Housing Securities, Inc. v. Maine Nat. Bank
Decision Date | 06 September 1978 |
Citation | 391 A.2d 311 |
Parties | , 26 UCC Rep.Serv. 750 HOUSING SECURITIES, INC. and Builders Investment Group v. MAINE NATIONAL BANK. |
Court | Maine Supreme Court |
Eaton, Peabody, Bradford & Veague by Bernard J. Kubetz (orally), Arnold L. Veague, Bangor, for plaintiffs.
Strout, Payson, Pellicani & Cloutier by Arthur E. Strout (orally), Rockland, for defendant.
Before POMEROY, WERNICK, ARCHIBALD, DELAHANTY, GODFREY and NICHOLS, JJ.
On October 1, 1974, plaintiffs Housing Securities, Inc. and Builders Investment Group commenced an action in the Superior Court (Knox County) against defendant Maine National Bank. Plaintiffs sought $60,000.00 in damages for the wrongful dishonor of a demand for payment under an irrevocable letter of credit issued by defendant. On October 18, 1976, after submission of the case on an agreed "Stipulation of Facts", the presiding Justice entered judgment for plaintiffs and ordered defendant to pay plaintiffs $60,000.00 plus legal interest and costs. Defendant has appealed from this judgment.
We deny the appeal.
On March 18, 1974, defendant issued its irrevocable letter of credit to David J. Dorenzo, agent of Housing Securities, Inc. as beneficiary. 1 The letter of credit, which was issued by defendant on behalf of its customer 2 Martin G. Olson, stated:
At the time the credit was issued, Housing Securities, Inc. was an agent and advisor to Builders Investment Group which was an unincorporated real estate investment trust. Builders Investment Group had previously issued a mortgage loan commitment to the Pine Tree Realty Trust in relation to a real estate construction project in which Pine Tree was engaged on its property at the Kittery Mall. Martin G. Olson, one of the trustees of Pine Tree, was personally liable on the mortgage loan. When construction costs at the Kittery Mall project exceeded the Builders Investment Group loan commitment to Pine Tree, David J. Dorenzo, an investment management officer of Housing Securities, Inc., asked Olson to obtain a letter of credit from a bank to secure the cost overruns. Builders Investment Group paid the excess construction costs and Olson caused defendant to issue the credit.
Before expiration of the 90 day period specified in the letter of credit, David J. Dorenzo of Housing Securities, Inc. presented defendant with a written demand for honor and payment. The demand for payment, as here applicable, stated:
On June 17, 1974, defendant advised Dorenzo that plaintiff's "documentation as presented for payment . . . (was) deficient" and therefore defendant could not make payment under the letter of credit.
Thereafter in 1975, after commencement of the action in this case, Martin G. Olson and the other trustees of Pine Tree, both individually and in their capacities as trustees of Pine Tree, made an agreement with Builders Investment Group whereby Pine Tree agreed to convey all of Pine Tree's interest in the Kittery Mall to Builders Investment Group, which in turn agreed to cancel the personal guarantees of the Pine Tree trustees. 3
As a threshold issue, we must consider defendant's argument that the Superior Court erred by refusing to require joinder of Olson as a party defendant. Defendant asserts that Olson is a "necessary and indispensable party" to this action because the failure to join Olson as a party defendant will leave defendant subject to inconsistent determinations, may prejudice Olson's interests and will result in a multiplicity of lawsuits.
The determination of whether the Superior Court committed error in refusing to order joinder of Olson in this action is governed by the standards set forth in Rule 19(a) M.R.Civ.P. 4 Rule 19(a) provides:
Under the first standard set forth in Rule 19(a), joinder is required in the circumstances of this case only if, in Olson's absence as a party, "complete relief cannot be accorded among those already parties." Resolution of this issue depends on the nature of the issuing bank's obligation to the beneficiary in a letter of credit transaction.
The Maine Uniform Commercial Code provides that a letter of credit is
"an engagement by a bank or other person made at the request of a customer . . . that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit." 11 M.R.S.A. § 5-103(1)(a).
A bank issuing a credit "must honor a draft or demand for payment which complies with the terms of the relevant credit." 11 M.R.S.A. § 5-114. The beneficiary may recover damages from the issuing bank where the "issuer wrongfully dishonors a draft or demand for payment presented under a credit." 11 M.R.S.A. § 5-115(1).
The essential characteristic of a letter of credit is that it represents an affirmative undertaking on the part of the bank to honor a beneficiary's draft or demand for payment which complies with the terms of the credit. 5 See W. Ward & H. Harfield, Bank Credits and Acceptances, at 11 (4th ed. 1958). The credit is an assurance of payment in the context of a " paper" transaction. The undertaking of the issuing bank, although initiated at the request and for the account of its customer usually in connection with the customer's contractual relationship with the beneficiary, is an independent primary and direct obligation of the bank to the beneficiary. The issuer's obligation to the beneficiary is completely independent of both the relationship between the issuer and its customer in regard to the letter of credit and the relationship between the customer and the beneficiary on the underlying transaction. See Venizelos, S.A. v. Chase Manhattan Bank, 425 F.2d 461 (2d Cir. 1970); Asociacion de Azucareros de Guatemala v. United States National Bank of Oregon, 423 F.2d 638 (9th Cir. 1970); Savage v. First National Bank & Trust Company of Tulsa, 413 F.Supp. 447 (N.D.Okl.1976); Chase Manhattan Bank v. Equibank, 394 F.Supp. 352 (W.D.Pa.1975); New York Life Insurance Company v. Hartford National Bank & Trust Company, 173 Conn. 492, 378 A.2d 562 (1977); Dovenmuehle, Inc. v. East Bank of Colorado Springs, 563 P.2d 24 (Colo.App.1977); Intraworld Industries, Inc. v. Girard Trust Bank, 461 Pa. 343, 336 A.2d 316 (1975).
Accordingly, the liability of issuing bank to a beneficiary for wrongful dishonor of a letter of credit can be fully adjudicated without making the customer a party to the action. The action here will resolve the question of the bank's liability to the beneficiary for wrongful dishonor of the letter of credit. The conduct of Olson as customer is completely irrelevant to the adjudication of this question in this case. We conclude, therefore, that complete relief can be accorded between plaintiff and defendant in this action in the absence of Martin Olson as a party. 6
Application of these standards raises the inquiry whether an adjudication of this action without Olson as a party will, "as a practical matter", prejudice Olson's interests or present a substantial risk that any of those who are parties to the action will subsequently incur inconsistent obligations.
Consequently, defendant says that the adjudication of defendant's obligation to honor the credit in this case may prejudice Olson's interest in any subsequent action initiated by the defendant against Olson in which Olson might attempt to defend in that (1) the letter issued by the defendant was not an...
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