Summary
discussing fraud standards applied by other courts
Summary of this case from Florence Cnty. v. State Bank of FlorenceOpinion
No. 75-720.
Submitted on briefs October 5, 1977. —
Decided November 14, 1977.
APPEAL from an order of the circuit court for Milwaukee county: HARVEY L. NEELEN, Circuit Judge. Affirmed.
For the appellants the cause was submitted on the briefs of Gerald S. Walsh, Michael A. Campbell and Walsh Simon of Milwaukee.
For the respondent the cause was submitted on the brief of William R. Steinmetz and Reinhart, Boerner, Van Deuren, Norris Rieselbach, S.C. of Milwaukee.
FACTS.
The appeal is from an order of the trial court denying a temporary injunction to restrain honor of a draft under a letter of credit. The action was brought by the plaintiffs-appellants Henry J. Werner, Valentine A. Werner and Benjamin W. Lodwick, doing business as WLW Investment Company, against the defendant-respondent, A. L. Grootemaat Sons, Inc., a Wisconsin corporation, and the defendant, First National Bank of Waukesha, seeking return of a $12,560 loan origination fee, incidental damages and a permanent injunction enjoining the defendants from presenting or honoring drafts under a letter of credit. The cause of action is based on the following transactions between the appellants and respondent.
In 1973, the appellants, as individuals, purchased real estate at 1000 North Mayfair Road in Wauwatosa. They then contacted the respondent, a Milwaukee investment company, to obtain financing for the construction of a three-story office building at a construction cost of approximately $1,256,000. They requested the respondent to obtain both long-term or permanent financing and interim or construction financing.
At the respondent's direction, the appellants first applied for a permanent mortgage loan. In a letter dated January 14, 1974, the respondent committed to the appellants through the Building Trades United Pension Trust Fund, the lender, a permanent first mortgage loan for $1,256,000, to be amortized over a period of twenty-five years, under the terms and conditions set forth in the letter. This loan was to be delivered upon full completion of all improvements "in accordance with the final plans and specifications as submitted to and approved by the lender [the Fund] . . . to enable A. L. Grootemaat Sons, Inc. to deliver the mortgage and related documents for the office building [to the Fund] no later than 7/31/75." Both sides agree that because of this condition in the commitment the appellants would lose the permanent mortgage loan if the building was not constructed by July 31, 1975. However, the conditions of the permanent loan commitment did not include a specific date for the commencement of construction.
In addition to a completion deadline, the permanent loan commitment required the appellants to pay two fees: (1) A "loan origination fee" of $12,560 (1% of principal) to be paid by the appellants to the respondent within thirty days of the date of the commitment or at the closing of the interim loan, whichever occurred earlier; and (1) a "commitment fee" of $12,560 to be refunded to the appellants in the event that the permanent loan was actually funded. Rather than escrowing the commitment fee the commitment letter required the appellants to have an acceptable bank issue an irrevocable letter of credit to respondent as beneficiary in the amount of $12,560, expiring no later than July 31, 1975. Appellants paid the loan origination fee in cash and had the defendant First National Bank of Waukesha issue an irrevocable letter of credit drawn in favor of the respondent Grootemaat in accordance with the terms of the commitment.
Once the permanent financing was arranged, appellants applied to the respondent for a construction loan. The application was accepted on June 27, 1974, and called for a construction loan in the amount of $1,256,000, an interest rate of 3% above prime and a term of twelve months. The application stated that the borrower would be a corporate entity to be formed by the appellants, but that the appellants would personally guarantee the borrowings of the corporation.
The respondent did not secure a construction loan for the appellants pursuant to this application. At the hearing on the motion for preliminary injunction the appellants introduced a letter from the respondent to the Marshall Ilsley Bank of Milwaukee, dated September 12, 1974, rejecting a construction loan proposed by M I Bank on the grounds that:
"A. L. Grootemaat Sons, Inc., will not permit the construction loan to be assigned after the closing. The borrowers wanted this right for tax benefits. After the closing they would transfer the project from the incorporated entity to themselves as individuals. [Grootemaat] would not permit this because of the risk that the individuals may, at a later date, wish to use the usury laws as a basis for negating the construction loan. The second reason is a direct result of the permanent lenders [the Fund] requirement that construction be started by September 1, 1974."
