West Virginia Housing Development Fund v. Sroka

• Decision Date: 16 April 1976
• Docket Number: Civ. A. No. 74-532.
• Parties: WEST VIRGINIA HOUSING DEVELOPMENT FUND v. John E. SROKA et al.
• Court: U.S. District Court — Eastern District of Pennsylvania

415 F. Supp. 1107

WEST VIRGINIA HOUSING DEVELOPMENT FUND v. John E. SROKA et al.

Civ. A. No. 74-532.

United States District Court, W. D. Pennsylvania.

April 16, 1976.

Raymond Hasley, Pittsburgh, Pa., for plaintiff.

John Lukens, Charleston, W. Va., Morton Meyers, Johnstown, Pa., Harold Gondelman, James Villanova, Pittsburgh, Pa., for defendants.

MEMORANDUM: PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AND HUD'S MOTION TO DISMISS OR IN THE ALTERNATIVE FOR SUMMARY JUDGMENT

KNOX, District Judge.

This litigation represents an attempt to sort out part of the financial responsibility for the failure of a low-cost housing development, the Bridgeport Gardens, located at Bridgeport, Harrison County, West Virginia. There are four parties to this case: West Virginia Housing Development Fund (hereinafter The Fund), John E. Sroka, The United States National Bank, (hereinafter The Bank) and James T. Lynn, Secretary of the Department of Housing and Urban Development (hereinafter HUD).

While the record of this case is replete with allegations as to who was responsible for the demise of the Bridgeport Gardens, the issue presently before the court can be simply put: Who is liable to the plaintiff for the sum of $66,350? No one appears to dispute the fact that the plaintiff is entitled to this money.

The relationship of these four parties to the Bridgeport Gardens is as follows: The Fund is a government instrumentality and public body corporate of the State of West Virginia, created under Chapter 31, Article 18, Section 1, et seq., of the Code of West Virginia, 1931, as amended. This Fund was created to fulfill certain public purposes, including the financing of residential housing. The Fund executed a loan of $3,317,500 to the Bridgeport Gardens Associates, a West Virginia limited partnership of which John E. Sroka was a general partner. This partnership was the general developer responsible for completion of the project. The initial closing of this loan took place on April 24, 1972, at the office of the Federal Housing Commissioner in Charleston, West Virginia.

HUD was related to the project as an insurer. On March 31, 1972, HUD issued to the Fund a "Commitment for Insurance of Advances". Under this commitment, the Federal Housing Commissioner agreed to endorse for insurance the mortgage note of $3,317,500 executed between the Fund and the Partnership.

The final party in this picture is the Bank which issued a letter of credit to the plaintiff on April 24, 1972. This letter of credit was required as part of the contract between the Fund and HUD as will be discussed in detail in Part II of this memorandum.

On or about May 1, 1973, the Partnership defaulted on the terms and conditions of the loan from the Fund. At this time, the unpaid balance of the loan was $764,868.25. HUD paid the plaintiff this full sum but deducted the amount of the letter of credit — $66,350. On August 3, 1973, the plaintiff executed and forwarded a sight draft to defendant seeking payment of the letter of credit. On August 8, 1973, the bank notified the plaintiff of its dishonor of the letter of credit.

The plaintiff instituted this cause of action on June 5, 1974, seeking payment of the $66,350 from all three of the other parties to the transaction. On July 17, 1974, Sroka filed a crossclaim against HUD. Schematically, the posture of the case looks like this:

The Fund vs. The Bank (issued letter of credit) (plaintiff & mortgagee) vs. Sroka (mortgagor) vs vs. HUD (insurer)

On December 12, 1975, the plaintiff filed a motion for summary judgment against the Bank. And on January 5, 1976, HUD filed a motion to dismiss or in the alternative for summary judgment on both the claims of plaintiff and the crossclaim of Sroka. The court will grant both motions.

To sort out this confusing tangle of affairs, the court will focus successively upon three aspects of these transactions: (I) The letter of credit transaction, (II) The insurance agreement between HUD and the Fund, and (III) The relationship between HUD and Sroka.

