No. 83-263
IN THE SUPREME COURT OF THE STATE OF MONTANA
1984
SHERWOOD & ROBERTS, I N C . ,
Plaintiff/Respondenki
FIRST SECURITY BANK OF MISSOULA,
Defendant-Third Party Plaintiff
and Appellant,
PROSPECT ASSOCIATES, INC., CHARLES W. ISALY,
ISALY, THOANAS H. SCHIMKE, MARY
, DAVID A. SCHIMKE, and TAMARA R.
SCIIIMKE,
Third Party Defendants an& Co-Appellants.
APPEAL FROM: District Court of the Fourth Judicial District,
In and for the County of Missoula,
The Honorable James B. Wheelis, Judge presiding.
COUiJSEL OF RECORD:
For Appellants:
Mulroney, Delaney & Scott; Dexter L. Delaney argued
for First Security Bank, Missoula, Montana
Donald Snavely argued for Prospect Associates,
Missoula, Montana
For Respondent:
Garlington, Lohn & Robinson; George D. Goodrich argued,
Missoula, Montana
Submitted: January 16, 1984
Decided: May 9 , 1984
Filed: .
.,, , , ;
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Clerk
Mr. Justice John C. Sheehy delivered the Opinion of the
Court.
The principle issue we determine in this case is that an
instrument issued by a bank entitled "letter of credit," and
containing language that it is a letter of credit must be
enforced as a letter of credit, and not as an instrument of
conditional guaranty.
First Security Bank of Missoula appeals from a summary
judgment against it entered by the District Court, Fourth
Judicial District, Missoula County, holding that the Bank was
liable according to the terms of a letter of credit issued in
favor of Sherwood & Roberts, Tnc.
Third party defendants, Prospect Associates, Inc., have
appealed from an interlocutory order of the District Court
denying Prospect's motion to intervene in the case.
The procedure in the District Court is somewhat complex.
Three actions have been filed in the District Court, all
involving the fins-ncing of construction for Prospect
Subdivision, on the west side of Missoula.
In July, 1980, Sherwood & Roberts, Inc. (Sherwood) a
Washington corporation, agreed to lend Prospect Associates,
Inc. (Prospect) $826,500 to finance construction of a
subdivision in the Grant Creek area near Missoula. Sherwood
agreed to disburse loan proceeds to Prospect according to a
budget, attached to the commitment letter, specifying the
amounts of the total proceeds allocable to specific purposes,
including payments of SID's, taxes and development costs.
The commitment letter provided that the disbursements would
be made in 30 day increments to reimburse Prospect for costs,
but not to exceed the budgeted a.mounts.
As part of the security for the loan from Sherwood,
Prospect was required to obtain a $100,000 letter of credit
with Sherwood as beneficiary. First Security Bank issued the
document at the request of Prospect. The parties dispute
authorship of the instrument. We set forth here the terms of
the instrument, which was typed on the letterhead of the
Bank.
"IRREVOCABLE
COMMERCIAL LETTER OF CREDIT
Letter of Credit #85
Sherwood & Roberts Inc.
2806 Garfield
Missoula, MT 59801
Re: Prospect Associates, Inc.
2806 Garfield, Suite D
Missoula, Montana. 59801
Gentlemen:
At the request and for the account of Prospect
Associates, Inc., of Missoula, Montana, First
Security Bank of Missoula of Missoula, Montana,
hereby guarantees the availability of funds in the
amount of $100,000.00 for the purpose of securing
Prospect Associates, Inc.'s, performance of its
loan agreement with Sherwood & Roberts Inc., as
well as its performance of that certain Mortgage
and Promissory Note payable to Sherwood & Roberts
Inc.
This letter of credit shall expire on midnight on
the 15th day of July, 1982. This letter of credit
shall be exercisable by Sherwood & Roberts Inc.
only upon the unremedied default by Prospect
Associates, Inc. in its performance of any of the
following documents; that certain loan application
agreement, loan commitment letter, promissory note,
or mortgage, which documents evidence that certain
loan transaction dated July 15, 1980 wherein
Sherwood & Roberts Inc. is named as lender and
mortgagee and Prospect Associates, Inc. is named as
mortgagor and borrower.
