Bank of America. Accordingly, prior to December 20, 1984,
Occidental received notice from Bankers Trust that the four
letters of credit would not be extended beyond their current
expiration date of December 31, 1984, see Stip. at ¶ 9(a), and
would be replaced by identical ones from Bank of America. In a
letter to all of the insurance companies who were beneficiaries
of letters of credit from Bankers Trust, Peter J. Thrower, a
Vice President of a company acting as Cambridge's managers,
stated "it should be emphasized that this is a change in
issuing banks only, and that the terms and conditions and
amount(s) of your present letter(s) of credit will not be
altered." Stip. at ¶ 9(b) & Ex. I. There is no indication in
the record of what response, if any, Occidental made with
respect to this communication.
On or about December 21, 1984, Cambridge caused Bank of
America to issue and deliver four letters of credit in favor
of Occidental, which corresponded to the four prior letters
of credit from Bankers Trust. See Stip. at ¶ 11. These letters
of credit were to become effective on January 1, 1985. See
Stip. at ¶ 11.
On December 31, 1984, shortly before the Bankers Trust
letters were due to expire, Occidental drew down upon and was
paid the full amount of those letters of credit. See Stip. at ¶
12. Thereafter, on May 10 and 16, 1985, Occidental drew upon
and was paid the full amount of the new letters of credit
issued by Bank of America. See Stip. at ¶ 13. Both banks
credited themselves with the security that Cambridge had posted
to secure the letters of credit. Thus, Occidental received the
benefit of both sets of letters of credit.
On May 17, 1988, plaintiffs commenced the instant action.
They originally sued Bankers Trust and Bank of America
alleging that they wrongfully paid out on the letters of
credit. Bank of America then brought a third-party complaint
against Occidental and other insurance companies that had
also drawn down on both sets of letters of credit. Plaintiffs
later dropped Bankers Trust as a defendant when they filed
their First Amended Complaint. On May 9, 1989 plaintiffs
filed a Second Amended Complaint and asserted a claim for
relief directly against Occidental. This claim was based upon
equitable theories of restitution, quasi-contract, unjust
enrichment and money had and received. Plaintiffs sought
damages of $197,825, the proceeds of one set of letters of
credit, plus interest. Occidental's answer admitted most of
the relevant facts but denied liability.
Plaintiff relies upon equitable principals of
quasi-contract, money had and received, unjust enrichment and
constructive trust, which, under New York law,*fn1 permit a
plaintiff to recover money when it has come into the
defendant's hands wrongfully and it is, under the
circumstances, "against good conscience for the defendant to
keep the money." Parsa v. State, 64 N.Y.2d 143, 148,
474 N.E.2d 235, 237, 485 N.Y.S.2d 27, 29 (1984) (discussing action for
money had and received) (quotations omitted); see Republic of
Philippines v. Marcos, 806 F.2d 344, 355 (2d Cir. 1986), cert.
dismissed, 480 U.S. 942, 107 S.Ct. 1597, 94 L.Ed.2d 784 (1987)
(discussing constructive trusts); Simonds v. Simonds, 45 N.Y.2d
233, 241-42, 380 N.E.2d 189, 193-94, 408 N.Y.S.2d 359, 363-64
(1978) (discussing constructive trusts); Bradkin v. Leverton,
26 N.Y.2d 192, 196-97, 257 N.E.2d 643, 645, 309 N.Y.S.2d 192,
195-96 (1970) (discussing quasi-contract); Miller v. Schloss,
218 N.Y. 400, 407-08, 113 N.E. 337, 339 (1916) (discussing
quasi-contract). These doctrines are necessarily flexible
because equity must apply its remedies to "whatever knavery
human ingenuity can invent." Simonds, supra, 45 N.Y.2d at 241,
380 N.E.2d at 194, 408 N.Y.S.2d at 363 (quotation omitted).
Generally, New York law requires that a party establish
four elements in order to be entitled to a constructive
trust: (1) a confidential or fiduciary relationship;
(2) a promise, express or implied; (3) a transfer made in
reliance on that promise; and (4) unjust enrichment.
