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No. 83-263 IN THE SUPREME COURT OF THE STATE OF MONTANA 1984

SHERWOOD

&

ROBERTS, I N C . , Plaintiff/Respondenki

FIRST SECURITY BANK OF MISSOULA, Defendant-Third Party Plaintiff and Appellant,

PROSPECT ASSOCIATES, INC., CHARLES W. ISALY, ISALY, THOANAS H. SCHIMKE, MARY , DAVID A. SCHIMKE, and TAMARA R. SCIIIMKE, Third Party Defendants an& Co-Appellants.

APPEAL FROM:

District Court of the Fourth Judicial District, In and for the County of Missoula, The Honorable James B. Wheelis, Judge presiding.

COUiJSEL OF RECORD: For Appellants: Mulroney, Delaney & Scott; Dexter L. Delaney argued for First Security Bank, Missoula, Montana Donald Snavely argued for Prospect Associates, Missoula, Montana For Respondent: Garlington, Lohn & Robinson; George D. Goodrich argued, Missoula, Montana

Submitted: Decided:

January 16, 1984 May 9 , 1984

Filed:

.

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..s

.

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,

. . .' "f

Clerk

Mr. Justice John C. Court.

Sheehy delivered the Opinion of the

The principle issue we determine in this case is that an instrument issued by a bank entitled "letter of credit," and containing language that it is a letter of credit must be enforced as a letter of credit, and not as an instrument of conditional guaranty. First Security Bank of Missoula appeals from a summary judgment against it entered by the District Court, Fourth Judicial District, Missoula County, holding that the Bank was liable according to the terms of a letter of credit issued in favor of Sherwood
&

Roberts, Tnc.

Third party defendants, Prospect Associates, Inc., have appealed from an interlocutory order of the District Court denying Prospect's motion to intervene in the case. The procedure in the District Court is somewhat complex. Three actions have been filed in the District Court, all involving the

fins-ncing

of

construction

for

Prospect

Subdivision, on the west side of Missoula. In July, 1980, Sherwood
&

Roberts, Inc.

(Sherwood) a

Washington corporation, agreed to lend Prospect Associates, Inc. (Prospect) $826,500 to finance construction of a

subdivision in the Grant Creek area near Missoula.

Sherwood

agreed to disburse loan proceeds to Prospect according to a budget, attached to the commitment letter, specifying the amounts of the total proceeds allocable to specific purposes, including payments of SID's, taxes and development costs. The commitment letter provided that the disbursements would be made in 30 day increments to reimburse Prospect for costs, but not to exceed the budgeted a.mounts.

As part of the security for the loan from Sherwood, Prospect was required to obtain a $100,000 letter of credit with Sherwood as beneficiary. First Security Bank issued the The parties dispute

document at the request of Prospect. authorship of the instrument.

We set forth here the terms of

the instrument, which was typed on the letterhead of the Bank.

"IRREVOCABLE COMMERCIAL LETTER OF CREDIT Letter of Credit #85 Sherwood & Roberts 2806 Garfield Missoula, MT 59801 Re: Prospect Associates, Inc. 2806 Garfield, Suite D Missoula, Montana. 59801

Inc.

Gentlemen: At the request and for the account of Prospect Associates, Inc., of Missoula, Montana, First Security Bank of Missoula of Missoula, Montana, hereby guarantees the availability of funds in the amount of $100,000.00 for the purpose of securing Prospect Associates, Inc.'s, performance of its loan agreement with Sherwood & Roberts Inc., as well as its performance of that certain Mortgage and Promissory Note payable to Sherwood & Roberts Inc. This letter of credit shall expire on midnight on the 15th day of July, 1982. This letter of credit shall be exercisable by Sherwood & Roberts Inc. only upon the unremedied default by Prospect Associates, Inc. in its performance of any of the following documents; that certain loan application agreement, loan commitment letter, promissory note, or mortgage, which documents evidence that certain loan transaction dated July 15, 1980 wherein Sherwood & Roberts Inc. is named as lender and mortgagee and Prospect Associates, Inc. is named as mortgagor and borrower. FIRST SECURITY BANK OF MISSOULA

