Mantua Mfg. Co. v. Commerce Exchange Bank

• Decision Date: 01 March 1996
• Docket Number: No. 94-2139,94-2139
• Citation: 75 Ohio St.3d 1,661 N.E.2d 161
• Parties: , 29 UCC Rep.Serv.2d 349 MANTUA MANUFACTURING COMPANY, Appellee, v. COMMERCE EXCHANGE BANK, Appellant.
• Court: Ohio Supreme Court

Page 1

75 Ohio St.3d 1

661 N.E.2d 161, 29 UCC Rep.Serv.2d 349

MANTUA MANUFACTURING COMPANY, Appellee, v. COMMERCE EXCHANGE BANK, Appellant.

No. 94-2139.

Supreme Court of Ohio.

Submitted Dec. 13, 1995.

Decided March 1, 1996.

SYLLABUS BY THE COURT

1. When a letter of credit states that it is subject to the Uniform Customs and Practice for Documentary Credits (Rev.1983), International Chamber of Commerce Publication No. 400 ("UCP") and there is a direct conflict between a provision of the UCP and an analogous provision of R.C. Chapter 1305, the UCP's terms replace those of R.C. Chapter 1305, unless that replacement violates the conditions of R.C. 1301.02(C).

2. The phrase "other person who causes an issuer to issue a credit" in R.C. 1305.01(A)(7) refers to a party in a transaction not involving a sale of goods who stands in a position analogous to that of a buyer in a sale of goods.

This matter arises from a transaction involving appellant Commerce Exchange Bank ("Commerce"); appellee Mantua Manufacturing Company ("Mantua"), a company which manufactures steel bed frames; Dart Steel, Inc. ("Dart"), a steel brokerage firm; and LTV Steel Company ("LTV"), a steel mill. In late 1987 Mantua was acquiring the steel it used in its production of bed frames through Dart. At the same time, Edward Weintraub, the president of Mantua, had become interested in expanding his company's steady access to steel.

To accommodate Weintraub, Jerry Eisner, the president of Dart, attempted to secure a more constant flow of steel to Mantua from LTV. However, LTV was only willing to supply Dart with larger quantities of steel on the condition that Dart provide LTV with a letter of credit ("LC"). Eisner asked Commerce to issue an LC on Dart's behalf in favor of LTV. After reviewing Dart's financial statements, Commerce determined that Dart would need to provide some form of security before Commerce would issue the LC. Weintraub agreed to provide Dart with the necessary security.

In January 1988, Weintraub and Eisner met with Richard C. Grob, a vice-president of loan administration for Commerce. At that meeting, Weintraub agreed to purchase a certificate of deposit ("CD") from Commerce in the amount of $100,000. At the same meeting Weintraub, on behalf of Mantua, executed and delivered to Commerce an "Authority to Hypothecate." This document gave Dart the authority to grant a security interest in the CD to Commerce as collateral for any "debt" owed by Dart to Commerce, including any debt arising from a draw on the proposed letter of credit. ¹

At the same meeting, Eisner assigned the CD to Commerce as security for any debt owed by Dart to Commerce. On January 21, Dart also executed a promissory grid note to Commerce in the amount of $50,000. This note obligated Dart to reimburse Commerce for any draw on the LC by LTV. The note listed Mantua's CD as collateral.

On January 25, Commerce issued an irrevocable letter of credit for $50,000 to LTV. The letter of credit permitted LTV to make a draw against the LC upon LTV's presentment of an unpaid invoice. The LC also stated that it was "subject to the Uniform Customs and Practice for Documentary Credits (Rev.1983), International Chamber of Commerce--Publication 400."

The LC had an expiration date of July 11, 1988; however, upon Dart's request, Commerce extended the term of the LC to January 10, 1989. Over the next two years, Dart requested an extension of the LC's expiration date five more times. The expiration date of the sixth and final extension was April 10, 1991. ²

On February 28, 1991, LTV presented the documentation necessary to effect a draw on the LC. Commerce honored the presentment and formally demanded repayment from Dart. Approximately five days later, Commerce informed Mantua that if Dart did not reimburse Commerce for the draw on the LC, Commerce would redeem the CD and apply the proceeds to Dart's debt. Dart did not reimburse Commerce for the draw on the LC, and on April 11, 1991, Commerce redeemed the CD.

Mantua filed a complaint in the Court of Common Pleas of Cuyahoga County on April 18, 1991. In its complaint, Mantua alleged that Commerce was not authorized to use the CD as security because Mantua had not consented to the final extension of the letter of credit. Mantua asserted that it was a "customer" of Commerce, as that term is defined by R.C. 1305.01(A)(7). Therefore, Commerce was obligated under R.C. 1305.05(B) to obtain Mantua's consent before Commerce renewed the LC. Mantua argued that Commerce's failure to obtain this consent invalidated the final extension of the LC and ended Commerce's authority to redeem the CD.