FIRST SECURITY BANK OF MISSOULA
By /s/ Duane G. Scheeler
Duane G. Scheeler, President"
In the fall of 1980 various subcontractor bills, tax
payments and interest payments went unpaid. Consequently
construction of the subdivision was halted preventing
completion of the subdivision and the sale of lots. The
resulting loss of revenue led to Prospect's failure to make
the payments required by the loan agreement and promissory
note.
Prospect alleges, and filed in the District Court
a f f j-davits supporting its allegations, that this chain of
events was triggered by Sherwood's failure to disburse loan
funds on schedule as required by the agreement. It alleges
that Sherwood decided to pull out of the western Montana real
estate financing market midway in the disbursement process
and unjustifiably refused to honor Prospect's proper request
for disbursements. Prospect contends that had it received
the requested loan proceeds, it would have been able to
perform its obl-igations under the various loan agreements.
After demanding payment, Sherwood filed a mortgage
foreclosure action against Prospect and a separate action
against the Rank to collect the face amount of the letter of
credit.
In the bank action, First Security asserted that the
document was not in fact a letter of credit, but was a
conditional instrument of guaranty. Bank submitted evidence
that the parties intended the instrument to be an instrument
of guaranty. Sherwood's evidence was to the contrary.
The Rank and Prospect also claimed that Prospect's
nonperformance was caused by Sherwood's nonperformance and
was therefore not a default. Thus they argued the condition
for payment was not met and Sherwood could not recover on the
letter of credit. First Security and Prospect have filed
affidavits that the parties intended by use of the phrase
"unremedied default" that the note would be payable only if
Sherwood had fulfilled all of its obligations and Prospect
then failed to perform. They emphasize that the term
"default" was used rather than simply "nonperformance."
Prospect, already defendants in the mortgage foreclosure
action brought by Sherwood, moved in the bank action to
intervene, or for consolidation of the foreclosure action
with the letter of credit action. Both motions were denied.
Thereafter, the Bank filed against Prospect as a third party
defendant. Sherwood moved for summary judgment on the letter
of credit in the bank action. After a hearing on the motion
for summary judgment, the District Court issued a order
granting the same. In the order, the court stated that the
letter of credit issued by the Bank was a valid letter of
credit under section 30-5-102 (1) (c), MCA. In addition, the
court found that the condition necessary for Sherwood to
collect on the letter of credit was Prospect's unremedied
default on the promissory note. The court concluded that
mere nonpayment by Prospect of the promissory note
constituted "unremedied default," regardless of whether
Sherwood caused it. The court thus found the Bank liable for
the face amount of the letter plus interest to Sherwood.
The District Court certified the summary judgment
against the Bank as one proper for appeal under Rule 54(b),
M.R.Civ.P. The third party action between the Bank and
Prospect is still pending in the District Court.
I.
If the instrument issued by the Bank is a letter of
credit, the Bank must honor a proper demand for payment of
$100,000 under the instrument regardless of whether the
documents conform to the underlying contract between the
customer (Prospect) and the beneficiary (Sherwood). Section
30-5-114, MCA. If the instrument is a guaranty, what
d.ifference in legal effect the Bank could hope to gain
thereby is not clear. It would depend on whether the
guaranty is absolute.
". . . Where the contract promise of the guarantor
is absolute--that is, subject to no condition
except the default of the principal debtor--or
where the promise has become absolute by the
occurrence of the named conditions, the guarantor
is obligated to pay the debt of the principal
debtor. In such a situation, the creditor may
maintain an action against the guarantor
imrned.iately upon default of the debtor . ..
and
without first having proceeded against the
debtor.. .. The question as to whether the debtor
or a.ny part thereof is collectible from the debtor
does not effect the liability of the guarantor, the
latter being unconditionally bound to satisfy the
obligation..
110.
..
" 38 Arn.Jur.2d 1116 Guaranty, S
And see General Finance Company v. Powell (1943), 114 Mont.
473, 138 P.2d 255.
A guaranty is to be deemed unconditional unless its
terms import some condition precedent to the liability of the
guarantor. Section 28-11-107, MCA. Generally a guaranty is
conditional when by its terms it requires the creditor to
pursue first and unsuccessfully the principal debtor. 38
Arn.Jur.2d 1118 Guaranty, cS 113.
The Bank contends in this case that the instrument is a
conditional guaranty, the condition being that before the
Bank is liable there should be an "unremedied default" of
Prospect, which requires the determination of a factual
dispute before its liability can arise, and that it was the
intention of the parties that such condition existed before
the Bank was liable in this case. The Bank submitted to the
District Court affidavits from its attorney and its president
stating the i-ntentionof the Bank was to that effect, and the
Bank contends that an issue of material fact existed before
the District Court which should have prevented the entry of a
summary judgment.
