First State Bank v. Diamond Plastics Corp., 76571

• Decision Date: 14 March 1995
• Docket Number: No. 76571,76571
• Citation: 891 P.2d 1262,1995 OK 21
• Parties: 26 UCC Rep.Serv.2d 443, 53 A.L.R.5th 905, 1995 OK 21 The FIRST STATE BANK, Ketchum, Oklahoma, Appellee, v. DIAMOND PLASTICS CORPORATION, Appellant.
• Court: Oklahoma Supreme Court

Page 1262

891 P.2d 1262

26 UCC Rep.Serv.2d 443, 53 A.L.R.5th 905,

1995 OK 21

The FIRST STATE BANK, Ketchum, Oklahoma, Appellee, v. DIAMOND PLASTICS CORPORATION, Appellant.

No. 76571.

Supreme Court of Oklahoma.

March 14, 1995.

As Corrected March 16 and 21, 1995.

Certiorari to the Court of Appeals, Division No. 3; Appeal from the District Court of Craig County, William J. Whistler, Trial Judge.

Certiorari to review opinion of Court of Appeals reversing the District Court's summary judgment in favor of appellee. The District Court determined appellee was not liable on letters of credit it had issued to appellant because appellant's draft on the letters of credit did not strictly comply with the terms of presentment contained in the letters of credit. However, material issues of fact remain to be resolved in regards to estoppel of appellee from asserting its right to require strict compliance with the terms of the letter of credit by its previous conduct and conversion of funds.

CERTIORARI PREVIOUSLY GRANTED.

COURT OF APPEALS OPINION VACATED.

JUDGMENT OF THE DISTRICT COURT REVERSED AND CAUSE REMANDED.

Ronald N. Ricketts, Gable & Gotwals, Inc., Tulsa, Ronald E. Fry, Bailey & Fry, Vinita, for appellee.

Mark K. Blongewicz, Robert G. Cass, Hall, Estill, Hardwick, Gable, Golden & Nelson, P.C., Tulsa, for appellant.

SIMMS, Justice.

Diamond Plastics Corporation (Diamond Plastics), defendant below, appeals the summary judgment entered by the trial court in favor of The First State Bank, Ketchum, Oklahoma, (Bank), appellee, on Bank's declaratory action regarding liability on a letter of credit. Diamond Plastics claims Bank is liable for payment under the letter of credit as well as damages for wrongful dishonor of the credit. Both parties filed summary judgment motions, and the trial court found in favor of Bank on both. The Court of Appeals reversed summary judgment for Bank and remanded with directions for the trial court to enter judgment for Diamond Plastics.

Certiorari was granted to consider the first impression question regarding Bank's dishonor of the letter of credit. We find that although the draft submitted by Diamond Plastics did not strictly conform to the letter of credit, material issues of fact regarding estoppel of Bank from asserting the strict compliance rule due to previously honoring nonconforming drafts must be resolved. We therefore hold the trial court erred in granting summary judgment to Bank. The facts, substantially undisputed, follow.¹

FACTS

In order to sell its products to Vic Klingenberg d/b/a Arkansas Irrigation and Waterworks, Diamond Plastics agreed to payment via a letter of credit arrangement with the Bank of which Klingenberg was a customer. A letter of credit is a contractual arrangement whereby the issuer, typically a bank The Bank issued two irrevocable letters of credit to Diamond Plastics, one on June 1, 1989, for $32,000.00 and one on June 8, 1989, for $15,000.00. The June 1 letter of credit was typewritten on the Bank's letter head and signed by Don J. Thorpe, Executive Vice-President of the Bank at that time. It provides, in pertinent part:

agrees to pay to a third party, the beneficiary, an amount of money up to the letter of credit limit on behalf of the bank's customer. The arrangement facilitates the commercial transaction between the customer and the beneficiary and assures the beneficiary that payment will be received upon proper demand.

"We hereby agree to accept and pay at maturity any draft or draft[sic] on us, at The First State Bank sixty (60) days sight, issued by Diamond Plastic Corporation for Vic Klingenberg, d/b/a Arkansas Irrigation and Waterworks, Springdale, Ark. to the aggregate amount of Thirty Two Thousand Dollars (32,000.00) and negotiated through The First State Bank, Ketchum, Oklahoma.

One negotiable Bill of Lading of each set and consular invoice² must be forwarded directly to The First State Bank, Ketchum, P.O. Box 750, Ketchum, OK 74349, immediately by the bank negotiating the documents. The remaining documents must accompany the drafts.

This letter is to replace a letter of credit dated May 30, 1989 in the amount of $32,000.00 and also another letter of credit dated May 30, 1989 in the amount of $30,000.00."