Brand v. Brand, 811 F.2d 74, 77 (2d Cir. 1987) (citations
omitted); Bankers Security Life Ins. Soc. v. Shakerdge, 49
N Y2d 939, 940, 406 N.E.2d 440, 440, 428 N.Y.S.2d 623, 624
(1980). However, these elements are not "talismantic," and
courts have held that a constructive trust can be imposed in
the absence of some of these factors. United States v.
Rivieccio, 661 F. Supp. 281, 292 (E.D.N.Y. 1987); Simonds,
supra, 45 N.Y.2d at 45, 380 N.E.2d at 194, 408 N.Y.S.2d at 363;
Coco v. Coco, 107 A.D.2d 21, 24-25, 485 N.Y.S.2d 286, 289 (2d
Dept.), appeal dismissed, 65 N.Y.2d 637 (1985).
This case, despite the absence of a fiduciary relationship
or a promise by Occidental not to draw upon both sets of
letters of credit, presents unique circumstances sufficient
to warrant imposition of a constructive trust, which is "the
formula through which equity finds expression," Republic of the
Philippines, supra, 806 F.2d at 355 (quoting Beatty v.
Guggenheim Exploration Co., 225 N.Y. 380, 386, 122 N.E. 378,
380 (1919)), because "[w]hen property has been acquired in such
circumstances that the holder of the legal title may not in
good conscience retain the beneficial interest, equity converts
him into a trustee." Id. Moreover, the New York Court of
Appeals has said that "[a] constructive trust will be erected
whenever necessary to satisfy the demands of justice . . .
[I]ts applicability is limited only by the inventiveness of men
who find new ways to enrich themselves unjustly by grasping
what should not belong to them." Simonds, supra, 45 N.Y.2d at
241, 380 N.E.2d at 194, 408 N.Y.S.2d at 363 (quoting Latham v.
Father Divine, 299 N.Y. 22, 27, 85 N.E.2d 168, 170 (1949)).
Occidental's argument that merely because Cambridge owed it
money a constructive trust may not be imposed is not
supported by New York law, where it is a well-settled rule
that a debtor owing more than one debt to a creditor may
prescribe the manner in which a payment is applied. See, e.g.,
Bank of California v. Webb, 94 N.Y. 467, 472 (1884); Central
National Bank of Canajoharie v. Paton, 109 Misc.2d 42, 43-44,
439 N.Y.S.2d 619, 621 (Sup.Ct. Otsego Co. 1981); Cukierski v.
Standard Milling Co., 60 Misc.2d 690, 692, 303 N.Y.S.2d 586,
588 (N.Y.City Civ.Ct. 1969). The basis for this rule is the
recognition that the funds which are being transmitted to the
creditor are the property of the debtor, and he alone has the
right to direct its manner or form of disposition.*fn2 See
Paton, supra, 109 Misc.2d at 43-44, 439 N.Y.S.2d at 621.
In this case, Cambridge gave clear and unambiguous notice
to Occidental, and indeed, all of the insurance companies
that were beneficiaries under the Bankers Trust letters of
credit, that the Bank of America letters were intended as
replacement collateral, not additional collateral. In light of
that circumstance Occidental's action in drawing down on both
sets of letters was wrongful.*fn3 See Cukierski, supra, 60 Misc. 2
d at 691-92, 303 N.Y.S.2d at 588. Furthermore, given that
circumstance, the fact that Cambridge may not have complied
with the terms of the reinsurance agreements in that it owed
under those agreements in an amount in excess of both sets of
letters of credit is irrelevant.*fn4
The Court also rejects Occidental's argument that this case
is analogous to the situation where a vendee who
unjustifiably defaults on a real estate contract cannot
recover the down payment. See Maxton Builders, Inc. v. Lo
Galbo, 68 N.Y.2d 373, 502 N.E.2d 184, 509 N.Y.S.2d 507 (1986);
Lawrence v. Miller, 86 N.Y. 131 (1881). In such a case, the
vendee's failure to perform prevents the consummation of the
contract pursuant to which the down payment was given and the
amount of the down payment is viewed as being analogous to
liquidated damages for the breach. See Maxton Builders, supra,
68 N.Y.2d at 382, 502 N.E.2d at 189, 509 N.Y.S.2d at 512. In
this case, the issuance of the substitute letters of credit had
nothing to do with Cambridge's performance under the contract
and most certainly cannot be regarded as liquidated damages for
an alleged breach of that performance obligation. In sum, while
Occidental was certainly entitled to receive letters of credit
in an adequate amount, it was not entitled to draw down what it
knew to be substitute letters of credit and was not free to
disregard Cambridge's express instructions as to how that
substitute collateral was to be used.
