Goldome Credit Corp. v. University Square Apartments

• Decision Date: 30 March 1992
• Docket Number: No. 07-91-0272-CV,07-91-0272-CV
• Citation: 828 S.W.2d 505
• Parties: 17 UCC Rep.Serv.2d 1254 GOLDOME CREDIT CORPORATION, Appellant, v. UNIVERSITY SQUARE APARTMENTS, a Texas General Partnership, Appellee.
• Court: Texas Court of Appeals

Page 505

828 S.W.2d 505

17 UCC Rep.Serv.2d 1254

GOLDOME CREDIT CORPORATION, Appellant, v. UNIVERSITY SQUARE APARTMENTS, a Texas General Partnership, Appellee.

No. 07-91-0272-CV.

Court of Appeals of Texas Amarillo.

March 30, 1992.

Hoover Bax & Shearer, David W. Waddell, Nathan A. Steadman, Houston, for appellant.

Law Offices of Jack McClendon, Greg Teeter, Jack McClendon, Lubbock, for appellee.

Before REYNOLDS, C.J., and BOYD and POFF, JJ.

POFF, Justice.

University Square Apartments (University Square), appellee, sued to enjoin First National Bank at Lubbock (the Bank) from honoring a $150,000 letter of credit. The letter of credit was issued to Goldome Credit Corporation (GCC), appellant, and drawn against University Square's account. The trial court issued a temporary restraining order prohibiting the Bank from paying GCC under the letter of credit. GCC intervened and moved to dissolve the temporary restraining order. After a hearing, the court denied GCC's motion. After another hearing, the court issued a temporary injunction enjoining the Bank from honoring the letter of credit.

GCC appeals from the order granting the temporary injunction. ¹ In two points of error, GCC contends that the trial court abused its discretion in granting the temporary injunction because: (1) University Square did not meet its burden of proof for general injunctive relief; and (2) University Square did not meet its special burden of proof for injunctive relief in a proceeding dealing with a letter of credit. We will overrule both points of error and affirm the order of the trial court.

On September 3, 1985, the Bank issued a letter of credit to GCC which authorized GCC to draw $150,000 against University Square's account. ² The letter of credit was originally due to expire on September 15, 1986. Annual amendments extended the expiration date to September 15, 1991. ³

On September 11, GCC's attorney, David Waddell, presented documentation to the Bank necessary for payment under the letter of credit, viz: (1) a letter dated September 3 from Ralph J. Foscolo, Jr., Secretary-Treasurer of GCC, stating that the letter of credit was due; and (2) a $150,000 negotiable sight draft dated September 3 and signed by Foscolo. Waddell also presented a third document to the Bank which instructed the Bank to pay the proceeds from the letter of credit to the client escrow fund of Waddell's law firm. James Turnbull, a Bank vice-president, told Waddell that although the documents complied on their face with the terms of the letter of credit, payment to the client escrow account would be an unauthorized assignment of proceeds. Turnbull told Waddell if the Bank did not receive a duly authorized assignment of proceeds by September 16, the proceeds would be paid directly to GCC at the address on the letter of credit. Waddell agreed to this arrangement. However, on September 16, before payment was made, University Square obtained a temporary restraining order enjoining the Bank from honoring the letter of credit. Two weeks later, the trial court granted the temporary injunction.

University Square sought a temporary restraining order and the eventual temporary injunction because it was concerned that GCC no longer existed. The trial court was persuaded that GCC's questionable existence warranted the issuance of a temporary injunction. In pertinent part, the order of the trial court stated:

The Court having considered the pleadings, the evidence presented, and the argument of counsel, the Court find [sic] that there is actual doubt as to whether the beneficiary of the Letter of Credit in question (Intervenor herein) actually exists and/or whether it may act in the capacities which it assumes in this litigation and that payment of the said letter of credit to such an ambiguitas [sic] entity might result in double payment and/or mispayment to a non-existent, unauthorized, or defunct payee and the Court therefore finds that Plaintiff has no adequate remedy at law, and further it being of the opinion therefrom that the application of Plaintiff for temporary injunction should be granted;

IT IS ACCORDINGLY THE ORDER OF THIS COURT that Plaintiff's application for Temporary Injunction be, and the same is hereby granted.

University Square presented substantial evidence that GCC does not exist. The record shows that on Monday, June 1, 1991, it was reported by the Associated Press that "[i]nsolvent Goldome was seized Friday [May 29] by the Federal Deposit Insurance Corp. and divided between two upstate New York competitors in the most expensive savings-bank collapse in the nation's history." The report went on to say that "[i]n a separate action, the Office of Thrift Supervision seized Goldome's Florida subsidiary, Goldome Savings Bank." No specific mention was made of GCC, which was a subsidiary of Goldome like Goldome Savings Bank.

