United States Court of Appeals United States Court of Appeals For the First Circuit For the First Circuit
No. 94-2106
COLONIAL COURTS APARTMENT COMPANY, ET AL.,
Plaintiffs, Appellants,
v.
PROC ASSOCIATES, INC., ET AL.,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND
[Hon. Raymond J. Pettine, Senior U.S. District Judge]
Before
Boudin, Circuit Judge,
Coffin, Senior Circuit Judge,
and Stahl, Circuit Judge.
Joseph V. Cavanagh, Jr., with whom Michael DiBiase and Blish &
Cavanagh were on brief for appellants.
Richard W. MacAdams with whom MacAdams & Wieck Incorporated was
on brief for appellees.
June 21, 1995
STAHL, Circuit Judge. This case requires us to STAHL, Circuit Judge.
determine whether letter-of-credit beneficiaries may recover
the value of the letters from the issuer's customer or the
customer's guarantors after the issuer dishonored the letters
and became insolvent. Interpreting applicable law and the
various agreements between the parties, we conclude that the
beneficiaries may not so recover. Thus, we affirm the
district court's grant of summary judgment for defendants-
appellees.
I. I.
FACTUAL AND PROCEDURAL BACKGROUND FACTUAL AND PROCEDURAL BACKGROUND
Resolving the issues in this case requires a
detailed recital of its somewhat complex factual background.
The magistrate's report is exceptionally helpful in
delineating the facts and we draw from it liberally.
Plaintiffs-appellants are four individuals and two
Ohio general partnerships (collectively, "appellants") who
owned, or whose assignors owned, three apartment complexes in
East Cleveland, Ohio. Appellants sold the apartments to
defendant-appellee Proc Associates, Inc. ("Proc
Associates"),1 which in turn assigned its interest as
1. Defendant-appellee Armand Procaccianti is a director and president of Proc Associates. Defendant-appellee James Procaccianti is a director, vice president, and treasurer of Proc Associates. Hereinafter, we refer to Armand and James Procaccianti collectively as "the Procacciantis."
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purchaser to Euclid Properties ("Euclid"), an Ohio limited
partnership.2
Euclid paid $2.2 million in cash for the
properties. To cover the remainder of the purchase price,
Euclid executed four promissory notes ("promissory notes")
totalling $1.3 million. As sole security for the promissory
notes, the Marquette Credit Union ("Marquette") issued to
appellants four irrevocable standby letters of credit
("letters of credit") corresponding to each of the promissory
notes. By their terms, the letters of credit expired on May
31, 1991.
Before issuing the letters of credit, Marquette
entered into a reimbursement arrangement with Proc Associates
and the Procacciantis memorialized in a commitment letter
("commitment letter") dated March 16, 1990, a letter
agreement ("letter agreement") dated May 31, 1990, and a
guaranty agreement ("guaranty") also dated May 31, 1990,
(collectively, "reimbursement agreements"). In essence, the
reimbursement agreements provided that Proc Associates would
repay Marquette for amounts drawn on the letters of credit.
Further, the Procacciantis agreed to guaranty Proc
Associates' obligation to Marquette. As additional security
2. Euclid is constituted of limited partners defendant James Procaccianti (95% interest) and defendant Armand Procaccianti (4% interest) and general partner East Cleveland Properties, Inc., an Ohio corporation. James Procaccianti is president, secretary, and treasurer of East Cleveland Properties, Inc.
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for the obligations assumed by the credit union as a result
of its issuance of the letters of credit, Marquette also
obtained a second mortgage on real property owned by Euclid.
On January 1, 1991, the Rhode Island governor
closed Marquette because the deposit insurer for Marquette
had failed and Marquette did not have federal insurance. On
May 17, 1991, Maurice C. Paradis was appointed as permanent
receiver ("receiver") for Marquette.
On April 30, 1991, Euclid failed in its obligation
to renew or replace the letters of credit.3 On May 21 and
29, 1991, appellants presented the letters of credit with all
required documents to the receiver for payment. Appellants
did not consent to an extension of time to honor the letters.
Dishonor occurred.
During the remainder of 1991, appellants pursued
their claims against Marquette in three separate actions.
First, in an Ohio state court, appellants sought assignment
of the collateral held by Marquette and the receiver under
the letters of credit, damages against Marquette and the
receiver for wrongful dishonor, and injunctive relief.
Second, in the U.S. District Court for Rhode Island,
3. Default occurred under the promissory notes upon failure by Euclid to renew or replace the lapsed letters of credit by April 30, 1991. Additionally, each of the letters of credit themselves provided for presentment for payment if there was no renewal by April 30, 1991.
