Ground Air Transfer, Inc. v. Westates Airlines, Inc.

• Decision Date: 11 January 1990
• Docket Number: No. 89-2082,89-2082
• Citation: 899 F.2d 1269
• Parties: 11 UCC Rep.Serv.2d 177 GROUND AIR TRANSFER, INC. d/b/a Charter One, Plaintiff, Appellee, v. WESTATES AIRLINES, INC. and Jesse Yohanan, Defendants, Appellants. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 1269

899 F.2d 1269

11 UCC Rep.Serv.2d 177

GROUND AIR TRANSFER, INC. d/b/a Charter One, Plaintiff, Appellee, v. WESTATES AIRLINES, INC. and Jesse Yohanan, Defendants, Appellants.

No. 89-2082.

United States Court of Appeals First Circuit.

Heard Jan. 11, 1990.

Decided March 30, 1990.

David M. Jones with whom McDermott & Rizzo, Boston, Mass., Marianne C. Rossi, Los Banos, Cal., and George P. Eshoo and Assoc., Redwood City, Cal., were on brief, for defendants, appellants.

Mark S. Kahan with whom Mark T. Priesing, Galland, Kharasch, Morse & Garfinkle, P.C., Washington, D.C., Kevin McGee and Seder & Chandler, Worcester, Mass., were on brief, for plaintiff, appellee.

Before BREYER, ALDRICH and TORRUELLA, Circuit Judges.

BREYER, Circuit Judge.

The two parties before us--Westates and Charter One--signed a "charter air service" contract. As the contract required, Charter One arranged for a bank to issue a $50,000 "standby" letter of credit in Westates' favor, a letter designed, in part, to make certain Westates would not suffer harm should Charter One fail to carry out its contractual obligations. See generally Itek Corp. v. First National Bank of Boston, 730 F.2d 19, 24 (1st Cir.1984) (explaining the purpose of the standby credit); J. Dolan, The Law of Letters of Credit p 1.04, at 1-12 to 1-15 (1984 & Supp.1989) (same). Subsequently, a dispute arose; each party claimed the other broke the contract.

Westates, the beneficiary of the letter of credit, would now like to "call" the letter, thereby obtaining the $50,000, which it hopes to keep, at least while the courts litigate the parties' various "breach of contract" claims. The federal district court, however, has issued an injunction, forbidding Westates to call the letter of credit.

Westates appeals from the issuance of the injunction. It says that the law prohibits a court from enjoining a call on a standby letter of credit, at least in a typical case, where the beneficiary's position in the underlying contract dispute is colorable and where the beneficiary can satisfy the terms that the letter of credit itself sets forth as conditions for its call. See, e.g., Trans Meridian Trading, Inc. v. Empresa Nacional de Comercializacion de Insumos, 829 F.2d 949, 956 (9th Cir.1987); Itek, 730 F.2d at 24-25; Intraworld Indus., Inc. v. Girard Trust Bank, 461 Pa. 343, 336 A.2d 316, 325 (1975); Dynamics Corp. of America v. Citizens & Southern National Bank, 356 F.Supp. 991, 999 (N.D.Ga.1973). We agree with Westates that the record before us indicates that this case presents the typical commercial circumstances (in respect to the underlying contract, the dispute, and the letter of credit), in which commercial law, as embodied in the Uniform Commercial Code, prohibits an injunction. Charter One argues that California law (which governs this dispute) is different; it reads an intermediate state appellate court decision as permitting an injunction. See Steinmeyer v. Warner Consolidated Corp., 42 Cal.App.3d 515, 116 Cal.Rptr. 57 (Cal.Ct.App.1974). We do not believe, however, that Steinmeyer creates what would amount to an unusual exception to the "no injunction" rule. Alternatively, if Steinmeyer means to create such an exception, we do not believe the California Supreme Court would follow it. Consequently, we reverse the district court.

I. Background

We set forth several background circumstances so that the reader can see that this case (as far as the record here reveals) is one in which commercial law normally would prohibit an injunction. That is to say, the underlying contract is a simple, typical commercial contract; Westates' claim that Charter One broke the contract is at least "colorable;" and Westates seems able to satisfy the terms that the letter of credit itself sets forth as conditions for its call.