The appellant Lodwick testified that he was never notified of the M I offer and that the respondent rejected the offer without notifying the appellants. The appellants also introduced into evidence a demand for payment under the letter of credit dated September 18, 1974, which Grootemaat never presented, but which, the appellants assert, tends to show that Grootemaat rejected the M I loan in bad faith and then decided to abandon any further attempts to obtain a construction loan for the appellants. However, Grootemaat claims that the M I loan offer was offered to the appellants and rejected.
On July 30, 1975, one day before the expiration of the permanent loan commitment and the letter of credit, appellants filed their summons and complaint in this action. (On the same day the First National Bank of Waukesha was served.) The complaint alleged that the respondent breached its contractual agreement with the appellants to "obtain, and timely deliver, to plaintiffs the agreed to construction loan," and its contractual agreement "to timely deliver to plaintiffs a permanent mortgage loan. . . as agreed to by Grootemaat with plaintiffs on or about January 14, 1974." Appellants sought the return of the $12,560 loan origination fee, incidental damages, and a permanent injunction against the First National Bank of Waukesha and the respondent to prohibit them from presenting or honoring drafts under the letter of credit. The appellants promptly sought a temporary restraining order and a temporary injunction to restrain the respondent from obtaining payment under the letter of credit.
On July 31, 1975, the respondent presented to First National Bank of Waukesha the documents specified in the letter of credit and demanded payment thereunder. The demand was rejected by the bank on the ground that this action had been commenced to enjoin such payment. On August 1, 1975, the appellants obtained the temporary restraining order, and on September 8, 1975, a hearing was held on their motion for a temporary injunction. The trial court directed the bank to deposit the $12,560 payable under the letter of credit into the court and that upon such payment the bank be dismissed from the case.
On February 17, 1976, the trial court denied the appellants' motion for temporary injunction, but allowed the appellants the choice of amending the damages portion of their complaint to include the additional sum of $12,560 to cover the amount paid under the letter of credit. The appellants have not amended their complaint and instead have appealed the denial of the temporary injunction. (The trial court stayed pending appeal its order directing that the funds deposited by the bank be paid over to Grootemaat.)
On this appeal the sole issue raised is the propriety of the denial of a temporary injunction.
In this state the authority for the issuance of a temporary injunction is statutory:
"When it appears from his pleading that a party is entitled to judgment and any part thereof consists in restraining some act, the commission or continuance of which during the litigation would injure him, or when during the litigation it shall appear that a party is doing or threatens or is about to do, or is procuring or suffering some act to be done in violation of the rights of another party and tending to render the judgment ineffectual, a temporary injunction may be granted to restrain such act."
Sec. 268.02(1), Stats. 1973 (renumbered sec. 813.02(1), Stats. 1975).
The denial of a temporary injunction under this statute is a matter within the discretion. of the trial court, and the sole issue on appeal is whether the trial court abused its discretion. As to the exercise of such discretion, this court has stated the following guidelines: Injunctions, whether temporary or permanent, are not to be issued lightly. The cause must be substantial. A temporary injunction is not to be issued unless the movant has shown a reasonable probability of ultimate success on the merits. Temporary injunctions are to be issued only when necessary to preserve the status quo. Injunctions are not to be issued without a showing of a lack of adequate remedy at law and irreparable harm, but at the temporary injunction stage the requirement of irreparable injury is met by a showing that, without it to preserve the status quo pendente lite, the permanent injunction sought would be rendered futile.
See: Joint School v. Wisconsin Rapids Ed. Asso., 70 Wis.2d 292, 308, 234 N.W.2d 289 (1975), holding: "It is a basic rule that the granting or refusal of a temporary injunction is a matter lying within the discretion of the trial court and its determination will not be upset unless an abuse of discretion is shown." See also: Pure Milk Products Coop. v. NFO, 64 Wis.2d 241, 219 N.W.2d 564 (1974); Shearer v. Congdon, 25 Wis.2d 663, 131 N.W.2d 377 (1964).