For the same reasons, the Court cannot accept Occidental's
contention that Cambridge cannot recover under equitable
theories because there are written contracts between the
parties. As noted above, Occidental's conduct and the claims
arising from it have nothing to do with either party's
performance obligations under the written contracts.
It follows that since Occidental was not authorized or
entitled to draw upon two sets of letters of credit, when it
knew that the second set was a replacement for the first,
Occidental's conduct constituted the kind of self-help that
New York law does not permit because that concept, if
construed too broadly, undermines the state's power to
resolve disputes. See Sharrock v. Dell Buick-Cadillac, Inc., 45
N Y2d 152, 166, 379 N.E.2d 1169, 1171, 408 N.Y.S.2d 39, 48
(1978); Hilliman v. Cobado, 131 Misc.2d 206, 210, 499 N.Y.S.2d
610, 614 (Sup.Ct. Cattaraugus Co. 1986); N.Y.U.C.C. § 9-503
(McKinney 1964); cf. People v. Reid, 69 N.Y.2d 469, 476,
508 N.E.2d 661, 664-65, 515 N.Y.S.2d 750, 753 (1987) (policy
consideration against expanding area of permissible self-help
mandated that claim of right defense to larceny charge not be
extended to robbery cases).
Occidental's reliance upon Kelly Asphalt Block Co. v.
Brooklyn Alcatraz Asphalt Co., 190 A.D. 750, 180 N.Y.S. 805 (2d
Dept. 1920), modified, 232 N.Y. 304, 133 N.E. 899 (1922), and
Porcella v. Kramrisch, 59 N.Y.S.2d 349 (N.Y.City Ct. 1945), is
misplaced. In Kelly, the Court held that the plaintiff had
authorized and remitted funds to the defendant in payment of
debts owed, and therefore could not seek to recover those funds
merely because an action to recover on the debts would have
been foreclosed by the statute of limitations. Kelly, supra,
190 A.D. at 756-59, 180 N.Y.S. at 810-12. The Porcella court
held only that a judgment creditor could recover sums subject
to a garnishee execution issued prior to the defendant's
bankruptcy for the time period between the debtor's discharge
in bankruptcy and the vacatur of the garnishment order, because
under New York law at that time a garnishment order remained
effective until it was directly modified or vacated. Porcella,
supra, 59 N.Y.S.2d at 351. Neither of these cases provide
guidance in a case where, as here, a creditor, in defiance of
explicit instructions from its debtor, misappropriates both a
substitute letter of credit and the original letter of credit
which it knew was to be superseded by that substitute letter of
Moreover, it is clear that Occidental was in fact unjustly
enriched. A conclusion that a party has been unjustly
enriched requires a common sense evaluation of the
circumstances of the transfer in light of the relationship
between the parties, the opportunities for unfairness and
overreaching, and equitable principles. See McGrath v. Hilding,
41 N.Y.2d 625, 629, 363 N.E.2d 328, 331, 394 N.Y.S.2d 603, 606
(1977); Sharp v. Kosmalski, 40 N.Y.2d 119, 123, 351 N.E.2d 721,
724, 386 N.Y.S.2d 72, 76 (1976).
Occidental's argument that it was not unjustly enriched
merely because it received what it was lawfully due ignores
commercial reality and must be rejected. The fact is that
Occidental was not entitled to draw on both sets of letters
of credit, and in so doing it gained an unfair advantage over
other creditors who saw fit not to engage in similar conduct.