I. The Letter of Credit Transaction.

Initially, it is necessary to explain the nature of a letter of credit and the legal relationships it creates. In the case of Chase Manhattan Bank v. Equibank, 394 F.Supp. 352 (W.D.Pa.1975), Judge Snyder of this court defined a letter of credit as follows, at p. 355:

"Historically, a Letter of Credit is an assurance of payment upon certain terms and conditions, substituting the acceptable credit standing of a bank or other person for the unknown or doubtful standing of a borrower. It differs from the classical surety undertaking in that it is a primary obligation between the issuer and the beneficiary, and for this reason, the recipient of the Letter is isolated from the arrangement between the issuer and the borrower. In construing the terms of a Letter of Credit, the same general principles apply which govern other written contracts. Except insofar as expressly incorporated therein, the bank's contract with its customer for the Letter of Credit is separate and distinct from the contract which exists between the creditor and the customer/borrower." (Citations omitted.)

Chief Judge Daugherty of the Western District of Oklahoma defined a letter of credit in somewhat different language:

"A letter of credit is essentially a third party beneficiary contract. A party wishing to transact business induces a bank to issue the letter to a third party. It is a contract between the procuring customer and the issuing bank for the benefit of the payee-beneficiary. In the ordinary letter of credit situation, at the request of one of its customers a bank issues directly to a third party a promise to pay a sum of money on being furnished with certain documents. . . . As an element of his contractual undertaking, the issuer must honor any draft or demand for payment which complies with the terms of the credit."

Harvey Estes Construction Company v. Dry Dock Savings Bank of New York, 381 F.Supp. 271 (W.D.Okl.1974) (Citations omitted).

Schematically, then, there are three parties to a letter of credit:

The parties to the letter of credit involved in this case can be inserted in the above schematic as follows:

It should be noted that HUD is not a party to this arrangement, although the letter of credit was procured as part of the Fund's contractual obligations to HUD. (These contractual provisions will be discussed in Part II of this memorandum.)

Liability on the letter of credit presents solely legal issues and thus can be disposed of by the court on a motion for summary judgment. In the case of Tomalewski v. State Farm Life Insurance Company, 494 F.2d 882 (3 Cir. 1974), the court said:

"If the pleadings and proof in the form of depositions, affidavits and admissions on file disclose that no real cause of action or defense exists, the court may determine there is no issue to be tried and may grant a summary judgment."

An examination of the record of this case discloses no defense to the bank's obligation to pay the letter of credit and summary judgment will therefore be entered on this issue.

The following four questions detail the available defenses of the bank under Article Five of the Uniform Commercial Code:

(1) Was the letter of credit revocable?

(2) Was the letter of credit revoked?

(3) Was the plaintiff's demand for payment improper?

(4) Did Sroka notify the bank of a legitimate defense of fraud?

All four of these questions can be answered in the negative mandating payment of the letter of credit by the bank.

The first issue to be considered is the alleged condition attached to the letter of credit. The letter of credit reads as follows:

"Letter of Credit Applicant: John E. Sroka 422 Lincoln Street Johnstown, Pennsylvania Beneficiary: West Virginia Housing Development Fund 900 Charleston National Plaza Charleston, West Virginia 25301 Amount: $66,350.00 Project: Bridgeport Gardens Project # 045-44005-LD Bridgeport, West Virginia We hereby issue this credit which is payable at the counters of the U. S. National Bank, Johnstown, Pennsylvania against Beneficiary's draft at sight drawn on U. S National Bank, Johnstown, Pennsylvania. Applicant informs us that this letter of credit relates to working capital funds for the captioned project. S/ A. H. Wagner, Vice President"

Of course, the last sentence constitutes the language in dispute.

Article 5-103(1)(a) provides for both revocable and irrevocable letters of credit. The former is, in reality, an illusory contract because Article 5-106(3) provides that:

"Unless otherwise agreed after a revocable credit is established it may be modified or revoked by the issuer without notice to or consent from the customer or beneficiary."

Sroka's argument is somewhat of a variation of 5-106(3) because he alleges that the letter of credit was revocable until the time that a condition precedent to its validity occurred: that a need for working capital funds arise for the Bridgeport Gardens Project. Sroka's argument must be rejected for several reasons.

Comment one to Article 5-103 states the following:

"Neither the definition nor any other section of this Article deals with the issue of when a credit, not clearly labelled as either revocable or irrevocable falls within the one or the other category although the Code settles this issue with respect to the sales contract (Section 2 — 325). This issue so far as it effects an issuer under the Article is intentionally left to the courts for decision in the light of the facts and general law (Section 1 — 103) with due regard to the general provisions of the Code in Article 1 particularly Section 1 — 205 on course of dealing and usage of trade."

Thus, the court receives only minimal guidance from Article Five of the Uniform Commercial Code in determining whether this letter of credit is revocable and must look to "the facts and general law."

Part of the relevant general law constitutes the normal...