Dovenmuehle, Inc. v. East Bank of Colorado Springs, N.A., 76--406
| Decision Date | 06 January 1977 |
| Docket Number | No. 76--406,76--406 |
| Citation | 38 Colo.App. 507,563 P.2d 24 |
| Parties | , 21 UCC Rep.Serv. 1149 DOVENMUEHLE, INC., a corporation, Plaintiff-Appellee, v. The EAST BANK OF COLORADO SPRINGS, N.A., Defendant-Appellant. . I |
| Court | Colorado Court of Appeals |
Asher, Kraemer, Kendall & Felt, Phillip A. Kendall, Sandy F. Kraemer, Colorado Springs, for plaintiff-appellee.
C. Lee Goodbar, Jr., Henry B. Eastland, Colorado Springs, for defendant-appellant. COYTE, Judge.
The defendant East Bank appeals a judgment directed against it on the question of its liability under a letter of credit. We affirm.
Plaintiff Dovenmuehle, Inc., entered into a loan agreement with Ronald Silverman and Ronald Mesec in connection with a construction project. By the terms of the agreement, Dovenmuehle was to provide a construction loan of $2,000,000. to Mesec and Silverman, who were in turn to procure an irrevocable letter of credit in the amount of $130,000 in favor of Dovenmuehle. The letter of credit was a condition precedent to the disbursement of any loan proceeds and was designed to 'provide for the total anticipated cash needs' for the project.
In March 1974, East Bank issued an irrevocable letter of credit naming Dovenmuehle as beneficiary and providing that the letter was for a 'loan imbalance' as described in Dovenmuehle's loan commitment. Drafts on the credit were to be accompanied by signed certifications that the amount drawn was required to cover the loan imbalance.
The project was subsequently commenced, Dovenmuehle supplying funds as the construction progressed to Pinion Springs Condominiums, Inc., a corporation wholly owned by Mesec and Silverman. Prior to completion, however, Dovenmuehle foreclosed on the property even though it had not at that point advanced the entire amount of funding contemplated in the loan agreement. Dovenmuehle thereafter made demands for payment against the letter of credit. East Bank refused to honor the calls and this litigation ensued.
I.
East Bank raises various assignments of error with respect to the trial court's rulings on evidentiary matters, the interpretation of the terms of the letter of credit, and the applicability of common law principles to this case. We conclude the trial court committed no error.
The instrument in dispute here is subject to the provisions of the Uniform Commercial Code. See §§ 4--5--102(1) and 4--5--103(1)(a), C.R.S. 1973. Under the terms of the Code, letters of credit are conceived to exist in an 'independent theoretical frame' distinct in nature from related credit devices. Section 4--5--101, C.R.S. 1973 (Official Comment); And see, J. White & R. Summers, Uniform Commercial Code § 18--2 (1972). As the law relative to letters of credit is yet developing, careful attention must be devoted to the 'fundamental theories' underlying these transactions in construing the article. Section 4--5--102, C.R.S. 1973 (Official Comment).
East Bank's allegations of error in this case are predicated essentially on the assumption that common law rules of contract interpretation govern the function of letters of credit. Therefore, the bank argues, no substitution of customers could be made without its consent, parol evidence as to the intent of the parties was admissible, and the circumstances of the underlying relationship between the beneficiary Dovenmuehle and Mesec and Silverman were necessary to a resolution of the issue of its liability. These arguments are unpersuasive.
The contractual relationships arising from a letter of credit are clearly delineated by Code provisions. An issuer such as East Bank 'must honor a draft or demand for payment which complies with the terms of the relevant credit,' regardless of a non-fraudulent breach of the underlying contract. Section 4--5--114(1), C.R.S. 1973. The letter of credit is primarily a contract between the issuer and the beneficiary, and liability arising on the part of the issuer is independent of the underlying contract between the beneficiary and the customer. See Hyland Hills Metropolitan Park & Recreational District v. McCoy Enterprises, Colo.App., 554 P.2d 708; Section 4--5--114, C.R.S. 1973 (Official Comment). When there has been compliance with the terms of the credit, wrongful dishonor entitles the beneficiary to recover from the issuer the full amount of the letter of credit. Section 4--5--115, C.R.S. 1973.
In view of the principles above, the trial court correctly held that the purported modification of the contract occurring when Mesec and Silverman formed the Pinion Springs Corporation was immaterial to East Bank's liability to Dovenmuehle. Mesec and Silverman, the customers designated in the credit, remained the original customers; the formation of the corporation affected only the relationship between Dovenmuehle and its debtor, a fact which had no legal significance insofar as East Bank's obligation to Dovenmuehle was concerned. See Asociacion de Azucareros v. United States National Bank, 423 F.2d 638 (9th Cir. 1970). Consequently, the evidence offered by East Bank to prove the intent of the parties to that contract or custom and usage regarding the financing of the project was properly excluded. See §§ 4--1--205(4) and 4--5--109(1)(c), C.R.S. 1973.
East Bank also argues that inasmuch as Dovenmuehle had foreclosed its deed of trust and bid in the property for the unpaid balance owed to it, East Bank was not further obligated under the credit. This argument assumes that East Bank occupied the position of a surety or guarantor with regard to the obligation owed Dovenmuehle by Mesec and Silverman. However, the Code provides that unless the credit so states, an issuer does not guarantee performance of the contract between the customer and the beneficiary, § 4--5--109(1)(a), C.R.S. 1973.
Consequently, East Bank could not avoid payment of the credit on the theory it was a surety or guarantor whose obligation had been discharged.
II.
The dispositive question in this litigation is whether there was compliance with the terms of the letter of credit relative to Dovenmuehle's attempted call. See § 4--5--103(1)(a) and 4--5--114(1), C.R.S. 1973. The trial court found such compliance and we agree with this finding.
East Bank maintains that the reference in...
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