The preference that it wrongfully obtained over those
creditors clearly constitutes the kind of unjust enactment
which equitable principles should foreclose. Indeed, it would
be hard to justify, as a matter of commercial policy,
rewarding Occidental for its wrongful conduct at the expense
not only of Cambridge, but of other creditors who did not
seek to unfairly obtain additional collateral by the simple
expedient of ignoring the explicit conditions upon which that
collateral had been received.
In sum, the windfall Occidental received by its action
depleted Cambridge's estate in liquidation and violated the
fundamental equitable principal of bankruptcy law*fn6 that
creditors of the same class should share equally in any
distribution from the debtor's estate. See, e.g., Begier v.
Internal Revenue Service, ___ U.S. ___, ___, 110 S.Ct. 2258,
2262, 110 L.Ed.2d 46 (1990) ("[e]quality of distribution among
creditors is a central policy of the Bankruptcy Code"); In re
Applied Logic Corp., 576 F.2d 952, 957 (2d Cir. 1978) ("[o]ne
of the dominant impulses in bankruptcy is equality among
creditors") (quoting Bankruptcy Court's decision); In re
Windsor Communications Group, Inc., 79 B.R. 210, 216 (E.D.Pa.
1987) (adopting opinion of the Bankruptcy Court); see also
Arkansas Fuel Oil Co. v. Leisk, 133 F.2d 79, 80 (5th Cir. 1943)
(creditor "may not secure an advantage over other general
creditors of the bankrupt by its own unlawful act"). The Court
therefore concludes that Occidental holds the proceeds of one
set of letters of credit as constructive trustee for
Occidental also contends that, even if it drew down upon
the second set of letters of credit wrongfully and was
unjustly enriched, it is entitled to set off the amount it
received against Cambridge's debt to it. However, the
doctrine of set-off, which allows mutual debts between a
creditor and a debtor's estate to be set-off against one
another, see In re Bohack Corp., 599 F.2d 1160, 1164-65 (2d
Cir. 1979); see generally Collier on Bankruptcy ¶ 553.04 (15th
ed. 1989), is "restricted in its application by both legal and
equitable principles." Windsor Communications, supra, 79 B.R.
at 215; see Brunswick Corp. v. Clements, 424 F.2d 673, 675
(6th Cir. 1970), cert. denied, 400 U.S. 1010, 1013, 91 S.Ct.
569, 564, 27 L.Ed.2d 623, 623 (1971); see also Federal Deposit
Ins. Corp. v. Bank of America, 701 F.2d 831, 836-37 (9th Cir.)
("set-off will not be permitted when it would be inequitable or
public policy to do so"), cert. denied, 464 U.S. 935, 104 S.Ct.
343, 78 L.Ed.2d 310 (1983). Courts therefore have uniformly
held that a creditor who obtains a debtor's property wrongfully
is not entitled to set off their liability for that wrongful
conduct against a claim that the creditor holds against the
debtor. See, e.g., Brunswick Corp., supra, 424 F.2d at 676;
Fore Improvement Corp. v. Selig, 278 F.2d 143, 148 (2d Cir.
1960) (Friendly, J., concurring); Morris v. Windsor Trust
Co., 213 N.Y. 27, 29-31, 106 N.E. 753, 754 (1914); Windsor
Communications, supra, 79 B.R. at 216; Ducker v. Lohrey,
33 B.R. 973, 976 (Bankr.S.D.Ohio 1983).
The reason for this rule is two-fold. First, because
set-off is an equitable principle it must be denied in a
situation where it would be inequitable to allow it. See, e.g.,
Brunswick, supra, 424 F.2d at 675; Windsor Communications,
supra, 79 B.R. at 216. Since Occidental's action in this
circumstance unjustly allowed it to obtain a preference over
other creditors its application here would be both
inappropriate and inequitable.
