Federal Deposit Ins. Corp. v. Bank of San Francisco

• Decision Date: 21 May 1987
• Docket Number: No. 86-1948,86-1948
• Citation: 817 F.2d 1395
• Parties: , 3 UCC Rep.Serv.2d 1521 FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver for Penn Square Bank, N.A., Plaintiff-Appellee, v. BANK OF SAN FRANCISCO, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1395

817 F.2d 1395

56 USLW 2041, 3 UCC Rep.Serv.2d 1521

FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver for Penn Square Bank, N.A., Plaintiff-Appellee, v. BANK OF SAN FRANCISCO, Defendant-Appellant.

No. 86-1948.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted March 12, 1987.

Decided May 21, 1987.

Dennis F. Shanagher, San Francisco, Cal., for the plaintiff-appellee.

Lynne Bantle, San Francisco, Cal., for the defendant-appellant.

Appeal from the United States District Court for the Northern District of California.

Before JOHN T. NOONAN, Jr. and O'SCANNLAIN, Circuit Judges, and STOTLER, ^* District Judge.

NOONAN, Circuit Judge:

Bank of San Francisco (the Bank) appeals from summary judgment in favor of the Federal Deposit Insurance Corporation (FDIC) on a letter of credit. Jurisdiction exists under 12 U.S.C. Sec. 1819. We affirm.

FACTS

On December 12, 1980 the Bank issued a standby letter of credit in the amount of $50,000. The letter was issued at the request of Arthur J. Shartsis and Mary Jo Shartsis (the Customers). It was issued in favor of Penn Square Bank (Penn Square) and was intended to be security for an The letter in its entirety read as follows:

investment made by the Customers in Longhorn Developmental Program, Ltd., a partnership in oil and gas managed by Longhorn Oil and Gas Company (Longhorn).

December 24, 1980

Penn Square Bank, N.A.

1919 Penn Square

Oklahoma City, Oklahoma 73118

Re: Irrevocable Letter of Credit No. 10006-TBSF

Gentlemen:

We hereby establish our Irrevocable Letter of Credit No. 10006-TBSF in your favor for the account of Arthur J. Shartsis and Mary Jo Shartsis for an amount not to exceed U.S. $50,000.00, available by your draft at sight, drawn on The Bank of San Francisco, San Francisco, California, accompanied by the following documents:

1. An affidavit executed by you or any transferee that any payment due under a Promissory Note negotiated and executed by Longhorn Developmental Program, Ltd., an Oklahoma limited partnership, on behalf of the investor, Arthur J. Shartsis and Mary Jo Shartsis, has not been paid and is in default in accordance with the terms of this Note.

2. The related Note endorsed without recourse to our order must accompany your drawing.

The entire amount of this credit is available to you from the date of this letter through December 31, 1982.

Very truly yours,

THE BANK OF SAN FRANCISCO

By: ____________________

Steven L. Shepherd

Vice President

Unless otherwise instructed, documents will be forwarded to us in one airmail letter by the negotiating bank. The credit will be subject to the Uniform Customs and practice for Documentary Credits (1974 Revision), the International Chamber of Commerce Publication No. 290.

On March 5, 1981 at the request of Longhorn the Bank deleted paragraph 2.

The FDIC became the receiver of Penn Square on July 5, 1982. On August 17, 1982 the FDIC requested the Bank to pay the letter of credit. On August 19, 1982 the Customers advised the Bank in writing that Penn Square "was directly involved in a fraudulent scheme" to procure the letter of credit "in connection with the Longhorn Oil and Gas Drilling Program, of which at least one officer and one director of the Penn Square Bank had a substantial interest." The Customers asked the Bank to dishonor the draft. On August 23, 1982 the Bank wrote FDIC pointing out that the FDIC had not furnished the affidavit required by the letter and requesting the FDIC to execute the affidavit. On August 24, 1982 the Customers obtained a temporary restraining order against the Bank honoring the draft. On August 25, 1982 the Bank wrote the FDIC stating, "The Bank stands ready to honor its obligation under the Letter of Credit at such time as the Temporary Restraining Order is removed and an Affidavit containing the provisions discussed below [the provisions of the letter of credit] are received by the Bank."