We hold that the instrument before us is indeed a letter
of credit issued by the Bank. We are literally compelled to
such holding by the provisions of the Uniform Commercial Code
defining a letter of credit:
"30-5-102. Scope. (1) This chapter applies:
"(a) to a credit issued by a bank if the credit
requires a documentary draft or a documentary
demand for payment; and
" (b) to a credit issued by a person other than a
bank if the credit requires that the draft or
demand for payment be accompanied by a document of
title; and
added. 1
Here the instrument, within its terms, calls itself a
letter of credit, and it is conspicuous1.y entitled
"Irrevocable Commercial Letter of Credit." It is referred to
as "Letter of Credit tf85." Thus, the instrument is within
the definition of section 30-5-102 (1)( c ) , above.
Regardless of its conformance to the statutory
definition of a letter of credit, the Bank contends that the
instrument requires the factual determination of an
"unremedied default," and that one must examine evidence
outside the instrument to make that determination. It relies
on the holding in Republic National Rank of Dallas v.
Northwest National Bank of Fort Worth (Tex. 1 9 7 8 ) , 578 S.W.2d
109, and Wichita Eagle and Beacon Publishing Company, Inc. v.
Pacific National Bank of San Francisco (9th Cir. 1974), 493
In Republic, above, the instrument before the Texas
court was entitled "Irrevocable Letter of Credit," wherein
the bank agreed to honor a draft for $50,000 if certain
promissory notes by a third party were not paid according to
their terms. The notes were not paid, and the beneficiary of
the letter of credit made demand upon the bank for payment of
the $50,000. The bank took the position tha.t the instrument
was not a letter of credit, but rather a guaranty, and that
since the issuance of guaranties are ultra vires with respect
to banks, the bank could not be held on the guaranty. The
Texas court analyzed the modern trend of banks to issue
standby letters of credit, and noted that a standby credit is
used primarily to finance or secure an underlying intangible
or monetary indebtedness undertaken by the account party
"such as a promissory note." 578 S.W.2d at 113. The court
held that the instrument was indeed a letter of credit,
without mentioning that the instrument was entitled
"Irrevocable Letter of Credit."
In Wichita Eagle, above, the Court of Appeals for the
Ninth Circuit had before it an instrument which in its text
referred to itself as a "letter of credit." The instrument
was given to secure performance of a lease. The Ninth
Circuit noted that:
". . . The instrument neither evidences an intent
that payment be made merely on presentation on a
draft nor specifies the documents required for
termination or payment. To the contrary, it
requires the actual existence in fact of most of
the conditions specified: for termination or
reduction, that the city have refused a building
permit; for payment, that the lessee have failed to
perform the terms of the lease and have failed to
correct that default, in addition to an affidavit
of notice." 493 F.2d at 1286.
The Ninth Circuit Court recognized that letters of
credit for commercial uses have expanded far beyond the
international sales context in which they originally
developed, but found that here the instrument strayed too far
from the basic purposes of a letter of credit, namely to
provide a means of assuring payment cheaply by eliminating
the need for the issuer to police the underlying contract.
The Ninth Circuit Court went on to say that if the letter of
credit concept is to have value in new situations, "the
instrument must be tightly drawn to strictly and clearly
limit the responsibility of the issuer." 59a- F.2d at 1287.
493
The Ninth Circuit Court held that the instrument was in fact
an instrument of guaranty, which meant that the bank would be
able to interpose defenses to the instrument that were
available to the lessee. If we considered the instrument in
the case at bar to be an obligation of guaranty, the same
result would obtain: the obligation of the guarantor is not
to exceed that of the principal. Section 28-11-201, MCA.
Treating the instrument as an instrument of guaranty,
the Ninth Circuit Court went on in Wichita Eagle to assess
the liquidated damages provided in the guaranty against the
issuing bank.
We distinguish Wichita Eagle from the case at bar. In
Wichita Eagle, as the Ninth Circuit Court noted, the
instrument strayed too far from the basic purpose of a letter
of credit. In the case at bar, the obligation of the
principal, Prospect, is easily discernible. The letter of
credit is exercised by Sherwood upon the unremedied default
Sy Prospect in its performance of any of the following
documents: that certain loan application agreement, loan
commitment letter, promissory note, or mortgage. The
instruments are set out in the disjunctive; that is,
nonperformance of any one of the instruments triggers the
liability on the letter of credit. The promissory note is
one of those instruments. Since Prospect defaulted in
payment on the promissory note the liability of First
Security Bank was triggered without more.