At the close of Mantua's case, Commerce unsuccessfully moved for a directed verdict on the grounds that Mantua was not a "customer" as that term is defined under R.C. 1305.01(A)(7). Commerce repeated this motion at the close of its case, but was again denied. The jury returned a verdict in favor of Mantua for $50,000 and the trial court entered judgment on May 13, 1993. Commerce subsequently moved for judgment notwithstanding the verdict or, in the alternative, a new trial. The trial court denied both of these motions.

On appeal, Commerce argued that the trial court erred by denying Commerce's motion for directed verdict and its motion for judgment notwithstanding the verdict. ³ The court of appeals affirmed the trial judge's disposition of both motions.

The cause is now before this court pursuant to the allowance of a discretionary appeal.

Strachan, Green, Miller, Olender & Hobt, William R. Strachan and Kirk W. Roessler, Cleveland, for appellant.

Kelley, McCann & Livingstone, Thomas J. Lee and Peter M. Poulos, Cleveland, for appellee.

Harris, McClellan, Binau & Cox, and John F. Casey, and Jeffrey D. Quayle, Columbus, urging reversal for amicus curiae, Ohio Bankers' Association.

WRIGHT, Justice.

This appeal invites us to determine whether the trial court correctly refused to grant appellant Commerce's motion for a directed verdict and motion for judgment notwithstanding the verdict. The standards applied to motions for directed verdict and motions for judgment notwithstanding the verdict are identical. Nickell v. Gonzalez (1985), 17 Ohio St.3d 136, 137, 17 OBR 281, 282, 477 N.E.2d 1145, 1147, citing Ayers v. Woodard (1957), 166 Ohio St. 138, 1 O.O.2d 377, 140 N.E.2d 401, paragraph one of the syllabus. Specifically, either motion should be granted when "the trial court, after construing the evidence most strongly in favor of the party against whom the motion is directed, finds that upon any determinative issue reasonable minds could come to but one conclusion upon the evidence submitted and that conclusion is adverse to such party." Civ.R. 50(A)(4). We find, as a matter of law, that Commerce did not need Mantua's consent prior to the extension of the letter of credit. Accordingly, we reverse the judgment of the court of appeals.

In the courts below, Mantua argued that it was a "customer" of Commerce, as that term is defined under R.C. 1305.01(A)(7). Consequently, Mantua asserted, Commerce could extend the letter of credit ("LC") only after it received the consent of both LTV and Mantua. This conclusion was based on R.C. 1305.05(B), which states that:

"Unless otherwise agreed once an irrevocable credit is established as regards the customer it can be modified or revoked only with the consent of the customer and once it is established as regards the beneficiary it can be modified or revoked only with his consent." ⁴

Commerce contends that the rights of the parties in this transaction were governed by the Uniform Customs and Practice for Documentary Credits (Rev.1983), International Chamber of Commerce Publication No. 400 ("UCP"), which does not require an issuing bank to obtain its customer's consent prior to the renewal of a letter of credit. Strictly speaking, the UCP is not law. Dolan, The Law of Letters of Credit (2 Ed.1991), Section 4.06(1). Rather, it is a "set of rules, generally viewed as customary rules of law, that may be incorporated into the private law of a contract between parties." Centrifugal Casting Mach. Co., Inc. v. Am. Bank & Trust Co. (C.A.10, 1992), 966 F.2d 1348, 1351, fn. 3. Although the drafters of the UCP originally intended for it to apply in international letter of credit transactions, banks issuing letters of credit in strictly domestic transactions also incorporate the UCP into the terms of the transaction. Dolan, supra, Section 4.06(1)(a); 3 White & Summers, Uniform Commercial Code (4 Ed.1995) 122, Section 26-3. The portion of the UCP relied upon by Commerce in this matter states that "[irrevocable letters of credit] can neither be amended nor cancelled without the agreement of the issuing bank, the confirming bank (if any), and the beneficiary." ⁵ Id., Article 10(d). Mantua does not claim to fall within any of the classes listed in Article 10(d). Consequently, if the UCP were the sole source of substantive law governing the LC, Commerce would have been completely within its rights to renew the LC without Mantua's consent. We agree with Commerce that the rights of the parties in the instant dispute are defined by the UCP.

Any analysis of letter of credit law in Ohio must begin with the chapter on letters of credit in Ohio's version of the Uniform Commercial Code ("UCC"), R.C. 1305.01 et seq. This chapter provides the basis for letter of credit law in this state and generally operates as a set of default rules in those instances when the parties have not agreed to the contrary. 3 White & Summers, supra, at 121-122, Section 26-3. Parties to a letter of credit may, however, choose to vary the effects of the provisions of R.C. Chapter 1305 "except as otherwise provided [in that chapter] and except that the obligations of good faith, diligence, reasonableness, and care prescribed by [that chapter] may not be disclaimed by agreement." R.C. 1301.02(C). See, also, R.C. 1305.01(D).

Indeed, R.C. 1305.05(B)...