Kenney v. Read

• Decision Date: 18 April 2000
• Docket Number: No. 18600-8-III.,18600-8-III.
• Citation: 100 Wash.App. 467,997 P.2d 455
• Court: Washington Court of Appeals
• Parties: James P. KENNEY, Jr. and Gail E. Kenney, husband and wife, Appellants, v. Melinda Boucher READ and John Doe Read, wife and husband and the marital community comprised thereof, Respondents.

997 P.2d 455

100 Wash.App. 467

James P. KENNEY, Jr. and Gail E. Kenney, husband and wife, Appellants, v. Melinda Boucher READ and John Doe Read, wife and husband and the marital community comprised thereof, Respondents.

No. 18600-8-III.

Court of Appeals of Washington, Division 3, Panel Five.

April 18, 2000.

Edward G. Johnson, Perkins, Coie, Spokane, for Appellants.

Hedley W. Greene, Spokane, for Respondents.

BROWN, J.

The trial court granted summary judgment to Melinda Read allowing her to retain $17,500 from a letter of credit authorized by James Kenney. Mr. Kenney's appeal focuses on whether the trial court erred interpreting the letter of credit. We decide the court did not err with respect to the letter, but that it mistakenly granted summary judgment because an issue of fact regarding the parties' intent remained. Accordingly, we reverse and remand.

FACTS

On February 9, 1996, Rook Broadcasting of Idaho, Inc. and Melinda Boucher Read entered into a Time Brokerage Agreement (TBA) for a one-year lease of Ms. Read's radio station pending the sale of the station to Rook. Rook's obligations under the TBA included the payment of $5,000 per month. The TBA required Rook to provide a letter of credit in the amount of $45,000 to secure nine monthly payments. Later, Rook formed a new corporation, KEZE, Inc., and assigned to it all rights under the TBA and the letter of credit.

Prior to the TBA, on February 7, 1996, James Kenney authorized his bank to issue the $45,000 letter of credit. Mr. Kenney did not sign or negotiate the TBA. Nor did he review it prior to providing the letter of credit; although he did see a preliminary draft. Ms. Read did not give Mr. Kenney any inducements to provide the letter of credit. Mr. Kenney did not directly communicate with Ms. Read or her husband.

Mr. Kenney provided the letter of credit in consideration of promises and inducements by representatives of Rook. Based on Rook's representations, Mr. Kenney believed that Ms. Read could draw down the letter of credit solely if Rook did not make a monthly lease payment. Other than the fact that Mr. Kenney provided the letter as Rook's surety, the record does not clarify his relationship to Rook.

The letter of credit provided disjunctively that Ms. Read could draw $5,000 increments to cover missed lease payments or Ms. Read could draw down the entire amount if a substitute letter of credit was not supplied within 10 days of its March 1, 1999 expiration date. These provisions are consistent with terms in the TBA regarding the letter of credit.

Rook timely made all nine of the monthly payments secured by the letter of credit. Nonetheless, Ms. Read drew down the balance of the letter of credit on February 21, 1997, within 10 days of the letter of credit's March 1 expiration date, because no substitute letter had been provided. Ms. Read later returned $27,500 to Mr. Kenney, retaining $17,500 she claimed was due to her under the TBA for expenses in addition to the monthly payments. KEZE, Rook's successor, agreed: "Broker [KEZE] is indebted to Licensee [Ms. Read] for the sum of $17,500 under the Time Brokerage Agreement for the term ending March 15, 1997 which amounts shall be considered paid in full by application of funds from the Time Brokerage Agreement Letter of Credit."

Mr. Kenney sued, alleging Ms. Read's retention of the $17,500 constituted conversion or unjust enrichment. On cross motions for summary judgment, Ms. Read prevailed on the theory that no substitute letter of credit had been supplied within 10 days of March 1, 1999. Mr. Kenney appealed.

ANALYSIS

The issue is whether the trial court erred by granting Ms. Read summary judgment after deciding no factual dispute remained that a substitute letter of credit had not been supplied within 10 days of the deadline and concluding Ms. Read was legally entitled to withdraw the $45,000.

When reviewing an order on summary judgment, this court engages in the same inquiry as the trial court. Hollis v. Garwall, Inc., 137 Wash.2d 683, 690, 974 P.2d 836 (1999). "Summary judgment is appropriate when the pleadings, depositions, admissions, and affidavits, if any, show that no genuine issue of material fact exists and the moving party is entitled to judgment as a matter of law." Hollis, 137 Wash.2d at 690, 974 P.2d 836; CR 56(c). "The facts and all reasonable inferences are considered in the light most favorable to the nonmoving party, and all questions of law are reviewed de novo." Hollis, 137 Wash.2d at 690, 974 P.2d 836. The moving party has the burden of establishing the absence of an issue of material fact. SAS America, Inc. v. Inada, 71 Wash. App. 261, 263, 857 P.2d 1047 (1993).

