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Note: Morris Cerullo World Evangelism (Victim) was approached by attorney Christopher Hammat (Attorney) on behalf of Larry Sorenson (Client). Attorney claimed Client needed USD 5.2 million to buy a gold mining property and offered a standby letter of credit issued by Compass Bank (Bank). It was handled by a branch manager, Jack Wilkinson (Rogue Employee), who, it turned out, did not have authority to issue letters of credit. Rogue Employee assured Victim of the letter of credit’s validity, so Victim wired the money to Attorney’s trust account. The funds were forwarded from there to Client. When demand was made, Bank refused to honor, claiming “[Bank] is not bound by [Rogue Employee]’s actions because [Rouge Employee] had neither actual or ostensible authority to issue the instrument.”

After this refusal Bank sued Victim, seeking a declaratory judgment that Victim was not entitled to damages for wrongful dishonor. After trial, the United States District Court for the Southern District of California, Gallo, J., found in favor of Bank, and denied Victim’s Federal Rule of Civil Procedure 15(b) motion to conform the pleadings to the evidence. On appeal, the United States Court of Appeals for the Ninth Circuit, Pregerson, J., Paez, J., and Berzon, J. in a memorandum opinion affirmed the denial of the Rule 15(b) motion.

Bank argued that an actual letter of credit must have existed for a claim of wrongful dishonor to be sustained. Since Rogue Employee did not have the authority to issue a letter of credit, it contended that Bank could not be liable.

Victim contended that even if Rogue Employee did not have the actual authority to issue the letter of credit, Rogue Employee acted under ostensible authority which applies when “‘[a] principal, intentionally or by want of ordinary care, causes or allows a third person to believe the agent to possess’ that authority” and that the reliance on the principal must be “in good faith.” The trial judge ruled that the principle of ostensible authority was not applicable in this case because of the clear defects in the documents (i.e. inaccurate dates, names of parties, outdated address for Bank, and “incoherent reference to nonexistent bracketed text.”) should have demonstrated to the Victim something was amiss and therefore could not have been in good faith.

The appellate opinion assumed that Victim had plead an action of wrongful dishonor but noted“a letter of credit must exist for a claim of wrongful dishonor to be adjudicated.”The opinion then stated that there was no clear error in the finding of the trial court, stating, “there is no actual letter of credit in this case”.

Reviewing this finding, the Appellate Opinion stated that Rogue Employee “conspired with outside actors to prepare a document that purported to be a letter of credit issued by the Bank in favor of [Victim].”

The Appellate Opinion noted that there was no basis for justifiable reliance by Victim because there was no basis for a reasonable belief in Rogue Employee’s authority.

It also noted “[the] independence principle has no place when making the threshold determination about whether a letter of credit exists, an inquiry which determines whether [U.S.] Article 5 of the Commercial Code, and the independence principle contained in Section 5-103(d), even apply.”

Comment: While the text of the LC is not given in the trial or appellate opinion, presumably it uses a promise to honor a documentary presentation within the meaning of U.S. UCC §5-102(a) (10) (“Letter of Credit”)1. Therefore, the LC existed. It was not, however, an obligation of Compass Bank. The point is technical but important.

It is not difficult to understand why the trial judge concluded that there was no basis for reliance, starting with the gold mine. This scheme has earmarks of fraud. The problem with the decision is the limits of its rule. Does every beneficiary dealing with a branch officer have to obtain assurance of his or her authority or know the structure of the bank? It would be useful to know whether it was issued on bank stationary and why the victim might have thought that it was authentic.

[KEC/ARB]

1
“‘Letter of credit’ means a definite undertaking that satisfies the requirements of Section 5-104 by an issuer to a beneficiary at the request or for the account of an applicant or, in the case of a financial institution, to itself or for its own account, to honor a documentary presentation by payment or delivery of an item of value.”

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