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SCARSDALE NATL. BANK & TRUST CO. v. TORONTO-DOMINI

February 24, 1982

SCARSDALE NATIONAL BANK AND TRUST COMPANY, Plaintiff,
v.
The TORONTO-DOMINION BANK, Defendant; The TORONTO-DOMINION BANK, Defendant and Interpleading Plaintiff, v. GRAPHIC CENTRE (ONTARIO) INC., Interpleaded Defendant; GRAPHIC CENTRE (ONTARIO) INC., Interpleaded Defendant and Third-Party Plaintiff, v. Martin C. LICHT, Esq., and Murray M. Loecher, Esq., individually and as partners formerly doing business under the name of Loecher & Licht; Martin C. Licht, Esq., Robert S. Feigen, Esq., Howard A. Drucker, Esq., and Murray M. Loecher, Esq., individually and as partners doing business under the name of Feigen, Drucker, Loecher & Licht; Web Equipment Sales Inc., and Michael B. Goldman, Third-Party Defendants



The opinion of the court was delivered by: CONNER

This action to recover payments under a letter of credit, which was tried by the Court without a jury, *fn1" is the result of a business deal gone awry. Jurisdiction is based upon diversity of citizenship, 28 U.S.C. ยง 1332. This Opinion incorporates the Court's findings of fact and conclusions of law pursuant to Rule 52, F.R.Civ.P.

Procedural Background

Scarsdale National Bank and Trust Company ("Scarsdale") commenced this action against the Toronto-Dominion Bank ("Toronto-Dominion") *fn2" for payment of two drafts totalling $ 165,000. The drafts were submitted for payment under a letter of credit issued by Toronto-Dominion at the request of Graphic Centre, Inc. ("Graphic Centre") for the benefit of Web Equipment Sales, Inc. ("Web"). Toronto-Dominion interpleaded Graphic Centre, which filed a third-party complaint against Michael B. Goldman ("Goldman"), president of Web, and Martin C. Licht ("Licht"), Goldman's attorney. *fn3" Licht in turn has asserted cross-claims against Goldman.

 Pursuant to a stipulation among Scarsdale, Toronto-Dominion and Graphic, Toronto-Dominion has paid the $ 165,000 into the Court's registry and has been discharged from any further liability under the letter of credit.

 Factual Background

 Web, a corporation with its principal place of business in Scarsdale, New York, was at all relevant times engaged in the business of buying, refurbishing and selling used web-fed printing presses. In June of 1979, Web entered into a contract with Graphic Centre, a printer having its principal place of business in Toronto, Canada. The contract called for Web's delivery to and assembly in Graphic Centre's Toronto printing plant of an eight-unit web-fed printing press. Because of disputes between Web and Graphic Centre over performance and payments, the contract was amended by two Telex messages, both dated January 18, 1980, to provide, in part, that:

 
"In consideration of Web's undertaking Graphics shall provide an irrevocable letter of credit from a Canadian chartered bank to Web for $ 265,000 which letter of credit shall provide that Graphics shall pay to Web the $ 265,000 in the following manner and upon the happening of the following events.
 
"(A) When free title to the eight unit press is in the name of Graphics.
 
"(B) 100,000 dollars US when the cylinders and rubbers for the rebuilding of the eight unit press and attachment arrive in Toronto.
 
"(C) 65,000 dollars US when the eight unit press actually starts functioning.
 
"(D) 100,000 dollars US when the eight unit press produces the first document which is substantially in compliance with the sample or is equal in standard to the sample provided by Web at the commencement of the contract."
 
Ex. 21. *fn4"

 Graphic Centre applied to Toronto-Dominion for the letter of credit. To effectuate the terms stated in the January contract amendment, the letter of credit required that each of the three drafts presented thereunder *fn5" be accompanied by a certificate signed by Graphic Centre stating that the corresponding stage of performance under the amended contract had been completed. *fn6" The letter of credit, which had an April 1 expiration date, was issued by Toronto-Dominion on February 1, 1980, at which time Graphics transferred $ 265,000 to Toronto-Dominion in payment therefor.

