

                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 &amp;                                                                              
Cavanagh were on brief for appellants.                
Richard W. MacAdams  with whom  MacAdams &amp; 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."

                             -2-                                          2

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.

                             -3-                                          3

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.

                             -4-                                          4

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,

                             -5-                                          5

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.

                             -6-                                          6

                          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.

                             -7-                                          7

          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  &amp; Robert S. Summers,  Uniform                                                                         

Commercial Code    19-2, at  809 (3d ed.  1988) (hereinafter,                           

"White  &amp;  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)).                  

                             -8-                                          8

          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 &amp; 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 &amp; 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

                             -9-                                          9

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

                             -10-                                          10

          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

                             -11-                                          11

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

                             -12-                                          12

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

                             -13-                                          13

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.

                             -14-                                          14

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

                             -15-                                          15

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 &amp; 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.                                      

                             -16-                                          16
