Heritage Bank v. Redcom Laboratories

Citation250 F.3d 319
Decision Date14 May 2001
Docket NumberNo. 00-10835,00-10835
Parties(5th Cir. 2001) Heritage Bank, Formerly Known as Brazos Bank, N.A., Plaintiff- Counter Defendant- Appellant, v. Redcom Laboratories, Inc., et al., Defendants, Redcom Laboratories, Inc., Defendant- Counter Claimant-Appellee
CourtUnited States Courts of Appeals. United States Court of Appeals (5th Circuit)

[Copyrighted Material Omitted]

[Copyrighted Material Omitted] Appeal from the United States District Court for the Northern District of Texas

Before REAVLEY, SMITH, and DeMOSS, Circuit Judges.

JERRY E. SMITH, Circuit Judge:

Heritage Bank issued a letter of credit to Fiber Wave Telecom, Inc. ("Fiber Wave"), which used it to purchase electronics from Redcom Laboratories, Inc. ("Redcom"), which delivered the goods and made presentment to the bank for payment. Fiber Wave believed the goods defective and successfully petitioned a Texas court to enjoin the bank from honoring Redcom's presentment.1 Redcom made another demand on the bank during the pendency of the injunction, but the bank refused to honor the presentment and sought a declaratory judgment exonerating it from liability.

Redcom sued the bank for wrongful dishonor, and the district court granted summary judgment for Redcom. The bank appeals, arguing that the court erred in exercising diversity jurisdiction and in granting summary judgment. Finding no reversible error, we affirm.

I.

On February 3, 1998, the bank issued Irrevocable Commercial Letter of Credit No. 9518 for $215,729 to Fiber Wave, naming Redcom as the beneficiary. The letter of credit was subject to the Uniform Customs and Practice for Documentary Credits, 1993 Revision, ICC Publication No. 500 ("UCP"), and was good for one year. It had no special conditions or unusual provisions. Redcom shipped goods to Fiber Wave on March 27, 1998, and made a presentment on April 24, 1998, which the bank received on May 1.

Before the bank determined whether the presentment complied with the letter of credit, Fiber Wave sued the bank and Redcom in state court and obtained a temporary restraining order ("TRO") that enjoined the bank from honoring the presentment. On May 6, the bank, because of the TRO, dishonored the presentment. On June 5, the state court converted the TRO into a temporary injunction.

On November 20, while the injunction was in effect, Redcom made another presentment to the bank for payment under the letter of credit. On November 25, the bank again dishonored the presentment, citing the injunction. On January 27, 1999, Redcom filed a motion to dissolve the injunction and a motion to enjoin the expiration of the letter of credit. The court granted nonsuit to Fiber Wave and denied Redcom's motions.

The letter of credit expired on February 3, and on March 3, Redcom made another demand to the bank for payment, alleging that the injunction had been dissolved when Fiber Wave non-suited its claims against the bank. The bank filed a declaratory judgment action against Fiber Wave and Redcom in state court, and Redcom removed the action to federal court.

Redcom claimed that the bank had fraudulently joined Fiber Wave to destroy diversity jurisdiction, and the bank moved to remand, arguing that Fiber Wave was properly joined. The district court determined that Fiber Wave was improperly joined, and both parties moved for summary judgment. The district court granted summary judgment for Redcom, concluding, inter alia, that (1) the bank waived discrepancies in the November 20 presentment; (2) any presentments made after the expiration of the letter of credit would be ineffective;2 and (3) the bank wrongfully dishonored the November 20 presentment, because the injunction only prohibited the bank from honoring improper presentments.

II.

Redcom removed this action to federal court on the basis of diversity of citizenship. Removal is proper only if that court would have had original jurisdiction over the claim. See 28 U.S.C. § 1441(a), (b). The bank and Fiber Wave are citizens of Texas; Redcom is a citizen of New York. For diversity jurisdiction, the parties must be citizens of different states, and the amount in controversy must exceed $75,000. See 28 U.S.C. § 1332(a)(1). The amount in controversy is $195,729, and Redcom and the bank are diverse.

Joining Fiber Wave as a defendant, however, destroys diversity.3 If Fiber Wave was properly joined as a party, diversity jurisdiction is destroyed, because the bank and Fiber Wave are not diverse. But if Fiber Wave was fraudulently joined, as Redcom asserts, then the case was properly in federal court.