Moreover, Wichita Eagle, above, has to be read in the
light of a later case decided by the Court of Appeals for the
Ninth Circuit, First Empire Bank v. Federal Deposit Insurance
Corporation (1978), 572 F.2d 1361. One of the judges who
participated in Wichita Eagle also participated in First
Empire Bank. In First Empire Rank, the United States
National Bank of San Diego had become insolvent, and F.D.I.C.
had become the receiver of the bank's insolvent estate.
First Empire Bank had made loans to customers of U.S.N.B.
relying on standby 1ett.ers of credit issued by U.S.N.B. The
receiver refused to honor the letters of credit when
presented by First Empire Bank, contending that the
instruments were conditional letters of guaranty rather than.
letters of credit. The contention of F.D.I.C. as receiver of
the insolvent estate was that since the claims had not
ripened. on the date of insolvency, the receiver was not bound
to honor them. The Ninth Circuit Court held that the
instrument before it was indeed a letter of credit because it
"creates an absolute, independent obligation and payment must
be made upon presentation of the proper documents regardless
of any dispute between the buyer and seller concerning their
agreement, such as a dispute over the quality of the goods
delivered." 572 F.2d at 1366. The Ninth Circuit Court
commented on the nature of letters of credit in modern usage,
and the comment is worth repeating in part:
"In recent years instruments operating as letters
of credit (in that they operate to create an
absolute obligation upon presentation of specified
documents) and termed 'standby' to distinguish them
from the traditional letters of credit have been
used as security devices in a variety of contexts
outside the traditional area of the international
sale of goods. They have been used to insure
construction loans, as quasi--performance bonds, to
support the issuance of commercial paper and to
secure the performance of purely monetary
obligations such a s those involved in this case.
.
(Citing authority.) Standby letters are convenient
and inexpensive and are being adapted to many uses
at this time. (Citing authority.) The principle
difference between the traditional letter of credit
and these newer standby letters is that 'whereas in
the classical setting, the letter of credit
contemplates payment upon performance, " the
standby". ..
"contemplates payment upon failure to
perform."' (Citing authority.)
"This has created an awkward situation for nationa.1
banks, since the standby letter of credit possesses
more of the characteristics of a guaranty and
national banks are not authorized to enter into
guarantees [sic] . (Citing authority.) No
contention is made here, however, that issuance of
the letters of credit in question was ultra
vires.. . ."
In Boise Cascade Corporation v. First Security Bank
(1979), 183 Mont. 378, 389, 600 P.2d 173, 180, we refused to
give letter of credit status to an instrument that did not
evince a clear intention on the part of the hank to be
primarily liable to the beneficiary upon compliance with the
terms of the instrument, irrespective of the underlying
agreements between the beneficiary and the account party. In
this case, the instrument is the opposite: it evinces a
clear intention on the part of First Security Bank to he
primarily liable upon the nonperformance by the account party
of the instruments named, particularly the payments on the
promissory note. The Bank here could determine its liability
by merely examining the instruments named, and it was not
necessary for the Bank to undertake a factual determination
as to performance of the underlying instruments.
Although every letter of credit appears to function as a.
guaranty, there are important distinctions. Republic
National Bank, 578 S.W.2d at 114. A true guaranty creates a
secondary obligation whereby the guarantor promises to answer
for the debt of another and may be called upon to perform
once the primary obligor has failed to perform. Since a
guaranty is ancillary to the underlying contract, a dispute
as to the rights and obligations of a guarantor can only be
resolved by a factual determination of the rights and
obligations of the parties of the underlying contract. A
bank that issues a credit however creates a primary
obligation as principal, not as an agent of the account
party. On the issuance of a credit the bank assumes a
primary obligation independent of the underlying contract.
From either of two aspects therefore, (I) the instrument
is by its terms clearly a letter of credit, or (2) the
instrument conspicuousl-y states that it is a letter of credit
and is conspicuously so entitled, the District Court was
correct in granting summary judgment thereon.
Prospect assigns error in the order of the District
Court denying Prospect's motion to intervene in the letter of
credit action brought by Sherwood against the Bank. Prospect
claims error in the refusal of the District Court to
consolidate the letter of credit action with the foreclosure
action, and with a separate action brought by one John Warner
against Prospect and Sherwood & Roberts, Inc., for the
foreclosure of a mechanic's lien relating to the Prospect
subdivision.
No statute gives Prospect the right to intervene in the
letter of credit action. Under Rule 24(a), M.R.Civ.P., an
applicant who claims an interest relating to the transaction
which is the subject of the action must be allowed to
intervene. Under Rule 24(b), M.R.Civ.P., he may be permitted
to intervene when the applicant's claim or defense and the
main action have a question of law or fact in common. In the
letter of credit action however, though Prospect was bound by
the underlying instruments, Prospect was not a party to the
letter of credit. The obligation of the letter of credit was
owed by the Bank to Sherwood upon the occurrence of the event
triggering liability. The Bank's liability arose without
regard to the underlying instruments, and therefore Prospect
had no claim or defense which would have a common question of
law or fact to the main action in the suit involving the
letter of credit. The District Court was clearly correct in
refusing Prospect the right to intervene in the letter of
credit action.
In like manner, the letter of credit action could not be
consolidated with the other two actions for the same reason;
there was no common question of law or fact between the
letter of credit action and the actions between the other
parties respecting the independent obligation on the letter
of credit. Here again the District Court was correct in
denying consolidation.
The matter does not end there however. In the letter of
credit action, the Bank exercised its right of third party
practice under Rule 14 (a), M. R.Civ.P., to file a third party
complaint against Prospect for indemnity on Sherwood's claim
against the Bank. However Prospect, as a third party
defendant i n t h e letter of credit action, has t h e r i g h t t o
" a s s e r t any c l a i m a g a i n s t t h e p l a i n t i f f a r i s i n g o u t of the
t r a n s a c t i o n o r occurrence t h a t i s t h e s u b j e c t matter of t h e
plaintiff's claim against t h e third-party plaintiff." Rule
14(a). The o c c u r r e n c e which is t h e s u b j e c t matter of the
l e t t e r o f c r e d i t a c t i o n i s t h e d e f a u l t i n t h e payment o f t h e
p r o m i s s o r y n o t e by P r o s p e c t t o Sherwood. Therefore, under
Rule 1 4 ( a ) , P r o s p e c t h a s t h e r i g h t i n t h e l e t t e r o f c r e d i t
a c t i o n now, a s a t h i r d p a r t y d e f e n d a n t , t o a s s e r t i t s cla-ims
a g a i n s t Sherwood i n t h a t a c t i o n . The s e n t e n c e which g i v e s
P r o s p e c t t h a t r i g h t was i n s e r t e d i n t h e f e d e r a l c o u n t e r p a r t
t o our r u l e , R u l e 1 4 ( a ) , F.R.Civ.P., by v i r t u e o f t h e 1946
amendment . The committee noted with respect to that
amendment:
". . . A new s e n t e n c e h a s a l s o been i n s e r t e d g i v i n g
t h e t h i r d p a r t y defendant t h e r i g h t t o a s s e r t
d i r e c t l y a g a i n s t t h e o r i g i n a l p l a i n t i f f any c l a i m
a r i s i n g o u t of t h e t r a n s a c t i o n o r occurrence t h a t
is t h e s u b j e c t matter of t h e p l a i n t i f f ' s claim
against the third party plaintiff. This permits
a l l c l a i m s a r i s i n g o u t o f t h e same t r a n s a c t i o n o r
o c c u r r e n c e t o b e h e a r d and d e t e r m i n e d i n t h e same
action. S e e A t l a n t i c C o a s t L i n e R . Co. v . U n i t e d
S t a t e s F i d e l i t y & G u a r a n t y Co. (MD Ga 1 9 4 3 ) , 5 2
F.Supp. 177.. . ." 1 Moore's F e d e r a l P r a c t i c e
R u l e s Pamphlet ( 1 9 8 4 ) a t 138.
The p u r p o s e of t h e enabling provision i n Rule 14(a),
M.R.Civ.P., i s t o provide a fina.1 d e t e r m i n a t i o n i n one s u i t
of a l l t h e i s s u e s t h a t might otherwise t a k e s e v e r a l s u i t s .
The indemnity a - c t i o n by t h e Bank against Prospect as
t h i r d p a r t y defendant i s s t i l l pending i n t h e D i s t r i c t Court.
On remand P r o s p e c t s h o u l d b e g i v e n o p p o r t u n i t y t o make s u c h
claims against p l a i n t i f f Sherwood a s P r o s p e c t h a s t h e r i g h t
t o make u n d e r Rule 1 4 ( a ) , M.R.Civ.P.
We also point out to the District Court, in the exercise
of its discretion if called on, the provision of Rule 62(h),
M.R.Civ.P. as follows:
"Rule 62(h). Stay of judgment upon multiple
claims. When a court has ordered final judgment on
some but not all the claims presented in the action
under the conditions stated in Rule 54 (b), the
court may stay enforcement of that judgment until
the entering of a subsequent judgment or judgments
and may prescribe such conditions as are necessary
to secure the benefit thereof to the party in whose
favor the judgment is entered."
The federal counterpart of Rule 62 (h) is identical. In
a fairly recent case, Curtiss-Wright Corporation v. General
Electric Company (1980), 446 U.S. 1, 100 S.Ct. 1460, 64
L.Ed.2d 1, the Supreme Court noted that Rule 62(h) allows the
court certifying a judgment under Rule 54(b) to stay its
enforcement until the entering of a subsequent judgment or
judgments. It also considered the language of the Rule that
the court may "prescribe such conditions as are necessary to
secure the benefit thereof to the party in whose favor the
judgment is entered." Under this rule, the Supreme Court
assumed that it would be within the power of the federal
district court to protect all parties by having the losing
party deposit the amount of judgment with the court,
directing the clerk to purchase high yield government
obligations and to hold them pending the outcome of the case.
In this way, valid considerations of economic duress and
solvency, which do not effect the judicial considerations
involved in a Rule 54 (b) determination, can be provided for
without preventing Rule 54(b) certification.
The order of the District Court granting summary
judgment in favor of Sherwood & Roberts is affirmed. The
order of the District Court denying consolidation of the
cases, and denying Prospect's motion to intervene is also
affirmed. This cause is remanded for further proceedings
consistent with this opinion. Costs of appeal shall be borne
as incurred by the respective parties without recourse to
other parties.
We Concur:
74& d,pda LJeM
Chief Jhstice
Justices
I concur and dissent as follows:
I fully concur in the holding by the majority that
affirms the district court's entry of summary judgment in
favor of Sherwood and Roberts, Inc. I dissent from the
balance of the majority opinion.
The majority goes forward to decide procedural issues
which I do not believe are before this Court.
The only appealable order in this case is the summary
iudgment entered by the trial court in favor of Sherwood and
Roberts, Inc. and against the First Security Bank of
Missoula. The only order certified for finality under Rule
54 (b) M.R.Civ.P., is that summary judgment. A notice of
appeal was filed by First Security Bank and by Prospect
appealing the granting of summary judgment against the First
Security Bank. No issues are raised on appeal except the
issue of whether the trial court erred in granting summary
judgment on the "letter of credit".
That portion of the majority opinion which deals with
the procedural aspects of the case is entirely gratuitous.
I would simply affirm the granting of summary judgment.
Mr. Justice Fred J. Weber, dissenting:
The letter of credit issued by First Security specifies
that payment becomes due only upon unremedied default. I
disagree with the majority's conclusion that under the facts
of this case, mere non-payment by Prospect constitutes
"unremedied default" and automatically triggers liability on
the letter of credit.
Section 30-5-114(1), MCA provides that an issuer must
honor a demand for payment which complies with the terms of
the relevant credit regardless of whether goods or documents
conform to the underlying contract between the customer and
beneficiary. Strict compliance with the terms of the letter
of credit is required. Courtaulds North American, Inc. v.
North Carolina National Bank (4th Cir. 1975), 53.8 F.2d 8 0 2 ,
805-06; White & Summers, Uniform Commercial Code S18-6 (2d
ed. 1980).
As applied to the letter of credit involved here,
section 30-5-114(1) creates a significant contradiction
because the triggering term of the letter of credit requires
occurrence of an event in the underlying transaction. Thus,
a determination that a demand for payment complies with the
terms of the letter of credit requires a legal and factual
analysis of the underlying transaction to ascertain whether
the triggering event of "unremedied default" has occurred.
The majority has assumed that the triggering terms of the
letter of credit are nonpayment by Prospect and notice of
default to the Bank, even though the letter itself requires
payment only upon unremedied default by Prospect. The letter
of credit says "unremedied default," not "nonperformance."