By /s/ Duane G. Scheeler Duane G. Scheeler, President" In the fall of 1980 various subcontractor bills, tax payments and interest payments went unpaid. construction of the subdivision was halted Consequently preventing The

completion of the subdivision and the sale of lots. resulting loss of revenue led

to Prospect's failure to make

the payments required by the loan agreement and promissory note. Prospect alleges, and filed in the District Court

a f f j-davits supporting its allegations, that this chain of

events was triggered by Sherwood's failure to disburse loan funds on schedule as required by the agreement. It alleges

that Sherwood decided to pull out of the western Montana real estate financing market midway in the disbursement process and unjustifiably refused to honor Prospect's proper request for disbursements. Prospect contends that had it received

the requested loan proceeds, it would have been able to perform its obl-igations under the various loan agreements. After demanding payment, Sherwood filed a mortgage

foreclosure action against Prospect and a separate action against the Rank to collect the face amount of the letter of credit. In the bank action, First Security asserted that the document was not in fact a letter of credit, but was a conditional instrument of guaranty. Bank submitted evidence

that the parties intended the instrument to be an instrument of guaranty. The Rank Sherwood's evidence was to the contrary. and Prospect also claimed that Prospect's

nonperformance was caused by Sherwood's nonperformance and was therefore not a default. Thus they argued the condition

for payment was not met and Sherwood could not recover on the letter of credit. First Security and Prospect have filed

affidavits that the parties intended by use of the phrase "unremedied default" that the note would be payable only if Sherwood had fulfilled all of its obligations and Prospect then failed to perform. They emphasize that the term

"default" was used rather than simply "nonperformance." Prospect, already defendants in the mortgage foreclosure action brought by Sherwood, moved in the bank action to

intervene, or for consolidation of the foreclosure action with the letter of credit action. Both motions were denied.

Thereafter, the Bank filed against Prospect as a third party defendant. Sherwood moved for summary judgment on the letter of credit in the bank action. for summary After a hearing on the motion issued a order

judgment, the District Court

granting the same.

In the order, the court stated that the

letter of credit issued by the Bank was a valid letter of credit under section 30-5-102 (1) (c), MCA. In addition, the

court found that the condition necessary for Sherwood to collect on the letter of credit was Prospect's unremedied default on the promissory note. mere nonpayment by Prospect The court concluded that of the promissory of note

constituted

"unremedied

default,"

regardless

whether

Sherwood caused it.

The court thus found the Bank liable for

the face amount of the letter plus interest to Sherwood. The District Court certified the summary judgment

against the Bank as one proper for appeal under Rule 54(b), M.R.Civ.P. The third party action between the Bank and

Prospect is still pending in the District Court.
I.

If the instrument issued by the Bank is a letter of credit, the Bank must honor a proper demand for payment of $100,000 under the instrument regardless of whether the

documents conform to the underlying contract between the customer (Prospect) and the beneficiary (Sherwood). 30-5-114, MCA. d.ifference in thereby is not If the instrument is a Section

guaranty, what to gain the

legal effect the Bank could hope clear. It would

depend on whether

guaranty is absolute. Where the contract promise of the guarantor is absolute--that is, subject to no condition except the default of the principal debtor--or where the promise has become absolute by the occurrence of the named conditions, the guarantor is obligated to pay the debt of the principal debtor. In such a situation, the creditor may maintain an action against the guarantor imrned.iately upon default of the debtor . and without first having proceeded against the The question as to whether the debtor debtor.. or a.ny part thereof is collectible from the debtor does not effect the liability of the guarantor, the latter being unconditionally bound to satisfy the " 38 Arn.Jur.2d 1116 Guaranty, S obligation.. 110.

". . .

..

..

..

And see General Finance Company v. Powell (1943), 114 Mont. 473, 138 P.2d 255. A guaranty is to be deemed unconditional unless its terms import some condition precedent to the liability of the guarantor. Section 28-11-107, MCA. Generally a guaranty is

conditional when by its terms it requires the creditor to pursue first and unsuccessfully the principal debtor. Arn.Jur.2d 1118 Guaranty, cS 113. The Bank contends in this case that the instrument is a conditional guaranty, the condition being that before the Bank is liable there should be an "unremedied default" of Prospect, which requires the determination of a factual 38

dispute before its liability can arise, and that it was the

intention of the parties that such condition existed before the Bank was liable in this case. The Bank submitted to the