We review de novo the denial of a motion to remand. Medina v. Ramsey Steel Co., 238 F.3d 674, 680 (5th Cir. 2001). To establish that Fiber Wave was joined fraudulently to defeat diversity, Redcom must demonstrate either fraud in the recitation of jurisdictional facts or the absence of any possibility that the bank has stated a claim against Fiber Wave. Rodriguez v. Sabatino, 120 F.3d 589, 591 (5th Cir. 1997). Redcom has not alleged fraud.

The bank contends that it sued under the Uniform Declaratory Judgments Act, which states that "[w]hen declaratory relief is sought, all persons who have or claim any interest that would be affected by the declaration must be made parties." Tex. Civ. Prac. & Rem. Code § 37.006. Thus, claims the bank, because Fiber Wave will be liable to the bank for reimbursement if the bank has to honor Redcom's presentment under the letter of credit, Fiber Wave has an interest that would be affected by the declaration.4

Redcom correctly notes that the declaratory judgment cannot itself trigger Fiber Wave's reimbursement obligation, which, instead, is imposed only when the bank honors a presentment under the letter of credit. The declaratory judgment cannot order the bank to pay Redcom anything; it merely resolves questions regarding the rights of the parties. See In re City of Dallas, 977 S.W.2d 798, 804 (Tex. App.--Fort Worth 1998, no writ). Indeed, Texas law prohibits a court from ordering a bank to honor an letter of credit in the context of a declaratory judgment. See Tex. Civ. Prac. & Rem. Code § 37.003(a) (Vernon 1997).

Texas law further requires that "a justiciable controversy must exist before a party can be properly joined" in a declaratory judgment action. Sub-Surface Constr. Co. v. Bryant-Curington, Inc., 533 S.W.2d 452, 456 (Tex. Civ. App.--Austin 1976, writ ref'd n.r.e.). If the resolution of a controversy "depends upon contingent or hypothetical facts, or upon events that have not yet come to pass," it is not ripe for review. Patterson v. Planned Parenthood, 971 S.W.2d 439, 443 (Tex. 1998).

The bank's claim against Fiber Wave for reimbursement is contingent on a finding that it improperly dishonored Redcom's presentments. Thus, even though Fiber Wave has an interest in the outcome, it has no interest in the current controversy. Because the claim against Fiber Wave is not presently justiciable, the district court properly determined that the bank could establish no claim against Fiber Wave.

In addition, the rationale underlying letters of credit weighs in favor of finding that Fiber Wave was improperly joined. Commercial parties use letters of credit for the purpose of reducing the risk of dealing with unknown entities. A letter of credit permits a seller to transact with a known credit source (such as a bank) rather than with an unknown buyer. E. Girard Sav. Ass'n v. Citizens Nat'l Bank & Trust Co., 593 F.2d 598, 601 (5th Cir. 1979). This type of arrangement creates three distinct relationships: (1) the transaction between buyer and seller; (2) the buyer's (applicant's) agreement to reimburse the bank for extension of credit; and (3) the letter of credit, representing the bank's promise to pay the seller (the beneficiary) when it presents certain documents. Id.

The entire arrangement exists to allow the credit issuer's obligation to the beneficiary to operate independently of its underlying agreement with the applicant. Id. at 602.5 Therefore, although the declaration of the rights of the bank and Redcom under the letter of credit ultimately may affect Fiber Wave, it has no legal interest in the current dispute. The district court did not err in finding fraudulent joinder and asserting diversity jurisdiction over the declaratory judgment claim.

III.

The bank contends that the court erred in granting summary judgment for Redcom on the wrongful dishonor claim. The bank argues that (1) Redcom made an untimely, deficient presentment; and (2) even if it were proper, the injunction prevented the bank from honoring it. Redcom contends that (1) the bank waived its right to raise discrepancies; and (2) the injunction prohibited only improper presentments. To prevail on a wrongful dishonor claim, Redcom must demonstrate (1) the issuance of a letter of credit; (2) timely presentation of the required documents; and (3) a failure to pay on the letter of credit. Voest-Alpine Trading USA Corp. v. Bank of China, 142 F.3d 887, 892 (5th Cir. 1998).

Summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). We review a grant of summary judgment de novo, applying the same standards as did the district court. Sherrod v. Am. Airlines, Inc., 132 F.3d 1112, 1119 (5th Cir. 1998).

A.

The bank and Redcom dispute whether the bank waived its right to raise discrepancies in the November 20 presentment. The parties agree that the April 24 presentment was improper, and Redcom has not appealed the decision that the bank did not have to honor it. The November 20 presentment, however, was an attempt to correct deficiencies in the earlier one. We must determine whether Redcom made a proper presentment under the terms of the letter of credit and, if not, whether the bank waived its...

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