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appellants sought to enjoin the distribution of assets by
Marquette and the receiver pursuant to the priority scheme
set forth in the Depositors Economic Protection Act of 1991
("DEPCO"), the Rhode Island legislation enacted in the
aftermath of that state's credit union insurance crisis.
Third, in the receivership proceedings pending in Rhode
Island state court, appellants filed proofs of claim for the
amount owed under the letters of credit and for a preference
as to the collateral held by Marquette or the receiver.
On July 2, 1992, appellants and the receiver
entered into a written settlement agreement ("settlement"),
the terms of which provided that appellants would dismiss the
three pending proceedings in Ohio and Rhode Island in
exchange for $500,000 and the assignment ("assignment") by
the receiver of his interest in the letter agreement, the
commitment letter, the guaranty, and the mortgage, including
any claims of the receiver against the defendants under those
instruments. By its terms, payment under the settlement
"shall not be deemed to or constitute a payment under or by
virtue of the [l]etters of [c]redit." On July 31, 1991,
Marquette became insolvent.
Appellants then brought the present action against
Proc Associates and the Procacciantis for the value of the
letters of credit. Appellants set forth, in separate counts,
three theories of recovery. First, appellants argued that,
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as Marquette's assignees, they could recover from defendants
pursuant to the reimbursement agreements. Second, appellants
contended that, under R.I. Gen. Laws 6A-5-117,4 which
codifies Section 5-117 of the Uniform Commercial Code, they
were entitled to realize on the collateral held by Marquette
and the receiver. Third, appellants argued that they were
entitled to recover under general equitable principles.
Defendants moved for summary judgment. Considering only
recovery under the first theory, dealing with the
reimbursement agreements, the magistrate judge determined
that appellants could not recover from defendant Proc
Associates, but that they could from the Procacciantis.
Deeming the remaining two theories subsumed by his analysis,
the magistrate did not reach those arguments. Following
objection from defendants, the district court remanded the
report and recommendation to the magistrate. The magistrate
stood by his original recommendation. Upon review, the
district court found no liability attached to the
Procacciantis under the terms of the guaranty and rejected
that portion of the magistrate's report as to their
liability. Judgment entered for defendants on all counts.
This appeal followed.
II. II.
4. The parties do not dispute that, in this diversity-based action, the substantive law of Rhode Island governs.
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DISCUSSION DISCUSSION
After reciting the standard of review, we take up
each of appellants' three theories of recovery.
A. Standard of Review
Summary judgment is appropriate when the record
reflects "no genuine issue as to any material fact and . . .
the moving party is entitled to judgment as a matter of law."
Fed. R. Civ. P. 56(c). We review a grant of summary judgment
de novo. See, e.g., Inn Foods, Inc. v. Equitable Coop. Bank,
45 F.3d 594, 596 (1st Cir. 1995). We review the record in
the light most favorable to the nonmoving party, and we
indulge all reasonable inferences in that party's favor. Id.
B. The Reimbursement Agreements
On appeal, appellants argue that the terms of the
reimbursement agreements render the Procacciantis liable to
Marquette. Specifically, appellants contend that, under the
language of the guaranty, liability attached to the
Procacciantis on June 3, 1991, when Marquette was required to
make full payment under the letters of credit. Thus,
appellants argue that, under the terms of the assignment,
they are entitled to recover the $1.3 million represented by
the letters of credit. Because appellants' theory
misconstrues the nature of a letter-of-credit transaction and
is inconsistent with the operative language of the parties'
agreements, we do not agree.
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To put this case in proper perspective, we start
with general principles. Letter-of-credit transactions are
three-party arrangements involving two parties to a
commercial transaction and a financial institution. The
financial institution, which is the issuer (here, Marquette),
at the direction of its customer, usually the buyer (here,
defendant Euclid), issues a letter of credit to a beneficiary
or beneficiaries, usually the seller (here, appellants). The
principal purpose of a standby letter of credit is a means
for the beneficiary-seller to ensure that if there is a
default on the underlying contract between it and the
customer-buyer, then the beneficiary-seller will have a ready
source of funds to satisfy the debt owed. See, e.g., Ground
Air Transfer, Inc. v. Westates Airlines, Inc., 899 F.2d 1269,
1272 (1st Cir. 1990). Thus, the standby letter of credit
acts as a "back up" against customer default on obligations
of all kinds. James J. White & Robert S. Summers, Uniform
Commercial Code 19-2, at 809 (3d ed. 1988) (hereinafter,
"White & Summers"). Additionally, the beneficiary may
request a letter of credit to ensure that should any
contractual dispute arise, it will "`wend [its] way toward
resolution with the money in [the beneficiary's] pocket,
rather than in the pocket' of his adversary." Ground Air,
899 F.2d at 1272 (quoting Itek Corp. v. First Nat'l Bank of
Boston, 730 F.2d 19, 24 (1st Cir. 1984)).