District Court affidavits from its attorney and its president stating the i-ntentionof the Bank was to that effect, and the Bank contends that an issue of material fact existed before the District Court which should have prevented the entry of a summary judgment. We hold that the instrument before us is indeed a letter of credit issued by the Bank. We are literally compelled to

such holding by the provisions of the Uniform Commercial Code defining a letter of credit: "30-5-102. Scope. (1) This chapter applies: "(a) to a credit issued by a bank if the credit requires a documentary draft or a documentary demand for payment; and

" (b) to a credit issued by a person other than a bank if the credit requires that the draft or demand for payment be accompanied by a document of title; and

added. 1 Here the instrument, within its terms, calls itself a letter of credit, and it is conspicuous1.y entitled

"Irrevocable Commercial Letter of Credit." as "Letter of Credit tf85."

It is referred to

Thus, the instrument is within

the definition of section 30-5-102 (1)( c ) , above. Regardless of its conformance to the statutory

definition of a letter of credit, the Bank contends that the instrument requires the factual determination of an

"unremedied default," and that one must examine evidence outside the instrument to make that determination. on the holding in Republic National Rank It relies

of Dallas v.

Northwest National Bank of Fort Worth (Tex. 1 9 7 8 ) , 578 S.W.2d 109, and Wichita Eagle and Beacon Publishing Company, Inc. v. Pacific National Bank of San Francisco (9th Cir. 1974), 493

In Republic, above, the instrument before the Texas court was entitled "Irrevocable Letter of Credit," wherein the bank agreed to honor a draft for $50,000 if certain promissory notes by a third party were not paid according to their terms. The notes were not paid, and the beneficiary of

the letter of credit made demand upon the bank for payment of the $50,000. The bank took the position tha.t the instrument

was not a letter of credit, but rather a guaranty, and that since the issuance of guaranties are ultra vires with respect to banks, the bank could not be held on the guaranty. Texas court analyzed the modern trend of banks The

to issue

standby letters of credit, and noted that a standby credit is used primarily to finance or secure an underlying intangible

or monetary

indebtedness undertaken by

the account party The court

"such as a promissory note." held that the instrument was without mentioning that

578 S.W.2d at 113. indeed a

letter of credit, was entitled

the

instrument

"Irrevocable Letter of Credit." In Wichita Eagle, above, the Court of Appeals for the Ninth Circuit had before it an instrument which in its text referred to itself as a "letter of credit." was given to The instrument The Ninth

secure performance of a lease.

Circuit noted that:

. The instrument neither evidences an intent that payment be made merely on presentation on a draft nor specifies the documents required for termination or payment. To the contrary, it requires the actual existence in fact of most of the conditions specified: for termination or reduction, that the city have refused a building

". .

permit; for payment, that the lessee have failed to perform the terms of the lease and have failed to correct that default, in addition to an affidavit of notice." 493 F.2d at 1286. The Ninth Circuit Court recognized that letters of the

credit for commercial uses have expanded international sales context in which

far beyond they

originally

developed, but found that here the instrument strayed too far from the basic purposes of a letter of credit, namely to provide a means of assuring payment cheaply by eliminating the need for the issuer to police the underlying contract. The Ninth Circuit Court went on to say that if the letter of credit concept is to have value in new situations, "the instrument must be tightly drawn to strictly and clearly limit the responsibility of the issuer."
59a- F.2d at 1287.

The Ninth Circuit Court held that the instrument was in fact an instrument of guaranty, which meant that the bank would be able to interpose defenses to the instrument that were

493

available to the lessee.

If we considered the instrument in

the case at bar to be an obligation of guaranty, the same result would obtain: the obligation of the guarantor is not Section 28-11-201, MCA.

to exceed that of the principal.

Treating the instrument as an instrument of guaranty, the Ninth Circuit Court went on in Wichita Eagle to assess the liquidated damages provided in the guaranty against the issuing bank. We distinguish Wichita Eagle from the case at bar. Wichita Eagle, as the Ninth Circuit Court noted, In the

instrument strayed too far from the basic purpose of a letter
of

credit.

In the case at bar, the obligation of the

principal, Prospect, is easily discernible.

