Intraworld Industries, Inc. v. Girard Trust Bank

• Decision Date: 17 April 1975
• Citation: 461 Pa. 343,336 A.2d 316
• Parties: , 17 UCC Rep.Serv. 191 INTRAWORD INDUSTRIES, INC., and Vacanze in Paradiso Hotels, S.A., Appellants, v. GIRARD TRUST BANK and Paulette Cymbalista.
• Court: Pennsylvania Supreme Court

Page 316

336 A.2d 316

461 Pa. 343, 17 UCC Rep.Serv. 191

INTRAWORD INDUSTRIES, INC., and Vacanze in Paradiso Hotels S.A., Appellants, v. GIRARD TRUST BANK and Paulette Cymbalista.

Supreme Court of Pennsylvania.

April 17, 1975.

Judah I. Labovitz, Philadelphia, for appellants; Wolf, Block, Schorr & Solis-Cohen, Philadelphia, of counsel.

Gregory M. Harvey, Philadelphia, for appellee Paulette Cymbalista; Morgan, Lewis & Bockius, Philadelphia, of counsel.

James Eiseman, Jr., Drinker, Biddle & Reath, Philadelphia, for appellee, Girard Bank.

Before EAGEN, O'BRIEN, ROBERTS, POMEROY, NIX and MANDERINO, JJ.

OPINION OF THE COURT

ROBERTS, Justice.

This appeal requires us to review the trial court's denial of a preliminary injunction to restrain honor of a draft under an international letter of credit. A precise statement of the facts, which are complex, is necessary for a proper understanding.

On February 11, 1972, a lease was executed by Intraworld Industries, Inc., a corporation ¹ headquartered in Wilkes-Barre, Pennsylvania, and Paulette Cymbalista, a citizen of Switzerland and resident of Italy. Cymbalista agreed to lease to Intraworld the Hotel Carlton, A luxury hotel located in St. Moritz, Switzerland, for a term of 15 years at an annual rental of 800,000 Swiss francs, payable in semi-annual installments. ² The lease provided that Intraworld was required to prepay the for the initial 18-month period. Intraworld was also obligated to procure, within the first 100 days of the term, a performance bond in the amount of $500,000.00 'to insure to lessor the payment of the rent.' ³

Intraworld entered into possession of the hotel on May 1, 1972. Shortly thereafter, Intraworld assigned its interest in the lease to its subsidiary, Vacanze In Paradiso Hotels, S.A., a Swiss corporation. ⁴

At a later time, ⁵ Intraworld and Cymbalista executed an addendum to the lease (to which the parties have referred by its German title 'Nachtrag'). The Nachtrag cancelled Intraworld's obligation to procure a performance bond and substituted a duty a provide letters of credit issued by 'the Girard Trust Company of Philadelphia' in order to guarantee rental payments one year in advance. Two letters of credit were specifically required, each in the amount of $100,000.00, maturing in November, 1973, and May, 1974, to secure the rent due at those times. After each rental payment, Intraworld was to provide a new letter of credit 'in order that the lessor remains secured one years (sic) rent in advance.' The Nachtrag also provided:

'In the event the lessee should not fulfill its obligation to pay, so that the letter of credit must be used, . . . then the lessor can terminate the lease immediately without further notice. In this case, the lessor retains the rent paid or guaranteed for the following year as a stipulated penalty for non-performance of the contract from the lessee, in doing so the lessor retains the right to make a claim for additional damages not covered by the stipulated penalty.'

On September 1, 1972, Intraworld and the Girard Trust Bank, Philadelphia, entered into an agreement to provide the letters of credit required by the Nachtrag. Girard agreed to

'issue a letter of credit . . . in the amount of $100,000 under which the Lessor may draw a sight draft on (Girard) for payment of the sum due under said lease (a) on November 10, 1973 and (b) May 10, 1974. Under the terms of such letter of credit, payments will be made if the Lessor presents a draft as provided in such letter of credit. Each such letter of credit will expire . . . on the twentieth day after the payment under said lease is due.' ⁶

In accordance with the agreement, Girard issued two irrevocable letters of credit on September 5, 1972. Each authorized Cymbalista to draw a draft on Girard in the amount of $100,000.00 if Intraworld failed to pay the rent when due. ⁷

In the summer of 1973, the relationship between Cymbalista and Intraworld began to go awry. Norbert Cymbalista, Paulette's husband, visited the hotel in August and, after discussions with the manager, became very concerned over the hotel's financial condition. He discovered that there were unpaid bills in excess of $100,000, that all telephone and Telex communications had been cut off for nonpayment of bills, and that the filing of mechanics liens against the hotel was imminent. After a trans-Altantic telephone call, the Cymbalistas travelled to the United States within several days of Norbert's discoveries to attempt to resolve the hotel's difficulties with Intraworld. However, as Norbert testified,

'I tried to reach (the president of Intraworld) innumerable times by telephone and each time his secretary answered that he would call me back and he never did. I stayed a whole month in the United States trying continually to reach him and it was never possible.'

