Lumbermans Acceptance Co. v. Security Pacific National Bank

Opinion

Lumbermans Mortgage Company, Lumbermans Acceptance Company and Ian T. Allison appeal from a summary judgment determining that Security Pacific National Bank is entitled to recover

The affidavits presented on the motion for summary judgment establish without conflict the following events. Lumbermans Mortgage Company was engaged in developing a real estate project called “San Jose Medical Arts Plaza.” Short term financing for construction of the project was provided by Union Bank. It was planned that after the project was completed the debt to Union Bank would be paid out of the proceeds of a long term loan to be made by Massachusetts Mutual Life Insurance Company. It was anticipated that this long term loan might not be sufficient to retire in full Lumbermans’ indebtedness to Union Bank. To cover this anticipated gap, Lumbermans obtained from Security Pacific an irrevocable letter of credit in favor of Union Bank payable “up to the aggregate sum of $700,000.00” upon presentation of Union Bank’s draft accompanied by Union Bank’s “signed statement that Lumberman’s Mortgage Company, 306 Mendocino Ave., Santa Rosa, CA 95404, on November 1, 1975, has not repaid the Union Bank the U.S. $700,000.00 gap construction financing loan on the San Jose Medical Arts Plaza.” The letter of credit was issued upon continuing guaranties executed by appellants Lumbermans Acceptance and Ian T. Allison.

After the project was completed, Massachusetts Mutual declined to issue a long term loan. Lumbermans informed Security Pacific of this development, stating the view that “the events required to implement the . . . letter of credit never transpired, and therefore this letter of credit should be declared null and void.” Security Pacific responded by letter that it felt obligated “to honor the Letter of Credit when it is presented for payment.”

By letter dated November 1, 1975, Union Bank presented the letter of credit for payment, certifying that Lumbermans had not “repaid the Union Bank the $700,000.00 gap construction financing loan on the San Jose Medical Arts Plaza.” On November 20, Security Pacific honored Union Bank’s draft and paid it $700,000 under the letter of credit.

Appellants contend, citing Dugar v. Happy Tiger Records, Inc. (1974) 41 Cal.App.3d 811 [ 116 Cal.Rptr. 412 ], and similar cases, that the documentary showing made by Security Pacific in support of its motion

Appellants contend that factual issues existed as to whether Security Pacific was required to pay under the letter of credit and whether Security Pacific acted in good faith with respect to its customer, Lumbermans Mortgage Company, and the guarantors, Lumbermans Acceptance Company and Ian T. Allison. This contention cannot be sustained. The letter of credit is a commercial instrument which represents a primary obligation between the issuer and the beneficiary. An issuer has no responsibility for performance of the underlying contract between the customer and the beneficiary (Cal.U.Com. Code, § 5109). An issuer “must honor a draft or demand for payment which complies with the terms of the relevant credit regardless of whether the goods or documents conform to the underlying contract for sale or other contract between the customer and the beneficiary.” (Cal.U. Com. Code, § 5114, subd. (1); Association De Az. De Gua. v. United States Nat. Bank of Ore. (9th Cir. 1970) 423 F.2d 638 , 641.) Appellants’ theory is that because Massachusetts Mutual declined to make a long term loan, there was no “gap” in the substitution of permanent financing, for the interim loan which had been made by Union Bank. But the issuer of an irrevocable letter of credit is, by the above quoted statutory language, exempted from any responsibility to determine the reciprocal rights and liabilities of the applicant for the letter of credit as against the beneficiary. (See Braucher & Riegert, Introduction to Commercial Transactions (1977) p. 368.) There is nothing in the record indicating fraud or lack of good faith on the part of Security Pacific in paying the irrevocable letter of credit upon presentation. The court acted correctly when it determined that there were no factual issues and thereupon rendered summary judgment.