Article

Topics: Injunction; Suretyship; Applicant

Note: Colorado Railcar Manufacturing ("Manufacturer") entered into a contract with Tri- County Metropolitan Transportation District of Oregon (Buyer), in which Manufacturer would manufacture and Buyer would purchase railcars. The contract required Manufacturer to maintain an irrevocable standby LC for US$3,000,000 in favor of Buyer/Beneficiary until final delivery of the railcars. When Manufacturer was incorporated later, it entered into an agreement with CRM Collateral II, Inc. (Applicant) whereby Manufacturer would pay Applicant to maintain an LC in satisfaction of Manufacturer's obligation in its contract with Buyer.

Applicant obtained this Standby LC from KeyBank National Association (Issuer). The standby LC required that Buyer/Beneficiary certify in writing that Applicant, despite not being a party to the contract, was in default in order for Beneficiary to draw. In a separate resolution, Applicant authorized Scott State - and no one else - to enter into agreements on Applicant's behalf. Subsequently, Manufacturer and Beneficiary negotiated a modification of the LC's terms in which Beneficiary was authorized to make "special contract payments" on behalf of Manufacturer funded by drawing on the LC.

Applicant was not a party to the modification, but later obtained actual knowledge of the modification. Believing that the modification was without its consent and materially increased its risk as secondary obligor of Manufacturer's obligation under the contract, thus discharging Applicant's surety obligations, Applicant planned to contest any attempt to draw on the LC. Applicant, however, did not inform Beneficiary of its intention.

When Beneficiary attempted to draw on the LC, a group of investors in Applicant sued in the Iowa state court for Clayton County to enjoin Issuer from honoring the LC. Issuer did not oppose the motion, but subsequently removed the action to the federal court in the Northern District of Iowa. Beneficiary then filed motions to intervene and to dissolve the injunction against Issuer. The former was granted, and the latter has yet to be acted on. Applicant likewise filed a motion to intervene, which was granted. Those proceedings, styled as Guetzko v. KeyBank National Ass'n, 2009 WL 890277, are also abstracted in this volume.

In a separate action at roughly the same time (2009 WL 3054959), Applicant sued Issuer and Beneficiary in the U.S. District Court for the District of Oregon, seeking declaratory judgment that the LC was null, void and unenforceable as well as rescission of the LC and all amendments. In response, Beneficiary filed a counterclaim for declaratory relief that the LC was valid and enforceable. Applicant then voluntarily dismissed Issuer as a party at action. The court issued two rulings.

Applicant moved for partial summary judgment on its claim for declaratory judgment that the LC was void. Beneficiary moved for summary judgment as to its counterclaim that the LC was valid. The United States District Court for the District of Oregon, Papak, J., denied all motions for summary judgment, but expressly left open certain issues to be supplemented by additional briefs. In denying summary judgments, the Judge noted that Applicant's suretyship defense does not impact the independent nature of the LC and that this defense could only be used by Applicant as a remedy against Beneficiary for breach of warranty or unjust enrichment. In regard to Applicant's request for rescission, the court ruled that there remained a question of fact as to whether or not those who negotiated the amendments to the LC were agents of Applicant and as to whether or not Applicant actually relied on Beneficiary's nondisclosure of the amendments. The Judge was unwilling to rule on whether Applicant's silence effectively waived its suretyship defense based on the covenant of good faith and fair dealing, or whether this silence gave rise to implied consent of the amendments.

These issues left unresolved in the first order were decided in a second order (2009 WL 5173495). The Judge ruled that Applicant did not have an affirmative duty to notify Beneficiary about a theory of discharge and, thus, in failing to advise Beneficiary, it did not waive its discharge defense. Also, since Applicant was under no duty to speak, it cannot be found to have implicitly consented to the terms of the amendments. Though Oregon law is silent on the matter, the Judge found that the majority view holds silence as insufficient to establish waiver of surety defenses.

[JEB/jdc]

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