclid Properties ("Euclid"), an Ohio limited partnership. ²

Euclid paid $2.2 million in cash for the properties. To cover the remainder of the purchase price, Euclid executed four promissory notes ("promissory notes") totalling $1.3 million. As sole security for the promissory notes, the Marquette Credit Union ("Marquette") issued to appellants four irrevocable standby letters of credit ("letters of credit") corresponding to each of the promissory notes. By their terms, the letters of credit expired on May 31, 1991.

Before issuing the letters of credit, Marquette entered into a reimbursement arrangement with Proc Associates and the Procacciantis memorialized in a commitment letter ("commitment letter") dated March 16, 1990, a letter agreement ("letter agreement") dated May 31, 1990, and a guaranty agreement ("guaranty") also dated May 31, 1990, (collectively, "reimbursement agreements"). In essence, the reimbursement agreements provided that Proc Associates would repay Marquette for amounts drawn on the letters of credit. Further, the Procacciantis agreed to guaranty Proc Associates' obligation to Marquette. As additional security for the obligations assumed by the credit union as a result of its issuance of the letters of credit, Marquette also obtained a second mortgage on real property owned by Euclid.

On January 1, 1991, the Rhode Island governor closed Marquette because the deposit insurer for Marquette had failed and Marquette did not have federal insurance. On May 17, 1991, Maurice C. Paradis was appointed as permanent receiver ("receiver") for Marquette.

On April 30, 1991, Euclid failed in its obligation to renew or replace the letters of credit. ³ On May 21 and 29, 1991, appellants presented the letters of credit with all required documents to the receiver for payment. Appellants did not consent to an extension of time to honor the letters. Dishonor occurred.

During the remainder of 1991, appellants pursued their claims against Marquette in three separate actions. First, in an Ohio On July 2, 1992, appellants and the receiver entered into a written settlement agreement ("settlement"), the terms of which provided that appellants would dismiss the three pending proceedings in Ohio and Rhode Island in exchange for $500,000 and the assignment ("assignment") by the receiver of his interest in the letter agreement, the commitment letter, the guaranty, and the mortgage, including any claims of the receiver against the defendants under those instruments. By its terms, payment under the settlement "shall not be deemed to or constitute a payment under or by virtue of the [l]etters of [c]redit." On July 31, 1991, Marquette became insolvent.

state court, appellants sought assignment of the collateral held by Marquette and the receiver under the letters of credit, damages against Marquette and the receiver for wrongful dishonor, and injunctive relief. Second, in the U.S. District Court for Rhode Island, appellants sought to enjoin the distribution of assets by Marquette and the receiver pursuant to the priority scheme set forth in the Depositors Economic Protection Act of 1991 ("DEPCO"), the Rhode Island legislation enacted in the aftermath of that state's credit union insurance crisis. Third, in the receivership proceedings pending in Rhode Island state court, appellants filed proofs of claim for the amount owed under the letters of credit and for a preference as to the collateral held by Marquette or the receiver.

Appellants then brought the present action against Proc Associates and the Procacciantis for the value of the letters of credit. Appellants set forth, in separate counts, three theories of recovery. First, appellants argued that, as Marquette's assignees, they could recover from defendants pursuant to the reimbursement agreements. Second, appellants contended that, under R.I.Gen.Laws Sec. 6A-5-117, ⁴ which codifies Section 5-117 of the Uniform Commercial Code, they were entitled to realize on the collateral held by Marquette and the receiver. Third, appellants argued that they were entitled to recover under general equitable principles. Defendants moved for summary judgment. Considering only recovery under the first theory, dealing with the reimbursement agreements, the magistrate judge determined that appellants could not recover from defendant Proc Associates, but that they could from the Procacciantis. Deeming the remaining two theories subsumed by his analysis, the magistrate did not reach those arguments. Following objection from defendants, the district court remanded the report and recommendation to the magistrate. The magistrate stood by his original recommendation. Upon review, the district court found no liability attached to the Procacciantis under the terms of the guaranty and rejected that portion of the magistrate's report as to their liability. Judgment entered for defendants on all counts. This appeal followed.

II. DISCUSSION

After reciting the standard of review, we take up each of appellants' three theories of recovery.

A. Standard of Review

Summary judgment is appropriate when the record reflects "no genuine issue as to any material fact and ... the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). We review a grant of summary judgment de novo. See, e.g., Inn Foods, Inc. v. Equitable Coop. Bank, 45 F.3d 594, 596 (1st Cir.1995). We review the record in the light most favorable to the nonmoving party, and we indulge all reasonable inferences in that party's favor. Id.

B. The Reimbursement Agreements

On appeal, appellants argue that the terms of the reimbursement agreements render the Procacciantis liable to Marquette. Specifically, appellants contend that, under the language of the guaranty, liability attached to the Procacciantis on June 3, 1991, when Marquette was required to make full payment To put this case in proper perspective, we start with general principles. Letter-of-credit transactions are three-party arrangements involving two parties to a commercial transaction and a financial institution. The financial institution, which is the issuer (here, Marquette), at the direction of its customer, usually the buyer (here, defendant Euclid), issues a letter of credit to a beneficiary or beneficiaries, usually the seller (here, appellants). The principal purpose of a standby letter of credit is a means for the beneficiary-seller to ensure that if there is a default on the underlying contract between it and the customer-buyer, then the beneficiary-seller will have a ready source of funds to satisfy the debt owed. See, e.g., Ground Air Transfer, Inc. v. Westates Airlines, Inc., 899 F.2d 1269, 1272 (1st Cir.1990). Thus, the standby letter of credit acts as a "back up" against customer default on obligations of all kinds. James J. White & Robert S. Summers, Uniform Commercial Code Sec. 19-2, at 809 (3d ed. 1988) (hereinafter, "White & Summers"). Additionally, the beneficiary may request a letter of credit to ensure that should any contractual dispute arise, it will " 'wend [its] way toward resolution with the money in [the beneficiary's] pocket, rather than in the pocket' of his adversary." Ground Air, 899 F.2d at 1272 (quoting Itek Corp. v. First Nat'l Bank of Boston, 730 F.2d 19, 24 (1st Cir.1984)).

under the letters of credit. Thus, appellants argue that, under the terms of the assignment, they are entitled to recover the $1.3 million represented by the letters of credit. Because appellants' theory misconstrues the nature of a letter-of-credit transaction and is inconsistent with the operative language of the parties' agreements, we do not agree.

To effect these commercial purposes, courts have considered the letter of credit to be a separate agreement between the issuer and the beneficiary, wholly distinct from the underlying contract between the customer and the beneficiary. Id.; see also U.C.C. Sec. 5-114, comment 1 ("The letter of credit is essentially a contract between the issuer and the beneficiary and is recognized by this Article as independent of the underlying contract between the customer and the beneficiary."); White & Summers, Sec. 19-2, at 812 ("The most unique and mysterious part of this [letter-of-credit] arrangement is the so-called 'independence principle.' The principle states that the...