PNC Bank v. Liberty Mut. Ins. Co.

• Decision Date: 10 January 1996
• Docket Number: Civil Action No. 94-1692.
• Parties: PNC BANK, NATIONAL ASSOCIATION, formerly Pittsburgh National Bank, Plaintiff, v. LIBERTY MUTUAL INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — Eastern District of Pennsylvania

912 F. Supp. 169

PNC BANK, NATIONAL ASSOCIATION, formerly Pittsburgh National Bank, Plaintiff, v. LIBERTY MUTUAL INSURANCE COMPANY, Defendant.

Civil Action No. 94-1692.

United States District Court, W.D. Pennsylvania.

January 10, 1996.

Richard B. Tucker, III, Tucker, Arensberg, Pittsburgh, PA, for Plaintiff.

Brian A. Davis, Lisa Fishbone Wallack, Choate, Hall & Stewart, Boston, MA, Charles C. Casalnova, O'Keefee, Grenen & Birsic, Pittsburgh, PA, for Defendant.

OPINION

CINDRICH, District Judge.

I. Introduction

This is an action for breach of warranty and fraudulent misrepresentation arising out of the bank issuer's payment of $3 million to the beneficiary upon presentment of a sight draft drawn against an irrevocable, standby letter of credit. The issuer, PNC BANK, ("PNC") (formerly Pittsburgh National Bank), has its principal place of business in Pittsburgh, Pennsylvania, and the beneficiary, Liberty Mutual Insurance Company ("Liberty Mutual"), has its principal place of business in Boston, Massachusetts. Jurisdiction is predicated upon diversity of citizenship and an amount in controversy which exceeds $50,000. 28 U.S.C. § 1332.

Pending before the court are the parties' cross-motions for summary judgment accompanied by supporting evidentiary material. The parties agree that there are no material questions of fact and that disposition of this case is properly based upon the court's interpretation of the applicable law and the documents relevant to the transaction. This being a diversity jurisdiction case, the law of the Commonwealth of Pennsylvania will be applied.

Among the documents submitted by Liberty Mutual are the affidavit and revised affidavit of Arthur G. Lloyd ("Lloyd Affidavits"). PNC's motions to strike the Lloyd Affidavits, will be decided together with the cross-motions for summary judgment.

PNC claims that it is entitled to summary judgment because Liberty Mutual breached its warranty under Uniform Commercial Code ("U.C.C.") § 5-111(1) by presenting a signed statement accompanying its draw on a letter of credit containing a fact or facts which it knew to be untrue. Based on this same document, PNC also requests summary judgment on its claim of fraudulent misrepresentation.

Liberty Mutual concedes that the document it signed and presented to PNC in connection with its draw contained a statement which was not literally true. However, it argues that UCC § 5-111 does not impose a warranty of literal truthfulness upon the presenter, but only a warranty that the conditions of the credit have been met.

Thus, the resolution of this case turns upon the interpretation of the UCC § 5-111(1) beneficiary warranty under the law of Pennsylvania. The issue boils down to this: does the beneficiary who presents a demand for payment on a letter of credit implicitly make a representation that any factual statements contained in the documents of presentment are literally true or is the warranty limited to a representation that the conditions of the credit have been met?

On September 22, 1995, we heard oral argument on all motions. For the reasons which follow, Liberty Mutual's summary judgment motion will be granted, PNC's summary judgment motion will be denied, and PNC's motions to strike will be granted in part and denied in part.

II. Facts

Mellon-Stuart Holding Company ("Mellon-Stuart"), formerly a Pennsylvania construction company, was a banking customer of PNC. From 1983 through 1988, Liberty Mutual issued annual workers' compensation and comprehensive general liability insurance policies to Mellon-Stuart on a "cash flow retrospective" basis. Also known as "cash flow rating plans," these policies provided for annual adjustments in Mellon-Stuart's estimated premiums based upon the company's actual claims history. Thus, depending on the claims history, examined retrospectively, the insured could owe the insurer more than the premium initially paid. This unpaid portion is referred to as the "deferred annual premium". Pursuant to the terms of these insurance policies, Mellon-Stuart and Liberty Mutual entered into six separate premium payment agreements, each of which required Mellon-Stuart to obtain an irrevocable letter of credit in favor of Liberty Mutual in order to guarantee the payment of its deferred annual premiums. From 1983 until 1988, Mellon-Stuart obtained six irrevocable letters of credit for the benefit of Liberty Mutual, five of which were issued by PNC and one by another bank.