On October 15, 1982 the Customers were denied a preliminary injunction and on November 30, 1982 the temporary restraining order expired by its terms. On December 10, 1982 the FDIC presented to the Bank a sight draft for $50,000 drawn on the letter of credit and accompanied by an affidavit apparently complying with the terms of the letter. On December 15, 1982 the Bank notified the FDIC that it would not honor the draft. The Bank stated that its decision was based on:

1. Allegations made by the Bank's customer to the effect that the subject Letter of Credit was procured by fraudulent means; and

2. Apparent inconsistencies between the underlying Promissory Note and the Affidavit submitted by the Federal Deposit Insurance Corporation in support of its demand.

This suit followed.

The Summary Judgment Motions

The Bank, as it puts the matter on appeal, "placed its decision to dishonor the

                Credit in the context of on going multi-district litigation," in which the Customers were "only two of many Longhorn investors complaining of fraud in connection with the procurement of Letters of Credit."    At the time of dishonoring the draft the Bank had relied on the verified complaint of the Customers against Penn Square and their supporting affidavits detailing fraud by Penn Square and Longhorn.  Before the district court in this case the Bank presented documentary evidence obtained in that litigation which, the Bank contended, showed Penn Square's participation in fraud by Longhorn on the Customers.  On cross-motions for summary judgment the district court granted the motion of the FDIC finding that the Bank had failed to show fraud in either the underlying transaction or in the presentment.  The Bank raised a second defense that the documents presented did not conform to the requirements of the letter of credit.  On a second motion for summary judgment by the FDIC on this issue, the Bank lost again.  It appealed on both issues to this court
                

ANALYSIS

Federal law governs the case. A suit brought by the FDIC arises "under the laws of the United States." 12 U.S.C. Sec. 1819. The liability of the Bank consequently "involves decision of a federal, not a state, question." D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447, 456, 62 S.Ct. 676, 679, 86 L.Ed. 956 (1942). We make "specialized federal common law," Friendly, "In Praise of Erie --And of the New Federal Common Law", 39 N.Y.U.L.Rev. 383, 406 (1964). Doing so, we have an option: we may adopt the law of the state involved, United States v. Kimbell Foods, Inc., 440 U.S. 715, 728, 99 S.Ct. 1448, 1458, 59 L.Ed.2d 711 (1979), and see Mishkin, "The Variousness of Federal Law: Competence and Direction in the Choice", 105 U.Pa.L.Rev. 797, 834 (1957); or we may draw on the federal law merchant as "a convenient source of reference." Clearfield Trust Co. v. United States, 318 U.S. 363, 63 S.Ct. 573, 87 L.Ed. 838 (1943). Either way, we act as a federal court making federal law. D'Oench, 315 U.S. at 465, 62 S.Ct. at 682 (concurring opinion); cf. United States v. Ellis, 714 F.2d 953, 955 (9th Cir.1983). Either way, we reach the same result here, and our interpretation of the Uniform Commercial Code that follows may be read as alternatively an interpretation of state law adopted by us as federal law or a statement of the federal law merchant as it governs letters of credit sued on by the FDIC.

D'Oench itself treated the FDIC as a holder in due course of a note whose maker had a secret understanding with the payee bank that the note would not be enforced. The note was on the bank's books, fraudulently inflating its assets. When the FDIC became the bank's receiver, it was permitted to enforce the note as a holder in due course. While the case could be analyzed, as the concurrence of Justice Frankfurter does, id., 315 U.S. at 463, 62 S.Ct. at 682, as equitable estoppel against the maker, the principal rationale of the decision is protection of the FDIC. Id. at 456, 62 S.Ct. at 679.

The Bank objects that D'Oench has already been held inapplicable in a suit brought against the FDIC as the Penn Square receiver by persons defrauded by Penn Square in connection with Longhorn. In re Longhorn Securities Litigation, 573 F.Supp. 278 (W.D.Okla.1983). The Bank also objects that this circuit has read D'Oench as based on equitable estoppel and will not apply it when the person sued by the FDIC is not a party to a fraud but an innocent victim of fraud perpetrated by the bank the FDIC has taken over. FDIC v. Meo, 505 F.2d 790 (9th Cir.1974).

Neither of these cases is precedent here because we deal with a letter of credit and only a letter of credit. A letter of credit is an instrument of commerce and finance which is sui generis. It issues by virtue of a contract between a bank and its customer. It becomes an engagement of the issuer to the beneficiary who accepts it. Harfield, Letters of Credit (1979) 9, 12. The assurance of payment thereby...