Second, set-off is also subject to the requirement of
mutuality, see Windsor Communications, supra, 79 B.R. at 216;
In re O.P.M. Leasing Services, Inc., 35 B.R. 854, 868
(Bankr.S.D.N.Y. 1983), modified, 48 B.R. 824 (S.D.N.Y. 1985);
Morris, supra, 213 N.Y. at 30-31, 106 N.E. at 754, which
"requires that `the debts and credits must be in the same
right, and between the same parties, standing in the same
capacity.'" Windsor Communications, supra, 79 B.R. at 217
(quoting In re Brendern Enterprises, Inc., 12 B.R. 458, 459
(Bankr.E.D.Pa. 1981) (citations omitted)). Mutuality is not
present when the creditor has no debt to off-set against the
debtor except the liability for the wrongful conversion. See
Windsor Communications, supra, 79 B.R. at 217. Similarly, where
the creditor's conduct is so wrongful that it holds the
debtor's property as a constructive trustee the mutuality
requirement is also lacking. See Fore Improvement, supra, 278
F.2d at 145; Morris, supra, 213 N.Y. at 30-31, 106 N.E. at 754.
In this case, Occidental's liability to Cambridge is
limited to its wrongful draw down of the additional set of
letters of credit. It has no other debt which can be set off
against Cambridge's debt and the debts are not mutual.
Additionally, since the Court has found that Occidental must
be deemed to hold the proceeds of one set of letters of
credit as a constructive trustee set-off would not be
permissible for that reason as well.*fn7
Finally, the Court notes that its decision will not, as
Occidental predicts, have dire consequences for the use of
letters of credit in commercial transactions. "A letter of
credit is an efficacious arrangement which assures payment
for completion of an obligation by placing the duty to pay on
an issuer of good financial reputation." Banco Nacional De
Desarrollo v. Mellon Bank, N.A., 726 F.2d 87, 91 (3d Cir.
1984); see Voest-Alpine Int'l Corp. v. Chase Manhattan Bank,
N.A., 707 F.2d 680, 682-83 (2d Cir. 1983); Venizelos, S.A. v.
Chase Manhattan Bank, 425 F.2d 461, 464-65 (2d Cir. 1970);
First Commercial Bank v. Gotham Originals, Inc., 64 N.Y.2d 287,
294, 475 N.E.2d 1255, 1258, 486 N.Y.S.2d 715, 718 (1985). There
are three relationships in a letter of credit transaction
the relationship between Cambridge and Occidental; the
contract between Cambridge and the Banks that issued the
letters of credit; and the banks' resulting obligation to pay
Occidental, the beneficiary of the letters in accordance with
the conditions specified by Cambridge. See Voest-Alpine, supra,
707 F.2d at 682; Venizelos, supra, 425 F.2d at 464-65; First
Commercial Bank, supra, 64 N.Y.2d at 294, 475 N.E.2d at 1258,
486 N.Y.S.2d at 715. The bank's obligation to pay the
beneficiary is "primary, direct and completely independent of
any claims which may arise in the underlying . . .
transaction." Voest-Alpine, supra, 707 F.2d at 682; see First
Commercial Bank, supra, 64 N.Y.2d at 294, 475 N.E.2d at 1259,
486 N.Y.S.2d at 719.
The relationship between Cambridge and Occidental is
therefore independent of any duty owed by the banks to either
party. The Court's decision that Occidental acted wrongfully
in drawing down on both sets of letters impacts only upon
Occidental's relationship with Cambridge. It has no impact
upon the obligations of the banks issuing those letters of
credit, and consequently no impact upon the efficiency of
letters of credit in furthering commercial transactions.
The Court concludes that Occidental acted wrongfully in
drawing down on both sets of letters of credit and was
unjustly enriched at the expense of Cambridge and its
creditors. The Court also concludes that Occidental holds the
proceeds of one set of letters of credit in a constructive
trust for the benefit of Cambridge and, ultimately, its
creditors. Cambridge's motion for summary judgment is granted
as to its first claim for relief against Occidental.
Occidental's cross-motion for summary judgment is denied. All
parties shall appear at a Pre-Trial Conference on July 27,
1990 at 10:30 AM in Courtroom 129.
It is SO ORDERED.