The letter of

credit is exercised by Sherwood upon the unremedied default

Sy

Prospect in

its performance of

any of

the following

documents: commitment instruments

that certain loan application agreement, loan letter, are promissory out in note, the or mortgage. that The is,

set

disjunctive;

nonperformance of any one of the instruments triggers the liability on the letter of credit. one of those on instruments. promissory The promissory note is in

Since Prospect defaulted note the liability of

payment

the

First

Security Bank was triggered without more. Moreover, Wichita Eagle, above, has to be read in the light of a later case decided by the Court of Appeals for the Ninth Circuit, First Empire Bank v. Federal Deposit Insurance Corporation (1978), 572 F.2d 1361. participated Empire Bank. One of the judges who in First States

in Wichita Eagle also participated In First Empire

Rank, the United

National Bank of San Diego had become insolvent, and F.D.I.C. had become the receiver of the bank's insolvent estate.

First Empire Bank had made loans to customers of U.S.N.B. relying on standby 1ett.ers of credit issued by U.S.N.B. receiver presented refused
by

The when the

to

honor Empire

the

letters

of

credit that

First

Bank,

contending

instruments were conditional letters of guaranty rather than. letters of credit. the The contention of F.D.I.C. as receiver of

insolvent estate was that since the claims had not

ripened. on the date of insolvency, the receiver was not bound
to

honor

them.

The Ninth

Circuit Court held

that the

instrument before it was indeed a letter of credit because it "creates an absolute, independent obligation and payment must be made upon presentation of the proper documents regardless of any dispute between the buyer and seller concerning their agreement, such as a dispute over the quality of the goods

delivered."

572 F.2d

at 1366.

The Ninth Circuit Court

commented on the nature of letters of credit in modern usage, and the comment is worth repeating in part: "In recent years instruments operating as letters of credit (in that they operate to create an absolute obligation upon presentation of specified documents) and termed 'standby' to distinguish them from the traditional letters of credit have been used as security devices in a variety of contexts outside the traditional area of the international sale of goods. They have been used to insure construction loans, as quasi--performance bonds, to support the issuance of commercial paper and to secure the performance of purely monetary . obligations such a s those involved in this case. (Citing authority.) Standby letters are convenient and inexpensive and are being adapted to many uses at this time. (Citing authority.) The principle difference between the traditional letter of credit and these newer standby letters is that 'whereas in the classical setting, the letter of credit contemplates payment upon performance, " the standby". "contemplates payment upon failure to perform."' (Citing authority.)

..

"This has created an awkward situation for nationa.1 banks, since the standby letter of credit possesses more of the characteristics of a guaranty and national banks are not authorized to enter into (Citing authority.) No guarantees [sic] contention is made here, however, that issuance of the letters of credit in question was ultra vires..

.

. ."

In Boise Cascade Corporation v.

First Security Bank

(1979), 183 Mont. 378, 389, 600 P.2d 173, 180, we refused to give letter of credit status to an instrument that did not evince a clear intention on the part of the hank to be primarily liable to the beneficiary upon compliance with the terms of the instrument, irrespective of the underlying In

agreements between the beneficiary and the account party. this case, the instrument is the opposite:

it evinces a

clear intention on the part of First Security Bank to he primarily liable upon the nonperformance by the account party of the instruments named, particularly the payments on the promissory note. The Bank here could determine its liability

by merely examining the instruments named, and it was not necessary for the Bank to undertake a factual determination as to performance of the underlying instruments. Although every letter of credit appears to function as a. guaranty, there are important distinctions. Republic

National Bank, 578 S.W.2d at 114.

A true guaranty creates a

secondary obligation whereby the guarantor promises to answer for the debt of another and may be called upon to perform once the primary obligor has failed to perform. Since a

guaranty is ancillary to the underlying contract, a dispute as to the rights and obligations of a guarantor can only be resolved by a factual determination of the rights
and

obligations of the parties of the underlying contract. bank that issues a credit however creates
a

A

primary

obligation as principal, not as an agent of the account party. On the issuance of a credit the bank assumes a

primary obligation independent of the underlying contract. From either of two aspects therefore, (I) the instrument is by its terms clearly a letter of credit, or
(2) the

instrument conspicuousl-y states that it is a letter of credit and is conspicuously so entitled, the District Court was correct in granting summary judgment thereon.

