Cromwell v. Commerce & Energy Bank of Lafayette
| Decision Date | 25 February 1985 |
| Docket Number | No. 84-C-1104,84-C-1104 |
| Citation | 464 So.2d 721,40 UCC Rep. Serv. 1814 |
| Court | Louisiana Supreme Court |
| Parties | 40 UCC Rep.Serv. 1814 Terry A. CROMWELL, M.D. v. COMMERCE & ENERGY BANK OF LAFAYETTE and Fidelity National Bank of Baton Rouge. Floyd J. BREAUX and Daniel G. Dupree v. FIRST NATIONAL BANK OF LAFAYETTE. Bennett Boyd ANDERSON, Jr. et al. v. AMERICAN BANK & TRUST COMPANY OF LAFAYETTE et al. Carl BAUER, et al. v. FIRST NATIONAL BANK OF LAFAYETTE et al. William D. LONG v. SECURITY FIRST NATIONAL BANK. |
Steven G. Durio, Mark C. Andrus, Durio, McGoffin & Andrus, Dennis L. Doise, Gary J. Russo, Onebane, Donohoe, Bernard, Torian, Diaz, McNamara & Abell, William E. Logan, Jr., P. Robert Viguerie, Jr., Logan & Viguerie, Lafayette, Henry H. Lemoine, Pineville, Henry C. Perret, Jr., Lafayette, for applicant-plaintiff.
Charles Kohlmeyer, Jr., William R. Forrester, Jr., Peter L. Koerber, Lemle, Kelleher, Kohlmeyer & Matthews, New Orleans; Michael H. Rubin, Steen, Rubin, Curry, Colvin & Joseph; John Dale Powers, Downing, Cazedessus & Powers, William C. Shockey, Gregory D. Frost, McCollister, McCleary, Fazio & Holliday; Susan H. Rouprich, Baton Rouge, Cliff Laborde, Laborde & LaFargue, H. Purvis Carmouche, Jr., Mouton, Roy, Carmouche, Bivins, Judice & Henke; Oscar Reed, Broadhurst, Brook, Mangham, Hardy & Reed, Ernest L. Parker, Bean & Parker, Lafayette, Robert Jackson, Baton Rouge, Aaron Frank McGee, Guillory, McGee, Mayeux & Fontenot, Eunice; Darrel D. Ryland, Marksville, Lee C. Kantrow, Kantrow, Spaht, Weaver & Blitzer, Baton Rouge; John W. Munsterman, Gist, Methvin, Hughes & Munsterman, Alexandria, Winston Ardoin, Ardoin & Daigle, Eunice; Gene Broussard, New Iberia for respondents.
The plaintiffs in these consolidated cases seek reversal of the court of appeal decisions in which the court found that plaintiffs were not entitled to enjoin the defendant banks from paying on standby letters of credit issued by the banks. 450 So.2d 1. 450 So.2d 13. 450 So.2d 14. 450 So.2d 15. 450 So.2d 16. We affirm the court of appeal decision insofar as it denies injunctive relief.
The plaintiffs in these five consolidated actions consist of the twenty-eight investors 1 who purchased limited partnership interests in Combined Investments, Limited (C.I., Ltd.), a Louisiana limited partnership. C.I., Ltd. was formed by Combined Equities, Incorporated (C.E., Inc.), a company engaged in the syndication and management of investment partnerships. C.E., Inc. was the general partner of C.I., Ltd.
As security for their capital contribution in C.I., Ltd., the limited partners were required to execute letters of credit in favor of C.I., Ltd. The letters of credit were issued by fourteen Louisiana banks. 2 The issuing banks were sued by the plaintiffs in order to prevent the beneficiary from drawing on the letters of credit. The primary basis of plaintiffs' claim was alleged fraudulent activities on the part of C.E., Inc. and C.I., Ltd.
The final beneficiary of the letters of credit was European American Bank (EAB). EAB became the beneficiary under the letters of credit as security for a ten million dollar line of credit established in favor of C.I., Ltd. EAB intervened in these cases in order to assert its right to draw on the letters of credit.
In addition to EAB, several other parties intervened in these cases to assert their interests. C.E., Inc., and C.I., Ltd. intervened in order to refute the plaintiffs' claim that they defrauded the plaintiff-investors. American Bank & Trust Company of Baton Rouge and American Bank & Trust Company of Lafayette intervened to oppose the plaintiffs' claim. 3
The formation of C.I., Ltd. began on June 1, 1981, when C.E., Inc. commenced offering partnership units in C.I., Ltd. C.E., Inc. had been in the business of syndicating partnerships since its formation in 1976. C.E., Inc. and its affiliated companies derived their income from fees charged for a variety of managerial and financial services provided to limited partnerships.