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To effect these commercial purposes, courts have
considered the letter of credit to be a separate agreement
between the issuer and the beneficiary, wholly distinct from
the underlying contract between the customer and the
beneficiary. Id.; see also U.C.C. 5-114, comment 1 ("The
letter of credit is essentially a contract between the issuer
and the beneficiary and is recognized by this Article as
independent of the underlying contract between the customer
and the beneficiary."); White & Summers, 19-2, at 812 ("The
most unique and mysterious part of this [letter-of-credit]
arrangement is the so-called `independence principle.' The
principle states that the bank's obligation to the
beneficiary is independent of the beneficiary's performance
on the underlying contract."). Similarly, "the obligation of
the issuer to pay the beneficiary is also independent of any
obligation of the customer to its issuer." White & Summers,
19-2, at 811. Thus, as with other letter-of-credit
arrangements, see id. at 812, the one in this case involves
two contracts (the underlying purchase-and-sale agreement
between Proc Associates and appellants and the reimbursement
arrangement between Proc Associates and Marquette) and one
letter of credit.
At the center of this dispute is the operative
language of the letter agreement and the commitment letter,
as guaranteed by the Procacciantis, which establish
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Marquette's right to reimbursement. The letter agreement
states: "that if at any time prior to the expiration of [the]
[l]etters of [c]redit, [Marquette] is required to make
payment," Proc Associates must repay Marquette pursuant to
the commitment letter. The commitment letter specified that
"if the [l]etter of [c]redit is drawn upon," then Proc
Associates must make to Marquette certain interest payments
and, further, "final payment of all outstanding principal and
all interest payable three years from the date of the
issuance of the [l]etter of [c]redit." In addition, the
Procacciantis guaranteed Proc Associates' obligation. The
guaranty provides that the Procacciantis "guarantee[] to
Lender [Marquette] . . . the punctual payment, . . . as and
when due (whether by acceleration or otherwise) of all
[o]bligations requiring payment." The term "obligations" is
defined as:
all indebtedness, obligations and liabilities of Borrower [Proc Associates] to Lender [Marquette] of every kind and description (including without limitation any and all of the foregoing arising in connection with any letters of credit issued by Lender for the account of Borrower), direct or indirect, secured or unsecured, joint or several, absolute or contingent, due or to become due, whether for payment or performance, now existing or hereafter arising, regardless of how the same arise or by what instrument, agreement or book account they may be evidenced, or whether evidenced by any instrument, agreement or book account; including without limitation, all loans (including any loan by renewal or
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extension), all indebtedness, all undertakings to take or refrain from taking any action, all indebtedness, liabilities or obligations owing from Borrower to others which Lender may have obtained by purchase negotiation, discount, assignment or otherwise, and all interest, taxes, fees, charges, expenses and attorneys' fees chargeable to Borrower or incurred by Lender in connection with any transaction between Borrower and Lender.
The parties do not dispute that appellants properly
presented the letters of credit to Marquette for payment,
that payment became due on June 3, 1991, and that dishonor
occurred when no payment was made. As noted above,
appellants argue that Marquette's nonpayment notwithstanding,
the Procacciantis' obligation under the guaranty was
triggered on June 3, 1991. Specifically, they point to the
language defining "obligations" under the guaranty, arguing
that it is so broad as to render the Procacciantis liable
when the $1.3 million payment on the letters of credit came
due.
Appellants' argument misconceives the nature of the
letter-of-credit obligation. As our discussion above makes
clear, applicable commercial law provides that the letter-of-
credit obligation is that of the issuer alone, and that
obligation is independent of either the underlying contract
or any reimbursement agreement. Upon proper presentment, the
liability ran to Marquette and not to Proc Associates. Thus,
proper presentment did not create, under the language of the
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guaranty, "indebtedness, obligations and liabilities of
Borrower to Lender of every kind and description . . . .
direct or indirect, secured or unsecured, joint or several,
absolute or contingent, due or to become due, whether for
payment or performance, now existing or hereafter arising"
(emphasis added).
The agreements between Marquette, Proc Associates,
and the Procacciantis did not alter the basic legal
relationships in a letter-of-credit transaction. When the
language of a contract is clear and unambiguous, we accord
the language its plain and natural meaning. In Re Newport
Plaza Assocs., 985 F.2d 640, 645 (1st Cir. 1993) (citing
Dudzik v. Leesona Corp., 473 A.2d 762, 765 (R.I. 1984)).
