
USCA1 Opinion

	




                            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."                                         -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  & 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)).            ______                                         -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 & 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                                         -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 & 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
