CRM Collateral II, Inc. v. Tricounty Metro. Transp. Dist. of Oregon, 10–36090.

• Decision Date: 20 January 2012
• Docket Number: No. 10–36090.,10–36090.
• Citation: 669 F.3d 963,2012 Daily Journal D.A.R. 834,12 Cal. Daily Op. Serv. 811
• Parties: CRM COLLATERAL II, INC., a Colorado corporation, Plaintiff–Intervenor–Appellee,andRichard Altorfer; Mark Guetzko; Lisa Guetzko; Seedorff Masonry, Inc.; Dale Kartman; Susan Kartman; Seedorff Partnership, L.P., Plaintiffs, v. TRICOUNTY METROPOLITAN TRANSPORTATION DISTRICT OF OREGON, an Oregon municipal corporation, Defendant–Intervenor–Appellant,andKeyBank National Association, Defendant.
• Court: U.S. Court of Appeals — Ninth Circuit

12 Cal. Daily Op. Serv. 811

2012 Daily Journal D.A.R. 834

669 F.3d 963

CRM COLLATERAL II, INC., a Colorado corporation, Plaintiff–Intervenor–Appellee,andRichard Altorfer; Mark Guetzko; Lisa Guetzko; Seedorff Masonry, Inc.; Dale Kartman; Susan Kartman; Seedorff Partnership, L.P., Plaintiffs,

v.TRICOUNTY METROPOLITAN TRANSPORTATION DISTRICT OF OREGON, an Oregon municipal corporation, Defendant–Intervenor–Appellant,andKeyBank National Association, Defendant.

No. 10–36090.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Dec. 5, 2011.Filed Jan. 20, 2012.

Joel A. Mullin, Esq., Stoel Rives LLP (argued); Timothy Snider, Esq., Leonard J. Feldman, Esq., Stoel Rives LLP, for defendant-intervenor-appellant Tri–County Metropolitan Transportation District of Oregon.

Timothy S. DeJong, Esq., Stoll Stoll Berne Lokting & Shlachter P.C. (argued); Keith A. Ketterling, Esq., Jacob S. Gill, Esq., Stoll Stoll Berne Lokting & Shlachter P.C., for plaintiff-intervenor-appellee CRM Collateral II, Inc.

Appeal from the United States District Court for the District of Oregon, Paul J. Papak, Magistrate Judge, Presiding. D.C. Nos. 3:08–cv–01266–PK, 3:09–cv–01135–PK.Before: A. WALLACE TASHIMA, M. MARGARET McKEOWN, and RICHARD C. TALLMAN, Circuit Judges.

OPINION

TALLMAN, Circuit Judge:

Appellant Tri–County Metropolitan Transportation District of Oregon (“TriMet”) provides bus, light rail, and commuter rail service in the Portland metropolitan area. TriMet contracted with Colorado Railcar Manufacturing, LLC (“Colorado Railcar”) for the manufacture of light railcars. The contract (“Railcar Contract”) required Colorado Railcar to secure a $3 million standby letter of credit, which Colorado Railcar arranged through CRM Collateral II, Inc. (“Collateral II”), a bankruptcy remote entity.¹ TriMet certified Collateral II's default and drew on the Letter of Credit when Colorado Railcar defaulted. We consider whether Collateral II was a surety to Colorado Railcar, entitled to the defense of discharge. We hold that it was not.

Because the standby letter of credit issued by KeyBank National Association (“KeyBank”) required TriMet to certify Collateral II's default, TriMet sought clarification that should Colorado Railcar default, TriMet's authority to certify Collateral II's default would be triggered. In response to TriMet's concern, Collateral II agreed to become a part of the Railcar Contract via Modification No. 1, but it undertook no new obligation nor did it subject itself to any additional liability beyond what it previously undertook by securing the Letter of Credit at Colorado Railcar's direction. Thus, no suretyship was created. Because Collateral II is not entitled to the protections of a surety, it was error for the district court to grant summary judgment in its favor. We reverse and remand.

I

In November 2005, TriMet entered into the Railcar Contract with Colorado Railcar to build and deliver three light railcars and one trailer for TriMet's use in connection with its new Westside Express Service between Beaverton and Wilsonville, Oregon. The final price for the railcars and trailer was $17,299,135. The Contract required Colorado Railcar to maintain an irrevocable standby letter of credit in the amount of $3 million from the time Colorado Railcar issued notification that manufacture would begin to the final delivery of the railcars and trailer to TriMet. The parties had considered other methods of securing the contract, such as a performance bond. But, due to Colorado Railcar's credit history and financial health, TriMet agreed that a letter of credit would be an attainable and less expensive form of security.

Collateral II was formed, in part, for the purpose of fulfilling Colorado Railcar's letter of credit obligation under the contract. Thomas Rader, CEO of Colorado Railcar, was named one of Collateral II's corporate directors along with Scott State, who was also Collateral II's sole corporate officer, serving as both President and Treasurer. John Thompson, Colorado Railcar's CFO, was Collateral II's registered agent at the time of incorporation.

