Philipp Bros., Inc. v. Oil Country Specialists, Ltd.

• Decision Date: 17 January 1990
• Docket Number: No. C-8191,C-8191
• Citation: 787 S.W.2d 38
• Parties: 10 UCC Rep.Serv.2d 943 PHILIPP BROTHERS, INC., Petitioner, v. OIL COUNTRY SPECIALISTS, LTD., Respondent.
• Court: Texas Supreme Court

Page 38

787 S.W.2d 38

10 UCC Rep.Serv.2d 943

PHILIPP BROTHERS, INC., Petitioner, v. OIL COUNTRY SPECIALISTS, LTD., Respondent.

No. C-8191.

Supreme Court of Texas.

Jan. 17, 1990.

Rehearing Overruled March 21, 1990.

Stephen D. Susman, Parker C. Folse, III, Houston, for petitioner.

William E. Junell, Jr., Kay J. Hazelwood, Ileana M. Blanco, Houston, for respondent.

ON MOTION FOR REHEARING

PER CURIAM.

We grant the petitioner's and respondent's motions for rehearing. The order of this court of June 7, 1989, granting petitioner's application for writ of error is withdrawn as improvidently granted. The court's per curiam opinion and judgment of June 7, 1989 are withdrawn and the following is substituted.

This case involves, in part, the nature of fraud necessary to allow a trial court to enjoin the presentment of a letter of credit under section 5.114(b)(2) of the Texas Business and Commerce Code. Tex.Bus. & Com.Code Ann. § 5.114(b)(2) (Tex UCC) (Vernon Supp.1989). The dispute arose out of a consignment contract, in which Phibro agreed to place on consignment with OCS approximately $15 million worth of oil field casing pipe. Under the terms of the consignment agreement, OCS was obligated to pay Phibro a "restocking" fee at a rate of 10% per year on that portion of the pipe in inventory and on consignment in the event OCS terminated the consignment agreement or otherwise defaulted on the contract. To secure OCS's payment of the restocking fee, OCS caused Texas Commerce Bank to issue a $1,516,000 standby letter of credit. In order to collect the proceeds, the terms of the letter of credit required Phibro to present the following documents: (1) a sight draft drawn on Texas Commerce Bank, (2) Phibro's letter stating that OCS had failed to pay the restocking fee when owed; and (3) a copy of Phibro's invoice stating the amount due from OCS marked unpaid.

Contending that Phibro's entire inventory of pipes was virtually worthless, OCS sent Phibro a letter stating its intention to cancel the contract. Phibro demanded that OCS pay the 10% restocking fee under the contract. When OCS failed to pay Phibro the restocking fee, Phibro attempted to draw on the letter of credit. Claiming that Phibro's representations concerning the quality of their pipe amounted to fraud under section 5.114(b)(2) of the Texas Business and Commerce Code, OCS filed suit to, among other things, enjoin Phibro from presentment, and Texas Commerce Bank from honoring the standby letter of credit. After a preliminary hearing, the trial court temporarily enjoined presentment of the letter of credit. The temporary injunction was affirmed by the court of appeals. Philipp Bros., Inc. v. Oil Country Specialists, Ltd., 709 S.W.2d 262 (Tex.App.--Houston [1st Dist.] 1986, writ dism'd w.o.j.).

OCS continued to prosecute its claims against Phibro for breach of contract, negligent misrepresentation, fraudulent inducement and to permanently enjoin Phibro from presentment of the letter of credit. Phibro counterclaimed for breach of contract and bad faith termination. The trial court entered judgment that OCS take nothing from Phibro and also entered a monetary judgment for Phibro on its counterclaims. Because the jury failed to find that Phibro had acted fraudulently, the trial court dissolved the injunction against the presentment of the letter of credit. Subsequently, Phibro complied with the terms for payment of the letter of credit and collected the proceeds.

The court of appeals held, among other things, that Phibro was not entitled to recover against OCS for breach of contract because Phibro's own breach of contract excused OCS's performance. The court of appeals further held that because OCS was not liable to Phibro for breach of contract, Phibro had no right to payment under the letter of credit issued by Texas Commerce Bank. Accordingly, the court reversed the judgment in favor of Phibro, rendered judgment that Phibro take nothing against OCS, and remanded the cause to the trial court for judgment in favor of OCS against Phibro for the amount determined to have been collected by Phibro on the letter of credit, and for other proceedings. 762 S.W.2d 170....