Administration of the six letters of credit, which required sight drafts in fluctuating amounts, grew increasingly difficult. Accordingly, in 1989, the five letters of credit issued by PNC, in the aggregate amount of $2.8 million, were consolidated into a single, $3 million irrevocable letter of credit. Like the predecessor letters, this one was unsecured.

It is undisputed that Mellon-Stuart and Liberty Mutual intended that the new letter of credit serve as a "blanket" to guarantee premium payments for all open policy years from 1983 through 1989 and that PNC was aware of this intention. At its customer's request, PNC personnel drafted the revised letter of credit to accomplish that purpose.

However, despite this shared intention, the language of the new, consolidated letter of credit required the beneficiary to present a sight draft accompanied by a signed statement that the draw represented funds due as a result of the non-payment of premiums due under the 1984 premium agreement and made no reference to any other premium years. Specifically, the PNC letter of credit contains the following presentment language which forms the basis of this litigation:

THE AMOUNT OF OUR DRAWING REPRESENTS FUNDS DUE AS A RESULT OF THE FACT THAT MELLON-STUART HOLDING COMPANY HAS NOT PAID PREMIUMS DUE TO US UNDER AGREEMENT DATED AUGUST 1, 1984.

The "Agreement dated August 1, 1984" provides for premium payments for that year only and makes no reference to prior or subsequent years. PNC concedes that it made a "mistake" in drafting. Liberty Mutual was aware of the language as drafted by PNC; however, neither party did anything to rectify it.

In May 1992, Mellon-Stuart filed for bankruptcy protection. On October 9, 1992, Liberty Mutual drew upon the letter of credit for the maximum amount by presenting PNC with a $3 million sight draft accompanied by a signed statement in language that matched the presentment statement of the amended PNC letter of credit. Payment was made without further inquiry of Liberty Mutual or the account party. No more than $150,960 was due under the 1984 premium agreement, but Liberty Mutual was owed in excess of $3 million for policy years through 1989.

In this suit for breach of warranty and fraudulent misrepresentation, PNC claims it was damaged in the amount of $2,849,040, representing the difference between the amount paid to Liberty Mutual upon its presentment of the sight draft and the amount Mellon-Stuart actually owed Liberty Mutual for the unpaid deferred insurance premiums under the 1984 premium agreement.¹

III. Discussion

PNC argues that the "independence principle" in the law of letters of credit requires that the beneficiary bear the responsibility of discovering deficiencies in a letter of credit. According to PNC, the independence principle dictates that the beneficiary bear any financial loss incurred where a letter of credit has failed in achieving its intended commercial purpose. PNC maintains that the $3 million letter of credit issued in 1989 failed to secure Mellon-Stuart's premium obligations to Liberty Mutual for all policy years beginning 1983 through 1989 because of the language in the statement of presentment referring only to the 1984 premium year and having failed to meet those desired commercial ends cannot be reformed to reflect the intended scope of coverage.

PNC's argues that under Section 5-111(1) of the Uniform Commercial Code a beneficiary of a letter of credit warrants the truthfulness of signed statements made in documents it is required to present in order to draw funds. According to PNC, Liberty Mutual breached the U.C.C. § 5-111(1) warranty by presenting the $3 million sight draft and the accompanying statement while knowing that Mellon-Stuart owed less than $3 million under the 1984 premium agreement. PNC contends that under the rule of strict compliance, Liberty Mutual is not entitled to retain those funds since it failed to adhere to the requirements of the letter of credit.

Liberty Mutual argues that the warranty of U.C.C. § 5-111(1) does not constitute a representation as to the literal accuracy of the factual assertions contained in the drawing documents presented to the issuer. Rather the beneficiary warrants that there is no material fraud in the underlying transaction or forgery of the documents. Liberty Mutual contends that it is undisputed that the $3 million letter of credit was intended to secure Mellon-Stuart's premium obligations to Liberty Mutual for all policy years from 1983 through 1988 and, therefore, the letter of credit must be construed in a manner consistent with this clear intention.

Liberty Mutual further argues that PNC has not suffered any compensable loss as a result of its decision to draw upon the letter of credit in 1992 since, regardless of the truthfulness of the assertions in the presentment clause, Mellon-Stuart did default upon its obligations in an amount in excess of $3 million and Liberty Mutual was entitled to draw up to the full amount of the face value of the letter of credit. Thus, PNC's measure of damages, if any, is the difference between the position it expected to be in if Mellon-Stuart defaulted and the position it now occupies since Mellon-Stuart has defaulted.

IV. Summary Judgment Standard

Summary judgment is appropriate where "the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact...