Heritage Bank v. Redcom Laboratories, Inc.

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT
_______________

m 00-10835
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HERITAGE BANK,
FORMERLY KNOWN AS BRAZOS BANK, N.A.,

Plaintiff-
Counter Defendant-
Appellant,

VERSUS

REDCOM LABORATORIES, INC., ET AL.,

Defendants,

REDCOM LABORATORIES, INC.,

Defendant-
Counter Claimant-
Appellee.

_________________________

Appeal from the United States District Court
for the Northern District of Texas
_________________________

May 14, 2001
Before REAVLEY, SMITH, and DeMOSS, 1998, and made a presentment on April 24,
Circuit Judges. 1998, which the bank received on May 1.

JERRY E. SMITH, Circuit Judge: Before the bank determined whether the
presentment complied with the letter of credit,
Heritage Bank issued a letter of credit to Fiber Wave sued the bank and Redcom in state
Fiber Wave Telecom, Inc. (“Fiber Wave”), court and obtained a temporary restraining
which used it to purchase electronics from order (“TRO”) that enjoined the bank from
Redcom Laboratories, Inc. (“Redcom”), which honoring the presentment. On May 6, the
delivered the goods and made presentment to bank, because of the TRO, dishonored the
the bank for payment. Fiber Wave believed presentment. On June 5, the state court
the goods defective and successfully petitioned converted the TRO into a temporary
a Texas court to enjoin the bank from injunction.
honoring Redcom’s presentment.1 Redcom
made another demand on the bank during the On November 20, while the injunction was
pendency of the injunction, but the bank in effect, Redcom made another presentment
refused to honor the presentment and sought to the bank for payment under the letter of
a declaratory judgment exonerating it from credit. On November 25, the bank again dis-
liability. honored the presentment, citing the injunction.
On January 27, 1999, Redcom filed a motion
Redcom sued the bank for wrongful dis- to dissolve the injunction and a motion to
honor, and the district court granted summary enjoin the expiration of the letter of credit.
judgment for Redcom. The bank appeals, ar- The court granted nonsuit to Fiber Wave and
guing that the court erred in exercising denied Redcom’s motions.
diversity jurisdiction and in granting summary
judgment. Finding no reversible error, we The letter of credit expired on February 3,
affirm. and on March 3, Redcom made another
demand to the bank for payment, alleging that
I. the injunction had been dissolved when Fiber
On February 3, 1998, the bank issued Ir- Wave non-suited its claims against the bank.
revocable Commercial Letter of Credit No. The bank filed a declaratory judgment action
9518 for $215,729 to Fiber Wave, naming against Fiber Wave and Redcom in state court,
Redcom as the beneficiary. The letter of credit and Redcom removed the action to federal
was subject to the Uniform Customs and court.
Practice for Documentary Credits, 1993
Revision, ICC Publication No. 500 (“UCP”), Redcom claimed that the bank had
and was good for one year. It had no special fraudulently joined Fiber Wave to destroy di-
conditions or unusual provisions. Redcom versity jurisdiction, and the bank moved to re-
shipped goods to Fiber Wave on March 27, mand, arguing that Fiber Wave was properly
joined. The district court determined that
Fiber Wave was improperly joined, and both
1
Fiber Wave and Redcom have sought to parties moved for summary judgment. The
resolve their differences over the goods through a district court granted summary judgment for
separate lawsuit in state court.

2
Redcom, concluding, inter alia, that (1) the to remand. Medina v. Ramsey Steel Co., 238
bank waived discrepancies in the November F.3d 674, 680 (5th Cir. 2001). To establish
20 presentment; (2) any presentments made that Fiber Wave was joined fraudulently to de-
after the expiration of the letter of credit feat diversity, Redcom must demonstrate ei-
would be ineffective;2 and (3) the bank wrong- ther fraud in the recitation of jurisdictional
fully dishonored the November 20 facts or the absence of any possibility that the
presentment, because the injunction only bank has stated a claim against Fiber Wave.
prohibited the bank from honoring improper Rodriguez v. Sabatino, 120 F.3d 589, 591 (5th
presentments. Cir. 1997). Redcom has not alleged fraud.

II. The bank contends that it sued under the
Redcom removed this action to federal Uniform Declaratory Judgments Act, which
court on the basis of diversity of citizenship. states that “[w]hen declaratory relief is sought,
Removal is proper only if that court would all persons who have or claim any interest that
have had original jurisdiction over the claim. would be affected by the declaration must be
See 28 U.S.C. § 1441(a), (b). The bank and made parties.” TEX. CIV. PRAC. & REM. CODE
Fiber Wave are citizens of Texas; Redcom is a § 37.006. Thus, claims the bank, because Fi-
citizen of New York. For diversity ber Wave will be liable to the bank for
jurisdiction, the parties must be citizens of reimbursement if the bank has to honor Red-
different states, and the amount in controversy com’s presentment under the letter of credit,
must exceed $75,000. See 28 U.S.C. Fiber Wave has an interest that would be
§ 1332(a)(1). The amount in controversy is affected by the declaration.4
$195,729, and Redcom and the bank are
diverse. Redcom correctly notes that the declaratory
judgment cannot itself trigger Fiber Wave’s re-
Joining Fiber Wave as a defendant, imbursement obligation, which, instead, is
however, destroys diversity.3 If Fiber Wave imposed only when the bank honors a
was properly joined as a party, diversity presentment under the letter of credit. The
jurisdiction is destroyed, because the bank and declaratory judgment cannot order the bank to
Fiber Wave are not diverse. But if Fiber Wave pay Redcom anything; it merely resolves
was fraudulently joined, as Redcom asserts, questions regarding the rights of the parties.
then the case was properly in federal court. See In re City of Dallas, 977 S.W.2d 798, 804

We review de novo the denial of a motion
4
TEX. BUS. & COM. CODE § 5.114(c) (Vernon
1998) governs Fiber Wave’s liability:
2
Neither party challenges this finding on
appeal. Unless otherwise agreed an issuer which has
duly honored a draft or demand for payment
3
See Strawbridge v. Curtiss, 7 U.S. (3 Cranch) is entitled to immediate reimbursement of
267 (1806) (finding that a controversy is between any payment made under the credit and to
“citizens of different states” within the meaning of be put in effectively available funds not later
the statute only if no plaintiff is a citizen of the than the day before maturity of any
same state as any defendant). acceptance made under the credit.

3
(Tex. App.SSFort Worth 1998, no writ). er and seller; (2) the buyer’s (applicant’s)
Indeed, Texas law prohibits a court from agreement to reimburse the bank for extension
ordering a bank to honor an letter of credit in of credit; and (3) the letter of credit,
the context of a declaratory judgment. See representing the bank’s promise to pay the
TEX. CIV. PRAC. & REM. CODE § 37.003(a) seller (the beneficiary) when it presents certain
(Vernon 1997). documents. Id.

Texas law further requires that “a The entire arrangement exists to allow the
justiciable controversy must exist before a credit issuer’s obligation to the beneficiary to
party can be properly joined” in a declaratory operate independently of its underlying
judgment action. Sub-Surface Constr. Co. v. agreement with the applicant. Id. at 602.5
Bryant-Curington, Inc., 533 S.W.2d 452, 456 Therefore, although the declaration of the
(Tex. Civ. App.SSAustin 1976, writ ref’d rights of the bank and Redcom under the letter
n.r.e.). If the resolution of a controversy of credit ultimately may affect Fiber Wave, it
“depends upon contingent or hypothetical has no legal interest in the current dispute.
facts, or upon events that have not yet come to The district court did not err in finding
pass,” it is not ripe for review. Patterson v. fraudulent joinder and asserting diversity
Planned Parenthood, 971 S.W.2d 439, 443 jurisdiction over the declaratory judgment
(Tex. 1998). claim.

The bank’s claim against Fiber Wave for III.
reimbursement is contingent on a finding that The bank contends that the court erred in
it improperly dishonored Redcom’s granting summary judgment for Redcom on
presentments. Thus, even though Fiber Wave the wrongful dishonor claim. The bank argues
has an interest in the outcome, it has no that (1) Redcom made an untimely, deficient
interest in the current controversy. Because presentment; and (2) even if it were proper,
the claim against Fiber Wave is not presently the injunction prevented the bank from
justiciable, the district court properly honoring it. Redcom contends that (1) the
determined that the bank could establish no bank waived its right to raise discrepancies;
claim against Fiber Wave. and (2) the injunction prohibited only improper
presentments. To prevail on a wrongful dis-
In addition, the rationale underlying letters honor claim, Redcom must demonstrate
of credit weighs in favor of finding that Fiber (1) the issuance of a letter of credit; (2) timely
Wave was improperly joined. Commercial presentation of the required documents; and
parties use letters of credit for the purpose of (3) a failure to pay on the letter of credit.
reducing the risk of dealing with unknown en- Voest-Alpine Trading USA Corp. v. Bank of
tities. A letter of credit permits a seller to China, 142 F.3d 887, 892 (5th Cir. 1998).
transact with a known credit source (such as a
bank) rather than with an unknown buyer. E.
Girard Sav. Ass’n v. Citizens Nat’l Bank & 5
Indeed, the bank’s complaint asks the court to
Trust Co., 593 F.2d 598, 601 (5th Cir. 1979). declare that it “has no liability to Redcom or Fiber-
This type of arrangement creates three distinct wave [sic] under the letter of credit.” Fiber Wave
relationships: (1) the transaction between buy- is not a beneficiary of the letter of credit, so the
bank has no liability to it as the issuer.

4
 Summary judgment is appropriate “if the to the bank as required by the letter of credit,
pleadings, depositions, answers to including an invoice, sworn statements as to
interrogatories, and admissions on file, the delivery of the goods, and Federal Express
together with the affidavits, if any, show that receipts signed by Fiber Wave. At issue is
there is no genuine issue as to any material fact whether Redcom complied with the letter of
and that the moving party is entitled to credit’s requirement that Redcom present “one
judgment as a matter of law.” FED. R. CIV. P. copy of the invoice/bill of lading upon receipt
56(c). We review a grant of summary of each shipment as well as notification from
judgment de novo, applying the same Fiber Wave Telecom, Inc. stating that such
standards as did the district court. Sherrod v. equipment has been or is in the process of
Am. Airlines, Inc., 132 F.3d 1112, 1119 (5th being delivered.” Redcom claims that its sub-
Cir. 1998). mission of an invoice, affidavits stating that the
goods were delivered, and signed Federal
A. Express receipts meets this requirement; the
The bank and Redcom dispute whether the bank argues that Redcom needed to submit a
bank waived its right to raise discrepancies in bill of lading.
the November 20 presentment. The parties
agree that the April 24 presentment was Article 21 of the Uniform Customs and
improper, and Redcom has not appealed the Practice for Documentary Credits (“UCP
decision that the bank did not have to honor it. 500") requires that the letter of credit stipulate
The November 20 presentment, however, was what types of documents will be accepted:
an attempt to correct deficiencies in the earlier
one. We must determine whether Redcom When documents other than transport
made a proper presentment under the terms of documents, insurance documents and
the letter of credit and, if not, whether the commercial invoices are called for, the
bank waived its right to object. Credit should stipulate by whom such
documents are to be issued and their
1. wording or data content. If the Credit
We first must examine whether Redcom does not so stipulate, banks will accept
complied with the terms of the letter of credit. such documents as presented, provided
An issuer’s liability on a letter of credit is con- that their data content is not inconsistent
tingent on proper presentment. See Westwind with any other stipulated document
Exploration Inc. v. Homestead Sav. Ass’n, presented.
696 S.W.2d 378, 381 (Tex. 1985). The
question of proper presentment encompasses Uniform Customs and Practice for
whether (1) Redcom provided appropriate Documentary Credits, 1993 Revision, ICC
documentation; (2) Redcom delivered its Pub. No. 500. Thus, if the letter of credit does
documents in a timely fashion; and (3) the not have specific requirements, the bank
bank had an obligation to notify Redcom of should accept anything not inconsistent with
the deficiencies even in the presence of the other documents presented.
injunction.
The bank argues that a bill of lading is a
Redcom presented various documentation specific form of document that Redcom failed

5
to provide. The plain language of the letter of unless the letter of credit specifically overrode
credit drafted by the bank indicates otherwise. the UCP. 7 As discussed below, an untimely
The letter of credit requires an “invoice/bill of presentment is an incurable defect, and the
lading.” The virgule separating the two terms bank had no duty to notify Redcom of it.
signifies that Redcom may provide either an Thus, if the April 24 presentment was
invoice or a bill of lading.6 Redcom provided untimely, Redcom could make no subsequent
an invoice; under the terms of the letter of presentment that would trigger the bank’s pay-
credit, it has complied. ment, and a finding that Redcom failed to
make a proper presentment in a timely fashion
2. under the UCP would dispose of the case.
The bank claims that Redcom did not pre-
sent its documents within twenty-one days Redcom argues that the parties specifically
after the date of shipment as required by article contracted around the twenty-one-day
43(a) of the UCP 500. The goods were provision, which says that the bank will honor
shipped to Fiber Wave on March 27, 1998. any proper presentment “on delivery of
Redcom made a deficient presentment on April documents as specified if presented at our
24, twenty-eight days after the date of counters on or before the expiration date.”
shipping, and a corrected presentment on No- The bank suggests that this language may be
vember 20, which was 200 days after the interpreted merely to affirm the period for
shipment. If the twenty-one-day provision ap- which the credit was good. “[A] significant
plies, Redcom’s presentment seems both de- showing would have to be made before parties
ficient and untimely. to a letter of credit governed by the UPC
would be found to have waived its express
Apparently for the first time on appeal, terms.” Banco Gen. Runinahui, 97 F.3d at
Redcom contends that it first made a defective 486.
presentment on April 5, 1998, well within the
twenty-one-day period, and that subsequent The terms of the letter of credit and the ac-
presentments were merely attempts to correct tions of the parties suggest that the parties in-
this timely presentment. We may not consider tended to contract around the UPC default
an issue raised for the first time on appeal rule. The bank notified Redcom after the April
unless it is a purely legal issue and a failure to 24 and the November 20 presentment that it
consider it will result in a miscarriage of planned to dishonor it because of the
justice. Heci Exploration Co. v. Holloway, injunction. Even though the bank need not
862 F.2d 513, 518 & n.7 (5th Cir. 1988). have notified Redcom of the deficiency of un-
timeliness, it seems surprising that, if the UCP
Even assuming the point is not waived,
Redcom still had an obligation to correct all
deficiencies within the twenty-one-day period 7
Cf. Banco Gen. Runinahui, S.A. v. Citibank
Int’l, 97 F.3d 480, 484 (11th Cir. 1996) (rejecting
plaintiff’s argument that where the letter of credit
6
See AMERICAN HERITAGE DICTIONARY OF gave a party fifteen days to present conforming
THE ENGLISH LANGUAGE 1922 (4th ed. 2000) documents, the party had fifteen days to submit
(defining “virgule” as “[a] diagonal mark (/) used some documents, then had until the expiration date
especially to separate alternatives”). to present corrected ones).

6
applied, it chose to use the injunction rather
than the UCP as the basis for dishonor. Based
on its own actions, the bank apparently The bank argues t hat the defects were in-
believed that the letter of credit overrode the curable, because the document was not timely
UCP’s requirements. Therefore, Redcom presented, and that Redcom suffered no
made a timely presentment. prejudice, because the injunction prevented it
from honoring the presentment. If the
3. presentment were untimely, no cure would be
Even if Redcom had made a timely, defi- possible, and the bank had no duty to notify
cient presentment, the bank waived its right to Redcom of the defect. See Siderius, 583
raise the discrepancies. The general rule is S.W.2d at 862. Redcom’s presentment was
that “where an issuer formally places dishonor timely, because the letter of credit contracted
on a specific ground, the issuer is held to have around the UCP default rules. Thus, Redcom
waived all others.” Siderius, Inc. v. Wallace could have cured any defects and would suffer
Co., 583 S.W.2d 852, 862 (Tex. Civ. prejudice if the bank failed to notify it.
App.SSTyler 1979, no writ). Moreover, to re-
tain its ability to raise discrepancies, the bank We address, below, whether the injunction
must prove the existence of an incurable de- prevented the bank from honoring the
ficiency or that the failure to notify resulted in presentment. Even if the injunction prevented
no prejudice. See Wing On Bank Ltd. v. Am. payment at the time of presentment, it did not
Nat’l Bank &Trust Co., 457 F.2d 328, 328-29 excuse the bank from its duty to notify Red-
(5th Cir. 1972). com of discrepancies. Thus, the bank has
waived all discrepancies related to the
The letter of credit is subject to article 13 of November 20 presentment.
the UCP 500, which requires that banks
examine draw documents within seven banking B.
days. If the bank decides to refuse the draw, The bank and Redcom dispute whether the
article 14 requires that it give notice no later injunction prevented the bank from honoring
than the close of the seventh day. Article the November 20 presentment. Because the
14(e) establishes that if the bank does not give bank waived its right to raise discrepancies, we
such notice within the time allotted, it waives must assume that the presentment was proper.
its right to claim that the documents are not in The bank may still prevail, however, if the
compliance. injunction prevented it from honoring any
presentment.8
The bank expressly dishonored Redcom’s
presentment on account of the injunction on
November 25, within the seven-day period. 8
Redcom believes that the bank specifically
The dishonor, however, did not notify Redcom should have pleaded an affirmative defense of legal
of any deficiencies in the presentment. Be- impossibility under FED. R. CIV. P. 8(c). The bank
cause the bank gave no notice of any other rightly excoriates this argument as exalting form
deficiencies, we must address whether the over substance. The bank’s original complaint
alleged defects were incurable, or whether states that “the Temporary Injunction . . .
Redcom suffered no prejudice from the failure. specifically enjoined the bank from honoring the
(continued...)

7
 1. presentment. Although a court order may
The parties dispute the scope of the excuse a party’s performance under a
temporary injunction, which states that it “is contractual obligation,9 the presence of an
granted as requested . . . rest raining and injunction, in and of itself, does not excuse
enjoining defendant . . . from honoring” the performance indefinitely. The injunction
letter of credit (emphasis added). This “merely suspended [the bank’s] obligation to
language seems plainly to mean that the bank honor or dishonor the drafts during the
cannot honor any presentment for a draw on pendency of the legal restraint,” and payment
the letter of credit. on a proper presentment would come due
when the injunction was lifted. Kelley v. First
An injunction, however, cannot issue on Westroads Bank, 840 F.2d 554, 558 (8th Cir.
matters outside the parameter of the request. 1988).10
Fairfield v. Stonehenge Ass’n Co., 678
S.W.2d 608, 611 (Tex. App.SSHouston [14th This rationale applies even where the letter
Dist.] 1984, no writ). Counsel for Fiber Wave of credit had expired when the injunction was
stated in oral argument before the injunction- lifted. Engel Indus., 798 F. Supp. at 15 (citing
issuing court that it requested an injunction Kelley). In Kelley, a TRO froze a timely pre-
only for improper presentments: sentment until the injunction was lifted, then
the issuing banks had to process the
Your Honor, we’re not here asking that presentment. Kelley, 840 F.2d at 558. Thus,
Redcom be enjoined from doing an injunction may provide a defense of
anything. If they can gather the impossibility for as long as it stands, but once
appropriate documentation and present it is lifted, the bank must honor or properly
it to the bank, then the letter of credit dishonor the drafts. “[T]he obligation to pay
should be paid. What we’re asking for was fixed at the time the documents were
an injunction and what we got a TRO presented.” Id. at 559.
against was only the bank paying on
improper presentment. Therefore, because Redcom made a timely
presentment, and the bank waived its right to
Thus, the district court correctly interpreted assert deficiencies, the injunction did not ex-
the injunction as applying only to improper
presentments. Because the bank waived its
9
right to challenge the presentment as improper, See, e.g., Centex Corp. v. Dalton, 840
the injunction did not bar the bank from S.W.2d 952, 955-56 (Tex. 1992) (concluding that
honoring it. a cease and desist order prevented payment of fees
to consultant); RSB Mfg. Corp. v. Bank of Baro-
2. da, 15 B.R. 650 (S.D.N.Y. 1981) (finding that a
third party’s injunction against a bank issuing a
Nor did the expiration of the letter of credit
letter of credit prevented it from paying the
prevent the bank from honoring the beneficiary). Redcom correctly distinguishes these
cases on the basis that there, the injunction was
still in place at the time of judgment.
8
(...continued)
10
Letter of Credit,” so Redcom’s suggestion that the See also Engel Indus. v. First Am. Bank,
bank has waived this argument is meritless. N.A., 798 F. Supp. 9, 15 (D.D.C. 1992).

8
cuse the bank’s performance permanently. judicial admissions. As we observed in
The district court did not err in finding that the Universal Am. Barge Corp. v. J-Chem., 946
bank had wrongfully dishonored the November F.2d 1131, 1142 (5th Cir. 1991), “judicial
20 presentment. admissions are not conclusive and binding in a
separate case from the one in which the
IV. admissions are made.” The statements were
The bank and Redcom dispute whether made in a separate suit to dissolve the
Redcom judicially admitted that the injunction injunction, so Redcom is not precluded from
excused the bank from paying on the letter of raising them here.
credit. To qualify as a judicial admission, the
statement must be (1) made in a judicial pro- AFFIRMED.
ceeding; (2) contrary to a fact essential to the
theory of recovery; (3) deliberate, clear, and
unequivocal; (4) such that giving it conclusive
effect meets with public policy; and (5) about
a fact on which a judgment for the opposing
party can be based. See Griffin v. Superior
Ins. Co., 338 S.W.2d 415, 419 (Tex. 1960).

Redcom made statements concerning alter-
native arguments as to the legal effect of dis-
solving the injunction. In explaining that the
injunction was the but-for cause of its receipt
of payment, it said that unless the court
dissolved the order before the letter of credit
expired, it would be deprived of payment.

The bank points out the inconsistency in
that position and the one it takes here, that the
obligation to pay or dishonor vests when the
bank receives the presentment. Redcom ap-
parently stated that “[the bank] is restrained
from paying the Letter of Credit, thereby
causing irreparable harm to Redcom if such
restraint will allow the Letter of Credit to ex-
pire by its own terms during the pendency of
this action.” Because the letter of credit did in
fact expire before the injunction, the bank be-
lieves that Redcom should be held to its
admissions.

Even if the bank has correctly characterized
Redcom’s statements, they do not qualify as

9