Prior to the creation of C.I., Ltd., the C.E., Inc. staff prepared a Private Placement Memorandum (PPM), a two hundred twenty page document which detailed the proposed structure of C.I., Ltd. and listed the terms of the partnership offering. All of the limited partners received a copy of the PPM prior to their investment in C.I., Ltd. The PPM included financial information and historical data concerning the general partner (C.E., Inc.) as well as a series of closing documents which were to be completed by each investor.
The closing documents were comprised of a series of forms to be completed by the investors. One of the purposes of the closing documents of the PPM was to require each investor to appoint an experienced investment advisor ("offeree representative") to review the PPM and advise him concerning the risks of the offering. The investors were each required to provide detailed information regarding their personal finances. Each investor was required to warrant that he was financially able to bear the risks of an investment in C.I., Ltd.
According to the PPM, the partnership's primary objectives were to acquire, transfer and invest in real estate in order to generate cash flow and to obtain long term capital gains. It was also the intention of C.I., Ltd. to secure significant tax advantages for the limited partners. These tax savings were to be obtained by passing through many of C.I., Ltd.'s losses onto the limited partners.
The PPM also indicated that C.I., Ltd. was a "blind pool" offering, since at the time of the offering the partnership did not own any property nor did it intend to acquire any specific property. The risks of such an offering were described in the PPM:
"RISK OF UNSPECIFIED INVESTMENTS
The proceeds of this Offering are intended to be invested in Properties which have not yet been selected. There can be no assurance as to if or when the proceeds from the Offering will be fully invested. Pending investment of Limited Partners' capital contributions, the General Partner is not required to invest Partnership funds in any particular manner and during such period investors will not have the opportunity to earn any return on such contributions. Persons who purchase Units will not have an opportunity to evaluate for themselves the specific Properties in which funds of the Partnership will be invested or the terms of any such investments and, accordingly, the Limited Partners must depend solely upon the General Partner with respect to the selection of investments...." PPM, p. 27.
Originally the syndication of C.I., Ltd. was intended solely to be accomplished through the sale of up to one hundred limited partnership interests. The purchase price of each unit was $250,000. In order to pay this sum, each limited partner was required to contribute $20,000 in cash, a two year, non-interest bearing demand note for $30,000, and a demand note for $200,000. Each investor was also required to obtain a $200,000 standby letter of credit, securing the $200,000 note.
The highly leveraged terms of the capital contribution allowed the limited partners to obtain significant tax advantages. The federal tax laws allow limited partnerships to pass through losses to their limited partners, based on the amount of the partner's money "at risk." Under the C.I., Ltd. proposal, each partner had $250,000 at risk in spite of the fact that his initial cash investment was only $20,000. During 1981 the partnership passed along a $76,000 tax loss to each investment unit.
Thirty-nine units in C.I., Ltd. were sold and the partnership officially came into existence on September 23, 1981. By the end of November, 1981 all plaintiffs except one had purchased interests; the last purchase was April 13, 1982.
In accordance with the terms of the capital contribution, each plaintiff secured a $200,000 letter of credit from his bank. The letters of credit were all issued in accordance with a form included in the closing package of the PPM. That form provided:
"(LETTERHEAD OF BANK)
ADDRESS
(Date)
Irrevocable Letter of Credit
Combined Investments, Ltd., a
Louisiana Limited Partnership
5551 Corporate Boulevard
Suite 3-A
Baton Rouge, Louisiana
Dear Sirs:
We hereby open our Irrevocable Letter of Credit in your favor for the account of (Name of Investor) (Address of Investor), for a sum or sums not exceeding in the aggregate the sum of Two Hundred Thousand and No/100 ($200,000.00) Dollars, available by your drafts drawn on (Bank) , (Address of Bank), at sight to be accompanied by:
which this Letter of Credit may secure.
Drafts must be drawn and negotiated on or before July 1, 1982, on which date this Letter of Credit expires. This Letter may be drafted against in full without being accompanied by the Affidavit referred to above from June 1, 1982 until July 1, 1982 if this Letter of Credit is not renewed by June 1, 1982 for a period of one year expiring July 1, 1983 in the face amount of $200,000 and in a form acceptable to the Beneficiary, its transferees or assigns.
The right to draw under this Letter of Credit is, by the holder hereof, absolutely irrevocable and unconditional (except as set forth herein) and is transferable and/or assignable in whole or in part.
Each draft must be marked 'Drawn under (Bank) , (Address of Bank), Letter of Credit Number ______, Dated ________, 19____', and the amount of each draft so drawn endorsed by the negotiating bank. The final draft drawn under this Letter of Credit must be accompanied by this Letter of Credit. This credit is subject to the Uniform Customs and Practice for Documentary Credits, 1974 Revision, fixed by the International Chamber of...
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