The independent nature of the letter of credit means
that liability of the issuer is determined by the terms of
the letter of credit rather than according to the obligations
and rights arising from the underlying transaction. However,
the issuer and beneficiary may agree upon the triggering
terms of the letter of credit and thus ma.y agree, as here,
that the triggering event will be an occurrence in the
underlying transaction which will require some element of
performance by the beneficiary. This does not mean that
these prerequisites to payment arise from the underlying
transaction; rather, for purposes of the letter of credit,
they arise from the choice of terms and terminology employed
in the letter of credit by the issuer and beneficiary. Here,
a consideration of Sherwood's alleged a-ctivity which caused
nonperformance arises from the language of the letter of
credit itself, rather than from the separate underlying
transaction. Regardless of whether this document is a letter
of credit rather than a guaranty, the issuer has available
the defense of noncompliance with the terms of the letter of
credit.
Whether failure to pay is "default" is a question which
can be answered only by further reference to the underlying
agreements, which are specifically listed in the letter of
credit, and principles of law. The majority has ignored this
issue and has concluded that nonpayment is necessarily
default, which is contrary to Montana law.
The term "unremedied default" necessarily implies
unexcused nonperformance. Where the act of a creditor
prevents the debtor from performing, performance is excused.
Section 28-1-1301, MCA provides in part:
"When delay or failure to perform or offer to
perform excused. The want of perforFa.nce of an
obligation or of an offer of performance, in whole
or in part, or any delay therein is excused by the
following causes, to the extent to which they
operate :
" (1) when such performance or offer is prevented or
delayed by the act of the creditor or by the
operation of law, even though there may have been a
stipulation that this shall not be an
excuse ....'I
This statute excuses Prospect's nonperformance if Sherwood in
fact caused the failure of Prospect to perform.
In Pioneer Engineering Works, Inc. v. McConnell (1949),
123 Mont. 1-71, 212 P.2d 641, the Court held that payment was
excused under this statute where nonpayment was caused by
actions of the other party to the contract. There, the
failure of the seller of gravel-crushing equipment to provide
conforming equipment prevented buyer from meeting obligations
on a contract to provide gravel to the government for
building Fort Peck Dam with a resulting inability to pay for
the equipment. The Court held that seller could not recover
where nonpayment was caused by seller's breach. 123 Mont. at
192, 212 P.2d at 652. In Smith v. Gunniss (1943), 115 Mont.
362, 144 P.2d 186, the Court stated that "'he who prevents a
thing from being done shall never be permitted to avail
himself of the non-performance which he himself has
occasioned.'" 115 Mont. at 379, quoting 12 Am.Jur. section
329. See also Gramrn v. Insurance Unlimited (1963), 141 Mont.
456, 462, 378 P.2d 662, 665.
Where performance is excused there is no default. An
unjustified refusal by Sherwood to disburse loan monies which
caused nonperformance by Prospect would excuse nonperformance
under section 28-1-1301, MCA. This raises a factual question
as to whether Sherwood caused Prospect's nonperformance.
The majority suggests that Prospect's promissory note
creates a.n obligation independent of Sherwood ' s performance
in the underlying tra.nsaction. However, the promissory note
expressly incorporates by reference the terms of Sherwood's
commitment letter. The promissory note states that it is
given for an actual loan of $826,500 (which Sherwood
allegedly refused to fully disburse). It also states that it
shall be construed with the other documents relating to the
transaction and in accordance with Montana law. The
promissory note therefore does not create an independent
obligation of Prospect to pay.
It is true that the commercial usability of letters of
credit should be protected. Careful inquiry is required to
determine if the standard of "unremedied default" has been
met. This requires a careful and factual determination. It
is true that in the ordinary letter of credit situation, the
court will not consider the completion of the underlying
transaction. However, that rule is not applicable to the
present situation where the parties have required that the
bank make payment only where an "unremedied default" occurs.
The meaning of "unremedied default" in this case is a
question of fact to be resolved at trial, not on summary
judgment.
I would reverse the conclusion of the District Court
that nonperformance is necessarily "unremedied default", and
would remand the case for trial to determine what was
intended by "unremedied default" and whether Sherwood's
nonperformsance caused and. therefore excused Prospect's
nonperformance.
I concur in the foregoing dissent. /
f
Justicei"