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 Blis
____

Cavanagh were on brief for appellants.

________
Richard W. MacAdams
___________________
on brief for appellees.

with whom

MacAdams & Wieck Incorporated

_____________________________

_____________________

June 21, 1995

_____________________

STAHL,

Circuit Judge.

This

case requires

us to

STAHL,

Circuit Judge.
_____________

determine whether letter-of-credit beneficiaries

the

value of the letters

from the issuer's

may recover

customer or the

customer's guarantors after the issuer dishonored the letters

and became

insolvent.

Interpreting applicable law

various agreements between the

beneficiaries may

not

district court's grant

so

and the

parties, we conclude that the

recover.

of summary

Thus,

we

judgment for

affirm

the

defendants-

appellees.

I.
I.
__

FACTUAL AND PROCEDURAL BACKGROUND

FACTUAL AND PROCEDURAL BACKGROUND
_________________________________

Resolving

the

detailed recital of its

issues

in

this

case

requires

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

Ohio

general

partnerships (collectively,

and two

"appellants") who

owned, or whose assignors owned, three apartment complexes in

East

Cleveland, Ohio.

Appellants sold

defendant-appellee

Proc

Associates"),1

in

which

the apartments

Associates,

turn

assigned

Inc.

its

to

("Proc

interest

as

____________________

1.

Defendant-appellee Armand Procaccianti is a

president

of

Proc

Associates.

Procaccianti is a director,
Proc Associates.

director and

Defendant-appellee

James

vice president, and treasurer of

Hereinafter, we refer to Armand

Procaccianti collectively as "the Procacciantis."

and James

-22

purchaser to Euclid

Properties ("Euclid"),

an Ohio

limited

partnership.2

Euclid

properties.

Euclid

To

paid

$2.2

million

cover the remainder

executed four

totalling $1.3 million.

in

cash

of the purchase

promissory notes

for

the

price,

("promissory notes")

As sole security for

the promissory

notes,

the Marquette

appellants

four

Credit Union

irrevocable

("Marquette") issued

standby

letters

of

to

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

("commitment

letter")

memorialized in

dated

March

agreement

("letter agreement")

dated

guaranty

agreement ("guaranty")

also

a commitment

16,

May 31,

dated May

(collectively, "reimbursement agreements").

reimbursement

1990,

letter

letter

1990, and

31,

1990,

In essence, the

agreements provided that Proc Associates would

repay Marquette for

Further,

the

amounts drawn on the letters

Procacciantis

agreed

Associates' obligation to Marquette.

to

of credit.

guaranty

Proc

As additional security

____________________

2.

Euclid is constituted of limited partners defendant James

Procaccianti (95% interest) and defendant Armand Procaccianti

(4% interest) and general
Inc., an Ohio corporation.

partner East Cleveland Properties,

James Procaccianti is president,

secretary, and treasurer of East Cleveland Properties, Inc.

-33

for the obligations assumed

of

its issuance

of the

by the credit union as

letters

obtained a second mortgage on

On

January 1,

closed Marquette

had

Marquette also

real property owned by Euclid.

1991,

because the

of credit,

a result

the

Rhode

Island

deposit insurer

governor

for Marquette

failed and Marquette did not have federal insurance.

May 17, 1991, Maurice C.

Paradis was appointed as

On

permanent

receiver ("receiver") for Marquette.

On April 30, 1991,

to renew

Euclid failed in its obligation

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

their

claims against

First, in

letters of

receiver

Second,

Marquette

an Ohio state court,

of the collateral

the

the remainder

for

in

in three

wrongful

U.S.

appellants pursued

separate actions.

appellants sought assignment

held by Marquette

credit,

the

of 1991,

and the receiver

damages against

dishonor,

District

and

Court

under

Marquette and

the

injunctive

relief.

for

Island,

Rhode

____________________

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.

-44

appellants

sought to

Marquette and

set forth in

("DEPCO"),

aftermath

enjoin the

the receiver

distribution of

pursuant to the

priority scheme

the Depositors Economic Protection

the

of

Rhode

that

Island

legislation

state's credit

union

assets by

Act of 1991

enacted

in

the

insurance crisis.

Third,

in

the

receivership proceedings

Island state court,

amount

pending

in

Rhode

appellants filed proofs of claim for the

owed under the letters of credit and for a preference

as to the collateral held by Marquette or the receiver.

On

entered

July

2,

into a written

1992,

appellants

and

the

receiver

settlement agreement ("settlement"),

the terms of which provided that appellants would dismiss the

three

pending

proceedings

in

exchange for

$500,000 and

the receiver

of his interest

Ohio

and

the assignment

in the

Rhode

Island

("assignment") by

letter agreement,

commitment letter, the guaranty, and the

in

the

mortgage, including

any claims of the receiver against the defendants under those

instruments.

"shall

By

its

terms, payment

not be deemed to or constitute

under the

settlement

a payment under or by

virtue

of the

[l]etters of

[c]redit."

On July

31, 1991,

Marquette became insolvent.

Appellants

Proc Associates

and the Procacciantis

letters of credit.

three theories

then brought the present action against

for the value

of the

Appellants set forth, in separate counts,

of recovery.

First,

-55

appellants argued that,

as Marquette's assignees, they could

recover from defendants

pursuant to the reimbursement agreements.

contended

that,

codifies Section

under R.I.

Gen.

and the

receiver.

entitled

to

Defendants

recovery

under

reimbursement

that

general

first

agreements,

but that

not

equitable

judgment.

theory,

the

they

which

Commercial Code, they

appellants argued that

for summary

could

6A-5-117,4

the collateral held by Marquette

under

the

appellants

Associates,

Third,

recover

moved

Laws

5-117 of the Uniform

were entitled to realize on

Second, appellants

could

from

principles.

Considering only

dealing

magistrate judge

recover

they were

from

the

with

the

determined

defendant

Proc

Procacciantis.

Deeming the remaining two

the

magistrate did

theories subsumed by his analysis,

not

reach those

objection from defendants,

the district

report and recommendation to

stood

by

district

his original

court

found

Procacciantis under

that

portion

liability.

of

recommendation.

no

liability

Judgment entered

II.
II.
___

____________________

Upon review,

attached

report

for defendants on

This appeal followed.

the

The magistrate

of the guaranty

magistrate's

Following

court remanded

the magistrate.

the terms

the

arguments.

to

the

the

and rejected

as

to

their

all counts.

4.

The parties do not

dispute that, in this diversity-based

action, the substantive law of Rhode Island governs.

-66

DISCUSSION
DISCUSSION
__________

After reciting

the standard of review,

each of appellants' three theories of recovery.

A. Standard of Review
______________________

we take up

Summary judgment

is

appropriate when

reflects "no genuine issue as to

the

record

any material fact and . . .

the moving party is entitled to judgment as a matter of law."

Fed. R. Civ. P. 56(c).

de novo.
__ ____

45 F.3d

We review a grant of summary judgment

See, e.g., Inn Foods, Inc. v. Equitable Coop. Bank,

___ ____ _______________
____________________

594, 596 (1st Cir.

the light

most

favorable to

1995).

the

We review

the record in

nonmoving party,

and

indulge all reasonable inferences in that party's favor.

we

Id.
___

B. The Reimbursement Agreements

________________________________

On appeal,

appellants argue that the

reimbursement agreements

Marquette.

terms of the

render the Procacciantis

liable to

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

appellants

payment

under

argue that,

letters

of

letters of

under the

they are entitled to recover

the

the

terms of

credit.

Thus,

the assignment,

the $1.3 million represented by

credit.

Because

appellants'

theory

misconstrues the nature of a letter-of-credit transaction and

is inconsistent

with the operative language

agreements, we do not agree.

-77

of the parties'

To put

with

this case

general principles.

three-party

commercial

we start

Letter-of-credit transactions are

arrangements

transaction

in proper perspective,

involving

and a

two

financial

parties

to

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).

principal

for

the

purpose of a standby

beneficiary-seller to

letter of credit

ensure

that if

The

is a means

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.

acts

1990).

as a "back up"

of all kinds.

request

&

19-2, at

Summers").

letter

resolution

with

& Robert S. Summers,

809 (3d ed.

Additionally,

of

contractual dispute

letter of

credit

against customer default on obligations

James J. White

Commercial Code
_______________

"White

Thus, the standby

credit

arise, it

the money

in

to

1988) (hereinafter,

the

ensure

beneficiary

that

will "`wend [its]

[the

Uniform
_______

should

may

any

way toward

beneficiary's] pocket,

rather

than in the pocket'

899 F.2d at 1272 (quoting

of his adversary."

Ground Air,
__________

Itek Corp. v. First Nat'l Bank of

__________
____________________

Boston, 730 F.2d 19, 24 (1st Cir. 1984)).

______

-88

To

effect these

commercial purposes,

courts have

considered

the letter of

between the issuer and

the

underlying

beneficiary.

credit to be

a separate agreement

the beneficiary, wholly distinct from

contract

Id.; see
___ ___

between

the

also U.C.C.
____

customer

and

5-114, comment

the

1 ("The

letter of credit is essentially a contract between the issuer

and

the beneficiary

independent of the

and is

recognized by

this

Article as

underlying contract between the

customer

and the beneficiary."); White & Summers,

19-2, at 812 ("The

most unique

[letter-of-credit]

and mysterious part

of this

arrangement is the

so-called `independence principle.'

The

principle

that

the

states

beneficiary is independent
___________

the

bank's

obligation

of the beneficiary's

on the underlying contract.").

to

performance

Similarly, "the obligation of

the

issuer to pay the beneficiary is also independent of any

obligation

19-2,

of the customer to its issuer."

at

811.

Thus,

arrangements, see id. at

___ ___

two

contracts

(the

other

letter-of-credit

812, the one in this

case involves

underlying purchase-and-sale

between Proc Associates and

arrangement between

as with

White & Summers,

agreement

appellants and the reimbursement

Proc Associates

and Marquette)

and one

letter of credit.

At

language of

as

the center

of

this dispute

the letter agreement and

guaranteed

by

the

operative

the commitment letter,

Procacciantis,

-99

is the

which

establish

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,

payment,"

Proc Associates

the commitment letter.

"if the

[l]etter

Associates must

of

[Marquette]

is

required

must repay Marquette

to

make

pursuant to

The commitment letter specified that

[c]redit

is drawn

make to Marquette certain

upon,"

then

Proc

interest payments

and, further, "final payment of all outstanding principal and

all

interest payable

issuance

of

Procacciantis

guaranty

Lender

when

three

the [l]etter

years

from

the

of [c]redit."

In

guaranteed Proc

provides

that

(whether

by

the Procacciantis

The

addition, the

"guarantee[]

otherwise)

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

connection

with

issued

Lender

by

any
for

letters of
the

in

credit

account

of

Borrower), direct or indirect, secured or

unsecured, joint or several,

The

to

of

all

term "obligations" is

defined as:

indebtedness,

the

payment, . . . as and

acceleration or

[o]bligations requiring payment."

all

of

Associates' obligation.

[Marquette] . . . the punctual

due

date

absolute or

contingent, due or to become due, whether

for payment or performance,
or hereafter arising,
the same

arise

agreement

or

evidenced,
instrument,
including
(including

or by

regardless of
what

book account

or

now existing

instrument,
they

may be

whether evidenced

by any

agreement

or book

without limitation,
any

how

loan

-1010

by

account;
all loans

renewal

or

extension),

all

indebtedness,

undertakings

to

taking

action,

any

liabilities

or

take

discount,
all

all

from

taxes,

fees,

and

charges,

fees chargeable

incurred

with any

negotiation,

or otherwise,

and attorneys'

connection

owing

which Lender may have

assignment

Borrower or

from

indebtedness,

purchase

interest,

expenses
to

by

refrain

obligations

Borrower to others
obtained

or

all

by

Lender

in

transaction between

Borrower and Lender.

The parties do not dispute that appellants properly

presented

that

the letters

of credit

payment became due on

occurred

when

no

payment

to Marquette

June 3, 1991,

was

made.

for payment,

and that dishonor

As

noted

above,

appellants argue that Marquette's nonpayment notwithstanding,

the

Procacciantis'

triggered on June 3,

obligation

1991.

under

the

guaranty

Specifically, they point

was

to the

language defining "obligations"

that it is

so broad

when the $1.3 million

under the guaranty,

as to render

arguing

the Procacciantis

payment on the letters of

liable

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

obligation is independent of

the

issuer alone,

either the underlying

or any reimbursement agreement.

and

contract

Upon proper presentment, the

liability ran to Marquette and not to Proc Associates.

proper presentment did not create,

-1111

that

Thus,

under the language of the

guaranty,

"indebtedness,

Borrower to Lender of
___________________

direct or

absolute

payment or

obligations

every kind

and

and description .

indirect, secured or unsecured,

or contingent,

due or to

performance, now

liabilities

. .

of

joint or several,

become due,

whether for

existing or hereafter

arising"

(emphasis added).

The agreements between Marquette,

Proc Associates,

and

the

Procacciantis

did

not

alter

relationships

in a letter-of-credit

language of a

contract is clear

the

language its plain and

Plaza Assocs., 985

______________

the

transaction.

Dudzik v.
______

Leesona Corp.,
_____________

473

Under the

letter agreement,

legal

When the

and unambiguous, we

natural meaning.

F.2d 640,

basic

accord

In Re Newport
_____________

645 (1st

Cir. 1993)

(citing

A.2d 762,

765 (R.I.

1984)).

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.

both conditions

did not obtain, Proc

"indebtedness,

obligations

Consequently,

there

being

and

Associates incurred no

liabilities" to

no

Because

"obligations

Marquette.

[of

Proc

Associates]

Procacciantis

requiring payment,"

to

guaranty.

there was

Thus, as

-1212

nothing for

the

Marquette's assignee

under

the

settlement, appellants

accede to

no enforceable

rights against the Procacciantis.5

Because

of

unfortunate) turn of

convert

the

obligations

However,

Thus, we

unusual

neither

(and

for

appellants,

events, appellants essentially

Procacciantis'

into

reimbursement

the

guaranty

guaranty

the

agreements

conclude that

law

of

Proc

Marquette's

nor

sustain

of

the

such

Associates'

obligations.

language

an

the district court

seek to

of

the

interpretation.

properly granted

summary judgment as to all defendants on count one.

C. U.C.C.
5-117
__________________

Appellants next argue that,

L.

6A-5-117 (codifying U.C.C.

pursuant to R.I.

5-117),6 they are

Gen.

entitled

____________________

5.

We

note that,

$500,000

payment

constitute
argument
because

under the
by the

terms of

receiver

a payment under the

it was

the

the

appellants does

not

letters of credit.

suggested that

settlement

to

the settlement,

this language

resolved

three

At oral

was included

separate

lawsuits

involving issues not related to the letters of credit.

6.

In relevant part,

(1)

6A-5-117 provides:

Where

an

issuer .

insolvent before final payment

[letter of]

credit . . .

allocation

of

secure

meet

[letter

or

funds

of]

or

under the

the receipt or
collateral

obligations
credit

becomes

under

the

have

the

shall

following results:

(a)

To the extent of any funds

or collateral turned over after

or

before

indemnity

the

insolvency
against

as
or

specifically for the purpose of

payment

of

drafts or

to

demands

-1313

to

collateral

"collateral"

held

that

letter agreement,

meaning

defendants

of

--

and

appellants seek

to

receiver.

realize

fail

5-117

to

see

--

how

The

on are

the

and the guaranty.7

agreements constitute collateral

section

we

the

the commitment letter,

Assuming that these

the

by Marquette

point

its

within

disputed

by

acquisition

by

appellants advances their cause.

outlines in

As the foregoing discussion

detail, under the provisions

of the settlement,

____________________

for

payment

designated
or

drawn
credit,

demands

payment

under

are

in

depositors
creditors

the drafts
entitled

preference
or

of

the

other
the

to
over

general
issuer

or

bank; and

(b)
credit

On

expiration

or

surrender

beneficiary's

rights

of

the

of

the

under it

unused any person who has given

such

funds

similarly

or

collateral

entitled

to

is

return

thereof; and

(c)

A charge to

a general or

current account with a

bank if

specifically
the

consented to

purpose

of

for

indemnity

against or payment of drafts or

demands for payment drawn under
the

designated

under the same

funds

had

credit

falls

rules as if the

been

drawn out

cash and then turned

in

over with

specific instructions.

7.

As noted above, a mortgage was

However,

appellants

effectively

concede

also given as collateral.

that,

because

the

receiver

assigned his interest in the mortgage, it is not

relevant to this case.

-1414

Marquette

assigned

appellants.

facts

of the

defendants.

segregate

assets,

rights

under

these

documents

to

However, the

terms of the

settlement and

case render

those rights

inoperative against

Nothing

an

liabilities

its

in section 5-117

insolvent

and

see R.I.
___

security

Gen. L.

-- which operates

institution's

from

the

depositor

6A-5-117,

to

letter-of-credit

liabilities

official

and

comment --

enhances appellants rights

vis-a-vis defendants.

appellants would accede to

rights already acquired under the

terms of the

Therefore, we

settlement.

district court properly granted

two.

At

conclude that

most,

the

summary judgment as to count

D. General Equitable Principles

________________________________

Finally, appellants invite us to

principles" on

that is

the

their behalf.

neither controlling

facts in this case.

denying

them

employ "equitable

Appellants rely

on authority

nor even remotely

analogous to

Appellants also vaguely assert that

recovery would

result

in unjust

enrichment.

From our review of the record, it is not at all apparent that

the

all,

balance of equities

upon

dishonor,

against Marquette.

They

chose to

asserted

$500,000

in

leans in appellants'

appellants had

R.I. Gen. L.

reduce that

the

plus

three

of

After

enforceable

right

6A-5-114(1), 6A-5-115(1).

right, along

suits,

assignment

an

favor.

to

with other

claims

lump-sum payment

Marquette's

rights

of

against

-1515

defendants.

reasons

Those rights proved to be of no value.

And, for

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

reduced defendants'

unjust

that

liability, but that does

indirectly

not constitute

enrichment, see R & B Elec. Co. v. Amco Constr. Co.,

___ ________________
________________

471 A.2d 1351, 1355-56 (R.I. 1984) (setting forth elements of

unjust

that

enrichment), and

would

operate

to

parties'

agreements.

properly

granted

we know

of no

displace

applicable

Accordingly,

summary

equitable principle

judgment

the

as to

law

and

district

count

the

court

three

of

appellants' complaint.

III.
III.
____

CONCLUSION
CONCLUSION
__________

For

the

forgoing

reasons,

the

decision

of the

district court is affirmed.

affirmed.
________

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