On August 20, 1973, apparently while the Cymbalistas were in the United States, their Swiss counsel sent a letter to Intraworld reciting the unpaid bills, erosion of the Carlton's reputation, and internal corporate difficulties (apparently of Intraworld's Swiss subsidiary). It concluded:

'Based upon (Swiss law) and in reference to the provisions of the Lease Contract, we herewith extend to you a final time limit up to September 15, 1973 in order to:

(a) to pay all due debts,

(b) to supply the necessary means to safeguard proper management of the business,

(c) to complete the Board of Directors according to the law.

Within this time limit you must prove to the Hotel Owners that the aforementioned measures have been effectuated. Should you (fail to?) comply with this demand within the time-limit, the Lease Contract will be regarded as void.'

Intraworld's Swiss counsel replied to the August 20 letter (but this reply is not in the record). Finding this reply unsatisfactory, Cymbalista's Swiss counsel answered on September 18, 1973:

'As (Intraworld) did not comply with our demand within this time-limit, we regard the leasing contract as terminated effective from 15 September 1973 . . .. From now on, the proprietor will have direct and sole control over the hotel real estate respective to the hotel management.' ⁸

Further correspondence was exchanged by Swiss counsel, including, apparently, a demand on November 3 for the rent due in November. On November 7, 1973, Intraworld's Swiss counsel wrote to Cymbalista's counsel:

'You state on behalf of the lessor that (Intraworld) has the obligation to pay . . . rent by November 1. My client (Intraworld), who is presently in close contact with their American Bank (Girard), however, have (sic) informed me that the payment of the rent can be made up to November 10 . . . My client informed me further that accordingly these payments shall be legally undertaken by the 'Girard Trust Bank' . . . (M)y client cannot agree with your position according to which the lease contract can be considered as terminated either because of (Swiss law) or because of the terms of the lease agreement . . ..'

That letter was followed on November 9, 1973, by another from Intraworld's counsel to Cymbalista's counsel in which he stated:

'If the transfer of the rent from the United States should not be made in timely fashion, your client (Cymbalista) is at liberty to obtain payment by way of the guarantee contracts (i.e., letters of credit). In any event, there exist the two guarantee contracts, valid until November 30, 1973 and May 30, 1974, respectively, in order to preserve the rights of your client.' ⁹

The rent due on November 10, 1973, was not paid by Intraworld. Accordingly, on November 21, 1973, Cymbalista's American counsel presented to Girard a draft drawn on Girard for $100,000.00 under Credit No. 35798. The draft was accompanied, all parties agree, by documentation that conformed to the terms of the credit. In his letter to Girard, Cymbalista's counsel stated:

'Your attention is directed to correspondence dated November 7 and November 9, 1973, copies of which are attached, in which Swiss counsel representing the Lessee invites the Lessor to draw upon the Letters of Credit; our client, as Lessor, takes the position that the lease . . . has terminated for various reasons, including the failure timely to pay the amount due pursuant to the 'Nachtrag' . . ..'

Girard informed Intraworld on November 21 that it intended to honor the draft. Intraworld immediately filed an action in equity in the Court of Common Pleas of Philadelphia seeking injunctive relief prohibiting Girard from honoring the draft. Cymbalista filed a petition to intervene, which was granted by the trial court.

The November action was terminated on December 6, 1973, by agreement of all parties. Pursuant to the agreement, Girard placed $100,000.00 in escrow with a Swiss bank, with entitlement to that fund to be determined by the courts of Switzerland.

The situation remained unchanged for about six months. The rent due on May 10, 1974, was not paid. On May 21, 1974, Cymbalista's American counsel presented to Girard a draft for $100,000.00 under Credit No. 35799, accompanied by conforming documentation. Girard immediately advised Intraworld that it intended to honor the draft.

On May 24, Intraworld filed this equity action in the Court of Common Pleas of Philadelphia. It sought preliminary and permanent injunctions restraining Girard from honoring Cymbalista's draft under the letter of credit. The court issued a preliminary restraining order and set a date for a hearing. Cymbalista again petitioned for leave to intervene, which the court granted on May 29.

After the filing of additional pleadings, including preliminary objections and an amended complaint, a hearing was held and testimony taken on May 30 and 31, 1974. On July 11, the trial court issued a memorandum and decree in which it denied a preliminary injunction. Intraworld has appealed to this Court. ¹⁰ We affirm.

At the outset we note the limited scope of our review:

'In Pa. P.U.C. v....