The June 8 letter of credit was substantially the same as the June 1 except that it was in the amount of $15,000.00 and did not contain the final paragraph regarding the replacement of the May 30 letter of credit. The letters of credit were apparently sent to Diamond Plastics by facsimile machine transmission.³

Evidently, the goods were delivered to Klingenberg's business. Diamond Plastics received invoices and nonnegotiable Bills of Lading which it attached to a demand letter and sent by certified mail to the Bank on July 18, 1989, requesting payment on the letters of credit. The demand letter, typewritten on Diamond Plastics' letterhead, provides in pertinent part:

"This will serve as our draft on your bank for the Letters of Credit drawn for Arkansas Irrigation and Waterworks, Springdale, Arkansas. Please make your cashiers check payable to Diamond Plastics Corporation, P.O. Box 1608, Grand Island, NE, 68802 in the amount of $43,137.02 (Invoices and Bills of Lading attached)."

Although the letters of credit specifically required negotiable Bills of Lading and consular invoices, Diamond failed to send either with the demand letter. It is important to note, however, that prior to the drafts in the case at bar, Diamond Plastics had submitted almost identical drafts on letters of credit containing the same compliance terms. Even though Diamond Plastics did not present the requisite negotiable bills of lading and consular invoices in those drafts, Bank honored the drafts and paid them.

The Bank refused to honor the demand, asserting nonconformity to the requirements of the letters of credit. However, the Bank failed to return the demand letter and attachments to Diamond Plastics. Eventually We have never before considered the issue before us, however, we note a majority of courts agree that questions regarding liability on letters of credit may in some instances be appropriate for disposition by summary judgment. Arbest Constr. Co. v. First Nat'l Bank & Trust Co. of Oklahoma City, 777 F.2d 581 (10th Cir.1985); Fidelity Bank v. Lutheran Mut. Life Ins. Co., 465 F.2d 211 (10th Cir.1972); Bank of Montreal v. Federal Nat'l Bank & Trust Co. of Shawnee, 622 F.Supp. 6 (W.D.Okla.1984); West Virginia Hous. Dev. Fund v. Sroka, 415 F.Supp. 1107 (W.D.Pa.1976); Data Gen. Corp. v. Citizens Nat'l Bank, 502 F.Supp. 776 (D.Conn.1980).

the Bank brought a declaratory action in the trial court to have its liability under the letter of credit determined. In turn, Diamond Plastics counterclaimed, asserting Bank wrongfully dishonored the demand upon the letters of credit and converted funds owed to Diamond Plastics.

Summary judgment is appropriate only where it appears that there is no substantial controversy as to any material fact and that one party is entitled to judgment as a matter of law. Sellers v. Oklahoma Publishing Co., 687 P.2d 116 (Okla.1984); Daugherty v. Farmers Coop. Ass'n, 689 P.2d 947 (Okla.1984). On review, all inferences and conclusions to be drawn from the underlying facts will be reviewed in the light most favorable to the party opposing the motion for summary judgment. Daugherty, supra; Redwine v. Baptist Medical Center of Oklahoma, Inc., 679 P.2d 1293 (Okla.1983).

Before addressing the specific question regarding Diamond Plastics' demand on the letter of credit issued by the Bank, a brief overview of the law of letters of credit is necessary.

I. LETTERS OF CREDIT

Oklahoma has adopted the Uniform Commercial Code (UCC) provisions governing letters of credit. 12A O.S.Supp.1984, §§ 5-101 to 5-117. The Tenth Circuit Court of Appeals summarized the law of letters of credit in Oklahoma in Arbest, supra:

"Under those provisions, a letter of credit involves three parties: (1) an issuer (generally a bank) who agrees to pay conforming drafts presented under the letter of credit; (2) a bank customer or "account party" who orders the letter of credit and dictates its terms; and (3) a beneficiary to whom the letter of credit is issued, who can collect monies under the letter of credit by presenting drafts and making proper demand on the issuer. See id. § 5-103(1). A letter of credit thus involves three relationships--between the issuer and the account party, the issuer and the beneficiary, and the account party and the beneficiary (this last relationship being the underlying business deal giving rise to the issuance of the letter of credit.) The simple result is that the issuer substitutes its credit, preferred by the beneficiary, for that of the account party. The arrangement facilitates commercial transactions." 777 F.2d at 583. Accord Centrifugal Casting Mach. Co. v. American Bank & Trust Co., 966 F.2d 1348 (10th Cir.1992) (construing Oklahoma law); Savage v. First Nat'l Bank & Trust Co. of Tulsa, 413 F.Supp. 447 (N.D.Okla.1976); Colorado Nat'l Bank of Denver v. Board of County Comm'rs of Routt County, 634 P.2d 32 (Colo.1981); Venizelos, S.A. v. Chase Manhattan Bank, 425 F.2d 461 (2d Cir.1970).

Although Arbest is factually distinguishable from the case at bar in that it involved a "standby" letter of credit⁴ issued to the lender in a construction project and concerned demand on that letter of credit by parties not named as beneficiaries, the Tenth Circuit properly construed the provisions of Article 5 of Oklahoma's version of the UCC. Thus, we adopt the holding regarding the operation of Oklahoma's statutory letter of credit law contained in Arbest and apply that construction of the law.

Each party to the transaction owes certain contractual and/or statutory duties to the other parties. Section 5-103 cited in Arbest, indicates one such duty, the duty of the issuer to the customer, when it defines a letter of credit as "an...