Prospect assigns error in the order of the District Court denying Prospect's motion to intervene in the letter of credit action brought by Sherwood against the Bank. claims error in the refusal of the District Prospect Court to

consolidate the letter of credit action with the foreclosure action, and with a separate action brought by one John Warner against Prospect and Sherwood
&

Roberts,

Inc., for the

foreclosure of a mechanic's lien relating to the Prospect subdivision. No statute gives Prospect the right to intervene in the letter of credit action. Under Rule 24(a), M.R.Civ.P., an

applicant who claims an interest relating to the transaction which is the subject of the action must be allowed to

intervene.

Under Rule 24(b), M.R.Civ.P.,

he may be permitted

to intervene when the applicant's claim or defense and the main action have a question of law or fact in common. In the

letter of credit action however, though Prospect was bound by the underlying instruments, Prospect was not a party to the letter of credit. The obligation of the letter of credit was

owed by the Bank to Sherwood upon the occurrence of the event triggering liability. The Bank's liability arose without

regard to the underlying instruments, and therefore Prospect had no claim or defense which would have a common question of law or fact to the main action in the suit involving the letter of credit. The District Court was clearly correct in

refusing Prospect the right to intervene in the letter of credit action. In like manner, the letter of credit action could not be consolidated with the other two actions for the same reason; there was no common question of law or fact between the letter of credit action and the actions between the other parties respecting the independent obligation on the letter of credit. Here again the District Court was correct in

denying consolidation. The matter does not end there however. In the letter of

credit action, the Bank exercised its right of third party practice under Rule 14 (a), M. R.Civ.P., to file a third party

complaint against Prospect for indemnity on Sherwood's claim

against

the

Bank.

However

Prospect,

as

a

third

party

defendant i n t h e letter of

credit action,

has t h e r i g h t t o the

" a s s e r t any c l a i m a g a i n s t t h e p l a i n t i f f

a r i s i n g o u t of

t r a n s a c t i o n o r occurrence t h a t i s t h e s u b j e c t matter of t h e plaintiff's 14(a). claim against t h e third-party plaintiff." Rule the

The o c c u r r e n c e which

is t h e s u b j e c t matter of

l e t t e r o f c r e d i t a c t i o n i s t h e d e f a u l t i n t h e payment o f t h e p r o m i s s o r y n o t e by P r o s p e c t t o Sherwood. Therefore, under

Rule 1 4 ( a ) , P r o s p e c t h a s t h e r i g h t i n t h e l e t t e r o f c r e d i t a c t i o n now, a s a t h i r d p a r t y d e f e n d a n t , t o a s s e r t i t s cla-ims a g a i n s t Sherwood i n t h a t a c t i o n . The s e n t e n c e which g i v e s

P r o s p e c t t h a t r i g h t was i n s e r t e d i n t h e f e d e r a l c o u n t e r p a r t t o our r u l e , amendment R u l e 1 4 ( a ) , F.R.Civ.P., The committee noted
by v i r t u e o f

t h e 1946 to that

.

with

respect

amendment:
A new s e n t e n c e h a s a l s o been i n s e r t e d g i v i n g t h e t h i r d p a r t y defendant t h e r i g h t t o a s s e r t d i r e c t l y a g a i n s t t h e o r i g i n a l p l a i n t i f f any c l a i m a r i s i n g o u t of t h e t r a n s a c t i o n o r occurrence t h a t is t h e s u b j e c t matter of t h e p l a i n t i f f ' s claim against the third party plaintiff. This permits a l l c l a i m s a r i s i n g o u t o f t h e same t r a n s a c t i o n o r o c c u r r e n c e t o b e h e a r d and d e t e r m i n e d i n t h e same action. S e e A t l a n t i c C o a s t L i n e R . Co. v . U n i t e d S t a t e s F i d e l i t y & G u a r a n t y Co. (MD Ga 1 9 4 3 ) , 5 2 F.Supp. 177.. 1 Moore's F e d e r a l P r a c t i c e R u l e s Pamphlet ( 1 9 8 4 ) a t 138.

". . .

. ."

The p u r p o s e M.R.Civ.P., of

of

t h e enabling provision

i n Rule

14(a),

i s t o provide a fina.1 d e t e r m i n a t i o n i n one s u i t

a l l t h e i s s u e s t h a t might otherwise t a k e s e v e r a l s u i t s . The indemnity a - c t i o n by t h e Bank against Prospect as

t h i r d p a r t y defendant i s s t i l l pending i n t h e D i s t r i c t Court. On remand P r o s p e c t s h o u l d b e g i v e n o p p o r t u n i t y t o make s u c h claims against p l a i n t i f f Sherwood a s P r o s p e c t h a s t h e r i g h t

t o make u n d e r Rule 1 4 ( a ) , M.R.Civ.P.