Letters of credit are well described by the Fourth Circuit:

Letters of credit have long been used to facilitate the financing of commercial transactions between buyers and sellers by providing a certain and reliable means to ensure payment for goods delivered or services rendered.... [A] letter of credit is a tripartite arrangement under which one party establishes a credit, usually at a bank, on which it authorizes a third party to draw, provided certain conditions are met. The bank, as a mere stakeholder of the credit, issues a letter to the third party (known as the beneficiary) confirming the credit and stating the conditions for any draw to be made against it. In essence, the bank's promise to pay the beneficiary upon the beneficiary's timely presentation to the bank of documents conforming to the conditions delimited in the letter replaces the promise of the party which established the credit.

Amwest Surety Ins. Co. v. Republic Nat'l Bank, 977 F.2d 122, 125 (4th Cir.1992), cert. denied, 507 U.S. 985, 113 S.Ct. 1582, 123 L.Ed.2d 149 (1993). In Washington State, RCW 62A.5-101 through 62A.5-117 govern letters of credit.¹ A letter of credit usually involves three distinct relationships:

The typical letter of credit involves three parties (issuer, customer/applicant, and beneficiary) and three separate transactions: (1) the contract between the bank and its customer to issue a letter of credit; (2) the letter of credit in which the issuing bank agrees to pay the beneficiary when the conditions contained in the letter are complied with; and (3) the underlying contract between the customer and the beneficiary for which the letter of credit was obtained.

Ensco Environmental Services, Inc. v. United States, 650 F.Supp. 583, 588 (W.D.Mo. 1986); see also Former RCW 62A.5-103(1) (defining "letter of credit," "issuer," "beneficiary," and "customer"). A four-party letter of credit may also be valid. Ensco, 650 F.Supp. at 588-89. "The letter of credit is an instrument designed to enable the beneficiary to collect money to which it believes itself entitled and to hold such sums while any disputes are pending." Andy Marine, Inc. v. Zidell, Inc., 812 F.2d 534, 537 (9th Cir.1987).

Here, Mr. Kenney (customer or applicant) established the first relationship when he contracted with his bank (issuer) for the issuance of the letter of credit. The second relationship was Mr. Kenney's bank's obligation as the issuer to pay Ms. Read (beneficiary) per the terms of the letter of credit. The third relationship is that created by the TBA, the contract between Ms. Read and Rook. The letter of credit itself is independent of the underlying transaction and any other related obligations. See Alaska Textile Co., Inc. v. Chase Manhattan Bank, 982 F.2d 813, 815 (2nd Cir.1992)

. Therefore, "the bank's obligation to the beneficiary is independent of the beneficiary's performance on the underlying contract." 3 James J. White & Robert S. Summers, Uniform Commercial Code, § 26-2, at 113 (4th ed.1995). In view of this principle, courts generally "cannot turn to an underlying agreement in order to interpret a letter of credit unless references to the underlying agreement in the letter of credit explicitly create a condition for honoring a draft." Andy Marine, Inc.

812 F.2d at 537.

Here, both parties rely on the terms of the letter of credit for their arguments. This reliance is, however, misplaced because the parties are not disputing whether the issuing bank should have honored the letter of credit. They agree that the bank properly did so. Rather, they are contesting whether Ms. Read may rightfully retain the proceeds from the letter of credit based on the underlying contract. Specifically, they contest whether the letter of credit was meant to secure only the nine monthly lease payments, or whether it was intended to secure all debts arising from the agreement.

Article 5 does not "deal at all with the underlying contract between the applicant and the beneficiary." White & Summers, supra, at 120. As explained in the code's comments:

The legal relations between the issuer ... and the beneficiary ... and between the issuer and the customer ... are spelled out in other sections of this Article. The legal relations between the customer and the beneficiary turn on the underlying transaction between them.

U.C.C. § 5-103, cmt. 3 (emphasis added). Where, as here, the issue concerns a dispute between the parties to the underlying contract after the issuing bank has honored its obligations under the letter of credit, courts may consider the underlying transaction in determining whether the beneficiary has performed the terms of the credit. Global Network Technologies, Inc. v. Regional Airport Auth., 122 F.3d 661, 665 (8th Cir.1997). Thus, we may look to the underlying suretyship agreement.

Neither party has placed a separately drafted suretyship agreement in the record. The only documents in the record are the letter of credit and the TBA. When several instruments are made as part of one transaction, they will be read together and construed with reference to each other. Boyd v. Davis, 127 Wash.2d 256, 261, 897 P.2d 1239 (1995). This is true even when the instruments do not refer to each other and when the instruments are not executed...