 In late 1979 and early 1980, Web engaged in negotiations with its bank, Scarsdale, *fn7" for additional financing. Web had established a banking relationship with Scarsdale in 1973 and from 1973 to 1979 Scarsdale had made a number of loans to Web to finance its used printing press business. Web had paid off a number of these loans but as of October 1979 owed Scarsdale an outstanding balance of $ 319,812. In October 1979, Web requested that Scarsdale grant it an additional $ 250,000 term loan and a renewal of its $ 250,000 line of credit. Rush Wilson III ("Wilson"), then senior vice president of Scarsdale in charge of the Web account and a close friend of Goldman's, recommended that the request be honored. However, at meetings of its loan committee on October 17 and 31, 1979, Scarsdale decided to deny this request. Furthermore, the loan committee determined that future loan requests would be reviewed on an "offering basis," which meant that all loan requests would have to be approved by Richard Gerloff ("Gerloff"), Scarsdale's president. The bank also took the position that any future loans to Web would have to be fully secured by negotiable hard assets. Wilson informed Goldman of these decisions in November 1979.

 In late December 1979 or early January 1980, Goldman told Wilson that Web needed additional funds to complete its contract with Graphic Centre and inquired whether a letter of credit provided by Graphic Centre for the benefit of Web would be acceptable collateral. Wilson stated that a letter of credit would suffice only if it was irrevocable and unconditional. Wilson testified that by "unconditional" he meant a "clean" letter of credit, and that by a "clean" letter of credit he meant two things: (1) a letter of credit that did not require the performance of any conditions other than the passage of time to render it negotiable, and (2) a letter of credit that did not require the presentation of any documents other than the drafts drawn under it.

 Later that month, Goldman informed Wilson that the Web-Graphic Centre contract had been amended to provide for a letter of credit and gave Wilson a copy of the January 18, 1980 Telex message detailing the substance of the proposed letter. In a file memorandum dated January 25, 1980, Wilson noted that the letter of credit was to be a performance letter of credit which would require Web to install and refurbish the press in compliance with the contract terms and that the performance would not be completed until about April 10. In this memorandum, Wilson also noted his recommendation that Scarsdale grant Web a new $ 250,000 loan, which would be collateralized by the assignment of the proceeds under the letter of credit.

 A few days later, Goldman signed a number of documents required for the new loan, including an assignment of the proceeds of the letter of credit. In most of the previous situations in which Scarsdale took a letter of credit in connection with a loan to Web, Scarsdale had obtained an assignment of the letter of credit or the proceeds and had obtained an acknowledgment of the assignment from the issuing bank.

 In this case, Wilson testified that he did not recall whether he had asked Goldman to sign the assignment nor could he identify the document. Wilson did identify his signature on the assignment form, however. Wilson also testified that he did not believe that he had ever had a conversation with anyone at Toronto-Dominion regarding the assignment of the letter of credit. Peter Becher ("Becher"), manager of the Eaton Centre branch of Toronto-Dominion where Graphic Centre maintained its account, testified to the contrary. Becher testified that Wilson informed him that Scarsdale had an assignment of the letter of credit and asked whether Becher would acknowledge and honor this assignment. This conversation occurred before Toronto-Dominion issued the letter of credit in its final form, which required the presentation of the certificates. Becher testified:

 
"Well, I mentioned to him that not having seen the document, first of all, I could not comment on it. I did not know whether we could accept the assignment, and my understanding was since it was a non-transferable letter of credit I did not believe that it was assignable, and I took this document to be an assignment."

 Trial Transcript, p. 124. The Court credits Becher's testimony as to the occurrence and substance of the conversation.

 A few days after the conversation (sometime at the end of January or early February), Goldman delivered the assignment of proceeds form to Becher's office. Toronto-Dominion did not sign the form and Wilson did not inform Gerloff of the episode. At trial, Wilson testified as to the reasons he did not pursue the assignment of proceeds.

 
"Q. Mr. Wilson, do you recall giving Mr. Goldman an assignment of proceeds form in connection with this letter of credit transaction?
 
"A. Yes.
 
"Q. Do you recall when you gave him that form?
 
"A. Not specifically, but I believe it was during one of the several discussions that we had in anticipation that a letter of credit might be forthcoming.
 
"Q. Once the letter of credit had been issued in the form to which you have testified, was the assignment of proceeds form any longer of any relevance to Scarsdale?
 
"A. It appeared to be of no further relevance.
 
"Q. Did Mr. Goldman or any other representative of Web tell you that he had delivered the assignment of proceeds form to ...

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