We also point out to the District Court, in the exercise of its discretion if called on, the provision of Rule 62(h), M.R.Civ.P. as follows:

"Rule 62(h). Stay of judgment upon multiple claims. When a court has ordered final judgment on some but not all the claims presented in the action under the conditions stated in Rule 54 (b), the court may stay enforcement of that judgment until the entering of a subsequent judgment or judgments and may prescribe such conditions as are necessary to secure the benefit thereof to the party in whose favor the judgment is entered." The federal counterpart of Rule 62 (h) is identical. In

a fairly recent case, Curtiss-Wright Corporation v. General Electric Company
(1980),

446 U.S.

1,

100 S.Ct.

1460, 64

L.Ed.2d 1, the Supreme Court noted that Rule 62(h) allows the court certifying a judgment under Rule 54(b) to stay its enforcement until the entering of a subsequent judgment or judgments.
It also considered the language of the Rule that

the court may "prescribe such conditions as are necessary to secure the benefit thereof to the party in whose favor the judgment is entered." Under this rule, the Supreme Court

assumed that it would be within the power of the federal district court to protect all parties by having the losing party deposit the the clerk amount to of judgment high with yield the court,

directing

purchase

government

obligations and to hold them pending the outcome of the case. In this way, valid considerations of economic duress and solvency, which do not effect the judicial considerations involved in a Rule 54 (b) determination, can be provided for without preventing Rule 54(b) certification.

The

order

of

the

District
&

Court

granting

summary The

judgment in favor of Sherwood

Roberts is affirmed.

order of the District Court denying consolidation of the cases, and denying Prospect's motion to intervene is also affirmed. This cause is remanded for further proceedings Costs of appeal shall be borne

consistent with this opinion.

as incurred by the respective parties without recourse to other parties.

We Concur:

74&

Chief Jhstice

d,pda LJeM

Justices

I concur and dissent as follows:
I fully concur in the holding by

the majority that

affirms the district court's entry of summary judgment in favor of Sherwood and Roberts, Inc. balance of the majority opinion. The majority goes forward to decide procedural issues which I do not believe are before this Court. The only appealable order in this case is the summary iudgment entered by the trial court in favor of Sherwood and Roberts, Missoula. Inc. and against the First Security Bank of I dissent from the

The only order certified for finality under Rule is that summary judgment.
A notice of

54 (b) M.R.Civ.P.,

appeal was

filed by First Security Bank and by

Prospect

appealing the granting of summary judgment against the First Security Bank. No issues are raised on appeal except the

issue of whether the trial court erred in granting summary judgment on the "letter of credit". That portion of the majority opinion which deals with the procedural aspects of the case is entirely gratuitous. I would simply affirm the granting of summary judgment.

Mr. Justice Fred J. Weber, dissenting: The letter of credit issued by First Security specifies that payment becomes due only upon unremedied default.

I

disagree with the majority's conclusion that under the facts of this case, mere non-payment by Prospect constitutes

"unremedied default" and automatically triggers liability on the letter of credit. Section 30-5-114(1), MCA provides that an issuer must honor a demand for payment which complies with the terms of the relevant credit regardless of whether goods or documents conform to the underlying contract between the customer and beneficiary. Strict compliance with the terms of the letter Courtaulds North American, Inc. v.

of credit is required.

North Carolina National Bank (4th Cir. 1975), 53.8 F.2d 8 0 2 , 805-06; White ed. 1980). As section applied to the letter of a credit involved here,
&

Summers, Uniform Commercial Code S18-6 (2d

30-5-114(1)

creates

significant

contradiction

because the triggering term of the letter of credit requires occurrence of an event in the underlying transaction. Thus,

a determination that a demand for payment complies with the terms of the letter of credit requires a legal and factual analysis of the underlying transaction to ascertain whether the triggering event of "unremedied default" has occurred. The majority has assumed that the triggering terms of the letter of credit are nonpayment by Prospect and notice of default to the Bank, even though the letter itself requires payment only upon unremedied default by Prospect. The letter

of credit says "unremedied default," not "nonperformance." The independent nature of the letter of credit means that liability of the issuer is determined by the terms of the letter of credit rather than according to the obligations

and rights arising from the underlying transaction.

