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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
2007 LC CASE SUMMARIES 153 Cal.App.4th 675 (Cal.App. 3 Dist 2007) [USA]
Topics: Equitable Contribution; Subrogation; Revised UCC Section 5-117
Type of Lawsuit: Applicant sued the guarantors of a loan for contribution for the amount reimbursed to a LC issuer and for subrogation to Beneficiary's rights.
Parties: Plaintiff/Appellant/Developer/Applicant - Morgan Creek Residential (Counsel: Lawrence Teplin, Heather Stern, Co, Castle & Nicholson)
Defendants/Respondents/Guarantors - Earl S. Kemp et al.
(Counsel: Eric C. Olson, Christopher S. Hill, Kirton & McConkie; Francis M. Goldsberry, II, James T. Freeman, Freeman & Guzman)
Borrower - Morgan Creek Golf Club, LLC
Lender/Beneficiary - Citicapital Commercial Corporation
Issuer - Northern Trust Bank
Underlying Transaction: Security Deposit for a Construction Loan.
LC: Standby LC in the amount of US$1,400,000. Governed by the California Uniform Commercial Code and Civil Code.
Decision: The Court of Appeals for the Third District of California, Sims, J., Blease, Acting P.J. and Cantil-Sakauye, J., affirmed the decision of the Superior Court of Placer County, Wells, Comm., which sustained Guarantors' demurrer and dismissed the suit.
Rationale: LCs are not suretyship obligations under Revised UCC Article 5. Parties other than the applicant for a LC are not equally liable with the applicant for reimbursing the issuer for funds paid under the LC. Applicants for LCs may not seek equitable contribution against strangers to the LC transaction, nor seek subrogation against anyone but the primary obligor.
Article
Factual Summary: While developing real estate in Morgan Creek, a California real estate developer improved amenities on property owned by Borrower. To pay for the improvements, Guarantors provided guarantees in order to secure the loan. When Lender found these guarantees insufficient, Borrower reduced the loan amount sought and Developer obtained a LC to supplement Guarantors' guarantees. When Borrower defaulted on the loan, Lender drew the full value of the LC issued as security for the loan and Developer reimbursed Issuer.
Developer/Applicant then sued Guarantors for equitable contribution and subrogation of reimbursement, arguing that the value of the draw on the LC represented a disproportionate payment compared to Guarantors' obligation for the defaults. Guarantors demurred, arguing that third parties are not subject to equitable contribution or subrogation of an applicant's duties under an LC. The Superior Court of Placer County, Wells, Comm., sustained the demurrer and dismissed the case. On appeal, affirmed.
Legal Analysis:
1. Equitable Contribution: Applicant argued that the reduced amount of the debt owed by Guarantors created an obligation of equitable contribution because it was a co-obligor with Guarantors. The court, however, ruled that equitable contribution could only be recovered where the obligors share equally in their obligation. The court concluded that there was no right to contribution because the security differed, that is, Applicant provided a LC whereas Guarantors provided a guarantee. The court noted that Revised UCC Article 5 established the independent character of a LC, differently from a suretyship obligation. The court distinguished the obligation as primary and secondary respectively. Where the parties to be recovered against are strangers to the LC transaction, it stated that they do not necessarily share liability equally with the Applicant, and the doctrine of equitable contribution will not apply.
2. Subrogation; Rev. UCC Section 5-117: Applicant also argued that it was entitled to recover based on subrogation to the rights of the Beneficiary under Rev. UCC Section 5-117. It claimed that the independent character of the LC did not affect the relationship of the Applicant to others. Applicant claimed that there is no reason why the distinction between a LC and other types of security should eliminate the right of contribution. The court ruled that subrogation could only be sought where the party seeking to recover has paid a debt for the primary obligor and seeks to recover from this primary obligor. In this case, the party seeking recovery was the primary obligor. The only party to this LC transaction who could be recovered against on grounds of subrogation is the Applicant.
Comment:
It appears that the court concluded that there was insufficient proof of unjust enrichment, thereby providing no basis for subrogation.
[JEB/gsp]
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