The record reflects that on June 24, Judge John C. Akard of the United States Bankruptcy Court for the Northern District of Texas, Lubbock Division, signed an order finding that GCC no longer existed. ⁴ Delbert McDougal, a general partner of University Square, testified that contemporaneously with the above-referenced Associated Press report, he was informed by Charles Myer, a Goldome senior vice-president, that neither Goldome nor GCC any longer existed.

On the other hand, GCC presented evidence that it did indeed exist. During the temporary injunction hearing, GCC introduced a certificate from the Delaware Secretary of State dated September 27th. The certificate declared that GCC "is duly incorporated under the laws of the State of Delaware and is in good standing and has a legal corporate existence so far as the records of this office show and is duly authorized to transact business."

We find the evidence before the trial court was sufficient to support the trial court's opinion that "there is actual doubt as to whether [GCC] actually exists." The fact, however, that GCC's existence is in doubt does not necessarily mean the issuance of the temporary injunction was proper.

Our review of an order granting a temporary injunction is strictly limited to a determination of whether the trial court abused its discretion in granting the injunction. Davis v. Huey, 571 S.W.2d 859, 862 (Tex.1978); Petty v. Winn Exploration Co., Inc., 816 S.W.2d 432, 433 (Tex.App.--San Antonio 1991, writ denied). The merits of the underlying action are not presented for appellate review. Davis v. Huey, 571 S.W.2d at 861; Fairfield Financial Group v. Gawerc, 814 S.W.2d 204, 207 (Tex.App.--Houston [1st Dist.] 1991, no writ). We may not substitute our judgment for that of the trial court. Davis v. Huey, 571 S.W.2d at 862. An abuse of discretion does not occur where the trial court bases its decision on conflicting evidence. Id. We are to view the evidence in the manner most favorable to the trial court's decision. Fairfield Financial Group v. Gawerc, 814 S.W.2d at 208; Metro. Life Ins. v. La Mansion Hotels, 762 S.W.2d 646, 648 (Tex.App.--San Antonio 1988, writ dism'd w.o.j.).

The issue before us is whether the trial court abused its discretion in temporarily enjoining the Bank from honoring the letter of credit due to the uncertainty regarding GCC's existence. We will address GCC's second point of error first, for if an injunction would not lie against the Bank's honoring the letter of credit, then University Square's equitable entitlement to the injunction is irrelevant.

Upon issuing a letter of credit, a bank assumes a primary obligation independent of the underlying contract and agrees to honor the letter of credit upon presentation of the requisite documents. Philipp Bros. v. Oil Country Specialists, 787 S.W.2d 38, 40 (Tex.1990). As a general rule, a bank must honor the letter of credit "even if the goods or documents do not conform to the underlying contract between the [account party] and the beneficiary." First City, Texas-Houston v. Gnat Robot, 813 S.W.2d 230, 233 (Tex.App.--Houston [1st Dist.] 1991, no writ). In three situations, however, a bank is not bound to honor the letter of credit. Tex.Bus. & Com.Code Ann. § 5.114(b)(2) (Vernon Supp.1992). The first of these situations is where the beneficiary has committed fraud. The second situation is where one of the requisite documents is forged. The third situation is where there is some "other defect not apparent on the face of the documents." Similarly, in any of these situations, a trial court may enjoin a bank from honoring a letter of credit.

In this case, one of the requisite documents was a signed statement by Goldome Credit Corporation stating "[t]he amount of the accompanying draft drawn under this Letter of Credit is due under that certain contract between University Square Apartments and Goldome Credit Corporation." Such a statement, signed by Ralph J. Foscolo as Secretary and Treasurer of GCC, was presented to the Bank. On its face, the statement appeared to be a conforming document, but University Square alleged and presented evidence that the document was nonconforming because GCC did not exist at the time of presentment. The trial court, therefore, had sufficient evidence impeaching the veracity of Foscolo's representation that he signed the statement as a representative of an extant corporation. If the court found the statement to be untrue, the facts would give rise to the third situation under Tex.Bus. & Com.Code Ann. § 5.114(b)(2) (Vernon Supp.1992). For the injunction to lie, the untrue statement or wrongful conduct of the beneficiary must have "so vitiated the entire transaction that the legitimate purposes of the independence of the issuer's obligation would no longer be served." Philipp Bros. v. Oil Country Specialists, 787 S.W.2d at 40. According to Philipp Bros., such conduct constitutes fraud under section 5.114(b)(2).

In the present case, however, the untrue statement does not pertain to the performance of the underlying contractual duty. University Square...