However,

the issuer and beneficiary may agree upon the triggering terms of the letter of credit and thus ma.y agree, as here, that the triggering event will be an occurrence in the

underlying transaction which will require some element of performance by the beneficiary. This does not mean that

these prerequisites to payment arise from the underlying transaction; rather, for purposes of the letter of credit, they arise from the choice of terms and terminology employed in the letter of credit by the issuer and beneficiary. Here,

a consideration of Sherwood's alleged a-ctivity which caused nonperformance arises from the language of the letter of credit itself, rather than from the separate underlying

transaction.

Regardless of whether this document is a letter

of credit rather than a guaranty, the issuer has available the defense of noncompliance with the terms of the letter of credit. Whether failure to pay is "default" is a question which can be answered only by further reference to the underlying agreements, which are specifically listed in the letter of credit, and principles of law. issue and has concluded The majority has ignored this nonpayment is necessarily

that

default, which is contrary to Montana law. The unexcused term "unremedied default" Where the necessarily act of a implies creditor

nonperformance.

prevents the debtor from performing, performance is excused. Section 28-1-1301, MCA provides in part: "When delay or failure to perform or offer to perform excused. The want of perforFa.nce of obligation or of an offer of performance, in whole or in part, or any delay therein is excused by the following causes, to the extent to which they operate :

an

" (1) when such performance or offer is prevented or delayed by the act of the creditor or by the

operation of law, even though there may have been a stipulation that this shall not be an excuse .'I

...

This statute excuses Prospect's nonperformance if Sherwood in fact caused the failure of Prospect to perform. In Pioneer Engineering Works, Inc. v. McConnell (1949), 123 Mont. 1-71, 212 P.2d 641, the Court held that payment was excused under this statute where nonpayment was caused by actions of the other party to the contract. There, the

failure of the seller of gravel-crushing equipment to provide conforming equipment prevented buyer from meeting obligations on a contract to provide gravel to the government for

building Fort Peck Dam with a resulting inability to pay for the equipment. The Court held that seller could not recover 123 Mont. at

where nonpayment was caused by seller's breach. 192, 212 P.2d at 652.

In Smith v. Gunniss (1943), 115 Mont.

362, 144 P.2d 186, the Court stated that "'he who prevents a thing from being done shall never be permitted of the non-performance which he to avail has

himself

himself

occasioned.'" 329.

115 Mont. at 379, quoting 12 Am.Jur. section

See also Gramrn v. Insurance Unlimited (1963), 141 Mont.

456, 462, 378 P.2d 662, 665. Where performance is excused there is no default. An

unjustified refusal by Sherwood to disburse loan monies which caused nonperformance by Prospect would excuse nonperformance under section 28-1-1301, MCA. as to whether Sherwood This raises a factual question Prospect's nonperformance.

caused

The majority suggests that Prospect's promissory note creates a.n obligation independent of Sherwood ' s performance in the underlying tra.nsaction. However, the promissory note expressly incorporates by reference the terms of Sherwood's commitment letter. given for an The promissory note states that it is loan of $826,500 (which Sherwood

actual

allegedly refused to fully disburse).

It also states that it

shall be construed with the other documents relating to the transaction promissory and note in accordance with Montana law. The

therefore does not create an independent

obligation of Prospect to pay. It is true that the commercial usability of letters of credit should be protected. Careful inquiry is required to

determine if the standard of "unremedied default" has been met. This requires a careful and factual determination. It

is true that in the ordinary letter of credit situation, the court will not consider the completion of the underlying transaction. However, that rule is not applicable to the

present situation where the parties have required that the bank make payment only where an "unremedied default" occurs. The meaning of "unremedied default" in this case is a

question of fact to be resolved at trial, not on summary judgment.
I would reverse the conclusion of the District Court

that nonperformance is necessarily "unremedied default", and would remand by the case for trial to and determine what whether excused was

intended

"unremedied caused

default"

Sherwood's Prospect's

nonperformsance nonperformance.

and. therefore

I concur in the foregoing dissent.

/
f

Justicei"



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Montana Law