Colorado Railcar, Collateral II, and certain investors entered into an Investment Agreement whereby Colorado Railcar provided quarterly interest payments to the investors for pledging collateral as security for the purchase of a letter of credit in satisfaction of Colorado Railcar's obligation to provide the standby letter of credit. As a result, Collateral II purchased Irrevocable Standby Letter of Credit No. 312084 (“Letter of Credit”) from KeyBank for the benefit of TriMet. The Letter of Credit provided that $3 million was available to TriMet upon its presentation of a sight draft accompanied by a signed and dated document “stating the amount requested and containing a statement that reads as follows: ‘The undersigned Officer or Director of TriMet hereby certifies that the Applicant is in default under Contract....’ ” The Letter of Credit was initially set to expire on November 15, 2007.

TriMet first learned that Collateral II, and not Colorado Railcar, was the applicant on the Letter of Credit several months after arrangements were finalized with KeyBank. TriMet initially requested that Collateral II and Colorado Railcar obtain a new corrected Letter of Credit, but they refused to do so. As an alternative solution, TriMet, Colorado Railcar, and Collateral II agreed to a written modification of the Railcar Contract (“Modification No. 1”), under which Collateral II became a party to the Railcar Contract for the sole purpose of equating a default by Colorado Railcar under the Railcar Contract to a default by Collateral II for purposes of drawing on the Letter of Credit. The modification was clear that Collateral II had no rights under the Railcar Contract, nor did it undertake any new obligations.

In January 2008, TriMet and Colorado Railcar entered into a separate Project Monitoring Agreement (“PMA”), which modified their rights and obligations under the Railcar Contract in an effort to address Colorado Railcar's continuing financial problems. TriMet feared that Colorado Railcar's financial woes would jeopardize its ability to complete the light railcars. After evaluating the feasibility of engaging substitute contractors, TriMet determined that it would be less costly and would reduce delay to financially support Colorado Railcar to the extent needed to ensure completion of the railcars. Thus, under the PMA, TriMet was to make “special contract payments” to or on behalf of Colorado Railcar, including payments not previously provided for under the Railcar Contract. Under the PMA, TriMet was authorized to draw on the Letter of Credit to fund these payments or to compensate itself for any special payments that Colorado Railcar failed to repay. Additionally, the PMA appointed a financial monitor to oversee Colorado Railcar's operations and TriMet was given authority to approve or disapprove Colorado Railcar's budgets and expenditures. Lastly, Colorado Railcar acknowledged in the PMA that it had defaulted under the Railcar Contract and expressly agreed that it would further be in default if it was unable to repay the special contract payments.

Colorado Railcar and TriMet did not inform Collateral II of these negotiations nor obtain its consent to the PMA. The PMA was amended in February 2008, primarily to add Alaska Railroad Corporation as an additional party. ² Collateral II was not a party to this amendment, nor was the amended PMA disclosed directly to Collateral II.

Without knowledge of the PMA or amended PMA, Mr. State—on behalf of Collateral II—agreed to an extension of the Letter of Credit to November 15, 2008. State reviewed the amended PMA in June 2008. He did not contact TriMet to discuss the PMA or Collateral II's obligations at that time, but later contacted KeyBank to urge it not to honor any draw as he believed any certification by TriMet to draw on the Letter of Credit would be fraudulent.

Between the date of the amended PMA and the completed manufacture of the railcars and trailer in October 2008, TriMet advanced more than $5.5 million in special contract payments to Colorado Railcar. On October 22, 2008, TriMet attempted to draw on the Letter of Credit to reimburse itself for $3 million of those special contract payments. In response, Collateral II filed an action against TriMet and KeyBank in the District of Oregon (the “lead action”). Collateral II alleged TriMet had fraudulently secured Collateral II's consent to the extension of the Letter of Credit, sought to enjoin KeyBank from honoring the draw, asked for a declaration that the Letter of Credit was unenforceable, and requested rescission of the amendments to the Letter of Credit. Subsequently, Collateral II voluntarily dismissed KeyBank from the action. TriMet filed a counterclaim in the lead action, requesting a declaration that the Letter of Credit was valid and enforceable, that TriMet's draw request was enforceable, that Collateral II was in default on the underlying contract, and that TriMet was entitled to draw $3 million on the Letter of Credit.

Contemporaneously, a group of Collateral II investors filed a motion to enjoin KeyBank from honoring the letter of credit in the state court for Clayton County, Iowa (the “member action”).³ KeyBank did not oppose the motion and a temporary injunction was granted on November 7, 2008, enjoining KeyBank from honoring any draw request by TriMet. KeyBank removed the member action to the United States District Court for the Northern District of Iowa on the basis of diversity. TriMet intervened and filed a motion to dissolve the injunction. Collateral II also intervened. The member action was transferred to the District of Oregon and consolidated with the lead action presided over by United States Magistrate Judge Paul Papak.

That court granted TriMet's renewed motion to dissolve the temporary injunction enjoining KeyBank from honoring...