1. The contract. Westates provides airplanes and related services for charter flights. Charter One sells charter flights to travelers. In mid-1989 Westates and Charter One signed a contract under which Westates promised to provide planes and crews for Charter One's new service between Providence, Rhode Island, and Atlantic City, New Jersey, and also (by later amendment to the contract) for its new service between Worcester, Massachusetts, and Atlantic City. The contract required Charter One to pay Westates each month a fee calculated on the basis of the number of hours flown, with a minimum fee of about $105,000 (based on 70 hours flown), which was increased to about $209,000 (150 hours flown) when the Worcester service was added. The contract contained a special "default" clause, which says,

upon any default by Charter One as defined in this agreement, Westates may immediately terminate all service.... Westates shall immediately notify Charter One of the default.... If the default is not cured by Charter One within ten (10) days from the date of mailing the notice of default, Westates shall have the right to immediately declare Charter One's default to be a material breach of this agreement and declare this agreement to be terminated without further notice to Charter One.

(Emphasis added.) The contract also required speedy transmission of each monthly payment. It said that late payment was "considered a default."

2. The contract dispute. Each party now says that the other party broke this contract. The record reveals a dispute that began in August 1989, when the contract was less than one month old. Charter One's president says that Westates' owner called him and threatened to cancel the contract unless Charter One would pay a higher minimum fee. Charter One refused. Westates then sent Charter One a "ten day default" notice, under the contract's special "default" provision. The "ten day notice" said that Westates would not provide planes for Charter One's Worcester/Atlantic City service after September 4. Westates, even before September 4, provided only one plane, rather than two planes (as the contract required), but Westates says that maintenance problems, not contract-cancellation efforts, were responsible.

Subsequently, Westates, apparently under pressure from Charter One, changed its mind about cancelling the contract. Charter One's attorney wrote to Westates suggesting that "Westates reconsider its decision to cancel the contract and instead perform its obligations as required." The letter adds:

Please advise the undersigned by close of business on Wednesday, August 30, 1989, whether Westates intends ... cancellation of the Worcester program. If we do not hear from [you] ... by that time, we will assume that Westates does not intend to abide by its contract, and Charter One will take such measures as are necessary to protect its rights.

On August 30 a Westates attorney, in California, called Charter One's attorney, in Washington, D.C. She says that she told Charter One that Westates indeed intended to abide by the contract and that it rescinded its cancellation. She did not call, however, until 3 p.m. California time, which was 6 p.m. Washington, D.C., time. Charter One then decided that it would not go through with the contract; and it wrote back to Westates that Westates' call had come "too late" (apparently meaning that the call had arrived after "close of business"). The letter added that Charter One would therefore "reject your verbal offer to rescind cancellation of the Worcester program...."

Westates then stopped providing Worcester/Atlantic City service. It continued, however, to provide Providence/Atlantic City service. In mid-September Charter One withheld about $32,000 from the monthly fees due Westates for that Providence service. Westates said that the contract did not permit Charter One to withhold this money. On September 22 it sent Charter One another "ten day default" notice. After ten days it cancelled the contract.

The parties have not yet litigated the merits of their contract disputes. We therefore need not decide whether Westates did, or did not, break the contract in mid-August, or whether it successfully reinstated the contract on August 30, or whether, irrespective of the status of the Worcester/Atlantic City portion of the contract, the Providence/Atlantic City portion remained in effect, or whether Charter One did, or did not, have the right to withhold $32,000 in mid-September. We need only decide that the record, so far, indicates that Westates' position, in respect to the contract dispute, is not obviously without merit, that its position is "colorable," and that, in arguing that it was entitled to receive the $32,000 and (not having received the money) to send a "ten day default" letter, Westates is not acting "fraudulently."

3. The letter of credit. The letter of credit here at issue is a typical, commercial letter designed to guarantee a beneficiary against harm caused by a contractual "default." The air service contract described above requires Charter One to arrange for a "letter of credit" as a "default guarantee." It says specifically in the section dealing with "default" that

Charter One must provide Westates with a Irrevocable Letter of Credit acceptable to Westates in the amount of $50,000....

It adds that:

Upon termination of the agreement by Westates ... it is agreed that Westates may take the irrevocable Letter of Credit as liquidated damages for the breach of this agreement by Charter One.

Charter One arranged for a Michigan bank to issue the letter. The letter itself says that Westates may "call" the letter and obtain the money by asking the bank for the money and providing the bank with a copy of the ten day default notice. It reads:

the credit amount is available to you [Westates] by your drafts on us at sight accompanied by: Dated notarized copy of the ten (10) day notice described in [the Westates/Charter One contract].

The record indicates that Westates can easily meet the terms in this letter of credit. It can provide the bank with a draft and with the "dated notarized copy of the ten ......