Under the letter agreement, Proc Associates (the Borrower)
became obligated to Marquette (the Lender) when Marquette was
required to make payment and, under the commitment letter,
when the letters of credit were actually drawn upon. Because
both conditions did not obtain, Proc Associates incurred no
"indebtedness, obligations and liabilities" to Marquette.
Consequently, there being no "obligations [of Proc
Associates] requiring payment," there was nothing for the
Procacciantis to guaranty. Thus, as Marquette's assignee
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under the settlement, appellants accede to no enforceable
rights against the Procacciantis.5
Because of the unusual (and for appellants,
unfortunate) turn of events, appellants essentially seek to
convert the Procacciantis' guaranty of Proc Associates'
obligations into a guaranty of Marquette's obligations.
However, neither the law nor the language of the
reimbursement agreements sustain such an interpretation.
Thus, we conclude that the district court properly granted
summary judgment as to all defendants on count one.
C. U.C.C. 5-117
Appellants next argue that, pursuant to R.I. Gen.
L. 6A-5-117 (codifying U.C.C. 5-117),6 they are entitled
5. We note that, under the terms of the settlement, the $500,000 payment by the receiver to appellants does not constitute a payment under the letters of credit. At oral argument it was suggested that this language was included because the settlement resolved three separate lawsuits involving issues not related to the letters of credit.
6. In relevant part, 6A-5-117 provides:
(1) Where an issuer . . . becomes insolvent before final payment under the [letter of] credit . . . the receipt or allocation of funds or collateral to secure or meet obligations under the [letter of] credit shall have the following results:
(a) To the extent of any funds or collateral turned over after or before the insolvency as indemnity against or specifically for the purpose of payment of drafts or demands
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to collateral held by Marquette and the receiver. The
"collateral" that appellants seek to realize on are the
letter agreement, the commitment letter, and the guaranty.7
Assuming that these agreements constitute collateral within
the meaning of section 5-117 -- a point disputed by
defendants -- we fail to see how its acquisition by
appellants advances their cause. As the foregoing discussion
outlines in detail, under the provisions of the settlement,
for payment drawn under the designated credit, the drafts or demands are entitled to payment in preference over depositors or other general creditors of the issuer or bank; and
(b) On expiration of the credit or surrender of the beneficiary's rights under it unused any person who has given such funds or collateral is similarly entitled to return thereof; and
(c) A charge to a general or current account with a bank if specifically consented to for the purpose of indemnity against or payment of drafts or demands for payment drawn under the designated credit falls under the same rules as if the funds had been drawn out in cash and then turned over with specific instructions.
7. As noted above, a mortgage was also given as collateral. However, appellants concede that, because the receiver effectively assigned his interest in the mortgage, it is not relevant to this case.
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Marquette assigned its rights under these documents to
appellants. However, the terms of the settlement and the
facts of the case render those rights inoperative against
defendants. Nothing in section 5-117 -- which operates to
segregate an insolvent institution's letter-of-credit
liabilities and security from depositor liabilities and
assets, see R.I. Gen. L. 6A-5-117, official comment --
enhances appellants rights vis-a-vis defendants. At most,
appellants would accede to rights already acquired under the
terms of the settlement. Therefore, we conclude that the
district court properly granted summary judgment as to count
two.
D. General Equitable Principles
Finally, appellants invite us to employ "equitable
principles" on their behalf. Appellants rely on authority
that is neither controlling nor even remotely analogous to
the facts in this case. Appellants also vaguely assert that
denying them recovery would result in unjust enrichment.
From our review of the record, it is not at all apparent that
the balance of equities leans in appellants' favor. After
all, upon dishonor, appellants had an enforceable right
against Marquette. R.I. Gen. L. 6A-5-114(1), 6A-5-115(1).
They chose to reduce that right, along with other claims
asserted in the three suits, to a lump-sum payment of
$500,000 plus assignment of Marquette's rights against
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defendants. Those rights proved to be of no value. And, for
reasons not immediately apparent but in any event beyond the
scope of the present case, appellants also agreed to language
foreclosing their right to recover -- as Marquette's assignee
-- the $500,000 settlement payment. Appellants may have
entered into an ill-considered agreement that indirectly
reduced defendants' liability, but that does not constitute
unjust enrichment, see R & B Elec. Co. v. Amco Constr. Co.,
471 A.2d 1351, 1355-56 (R.I. 1984) (setting forth elements of
unjust enrichment), and we know of no equitable principle
that would operate to displace applicable law and the
parties' agreements. Accordingly, the district court
properly granted summary judgment as to count three of
appellants' complaint.
III. III.
CONCLUSION CONCLUSION
For the forgoing reasons, the decision of the
district court is affirmed. affirmed.
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