Fromm Sichel, Inc. v. Ray's Brookfield, Inc., 33 Wis.2d 98, 103, 146 N.W.2d 447 (1966), where we stated, "`Injunctions are not to be issued lightly.'" Quoting Bartell Broadcasters, Inc. v. Milwaukee Broadcasting Co., 13 Wis.2d 165, 171, 108 N.W.2d 129 (1961).
Id. at 103, where we held: "The general rule is that, `Injunctions do not issue for inconsequential or trivial causes.'" Quoting Milwaukee Electric Railway Light Co. v. Pallange, 205 Wis. 126, 134, 236 N.W. 549 (1931).
In Akin v. Kewaskum Community Schools, 64 Wis.2d 154; 159, 160, 218 N.W.2d 494 (1974), the court held: "`The writ [temporary injunction] is to a great extent a preventative remedy; and where the parties are in dispute concerning their legal rights, it will not ordinarily be granted until the right is established. . . .'" Quoting from Mogen David Wine Corp. v. Borenstein, 267 Wis. 503, 509, 66 N.W.2d 157 (1954).
Pure Milk Products Coop. v. NFO, supra, n. 2 at 251. See also: Fromm Sichel, Inc. v. Ray's Brookfield, Inc., supra, n. 3.
Joint School v. Wisconsin Rapids Ed. Asso., supra, n. 2, at 308.
Shearer v. Congdon, supra, n. 2, at 668. See also: De Pauw v. Oxley, 122 Wis. 656, 100 N.W. 1028 (1904).
While standards for the granting of temporary and permanent injunctive relief differ, the presence of irreparable injury and inadequate remedy at law are relevant factors to consider in granting either temporary or permanent injunctions for the reason that, "[I]f it appears . . . that the plaintiff is not entitled to the permanent injunction which his complaint demands, the court ought not to give him the same relief temporarily." Thus, a showing of irreparable injury and inadequate remedy at law is required for a temporary as well as for a permanent injunction.
Shearer v. Congdon, supra, n. 2, at 668, 669, where we stated that in a temporary injunction situation, "[W]here one party is prohibited from acting only until the question of legal rights can be resolved, a showing of irreparable damage would not be as critical."
Vredenburg v. Safety Devices Corp., 270 Wis. 36, 39, 70 N.W.2d 226 (1955).
Applying this statute and these guidelines to the denial of a temporary injunction in the case before us, it is clear that no abuse of discretion was present. The complaint alleges a breach of contract by Grootemaat. This court does not normally accord injunctive relief in a breach of contract case. However, here the appellants sought temporary and permanent injunctive relief against the honor of demands for payments under a letter of credit. Such relief is permitted by statute. Thus the appellants' claim for injunctive relief is actually a separate claim from that for damages for breach of contract, even though it is not so pleaded.
See, e.g., Ed Schuster Co. v. Kuryer Pub. Co., 165 Wis. 327, 162 N.W. 173 (1917).
Sec. 405.103(1)(a), Stats., defines a "letter of credit" as "[A]n engagement by a bank or other person made at the request of a customer and of a kind within the scope of this chapter (s. 405.102) that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit. A credit may be either revocable or irrevocable. The engagement may be either an agreement to honor or a statement that the bank or other person is authorized to honor."
Sec. 405.114(2)(b), Stats.
Letters of credit are governed by ch. 405, Stats., art. 5 of the Uniform Commercial Code. This chapter imposes on the First National Bank of Waukesha, the issuing bank in this case, a duty to determine whether the documents presented by Grootemaat, the beneficiary of the credit, appear on their face to be in accordance with the terms of the credit. Having fulfilled this duty, it must honor a complying draft or demand regardless of whether the documents conform to the underlying contract between the appellants and the respondent. However, there are some situations when an issuer may decide whether or not to honor the demand and in those situations a court may enjoin such honor. These situations are specified in sec. 405.114(2), Stats. Except as to a presenter who is a holder in due course, which the respondent, a party to the underlying transaction is not, the statute provides as follows:
Sec. 405.109, Stats.
Sec. 405.114(1), Stats.
"In all other cases as against its customer, an issuer acting in good faith may honor the draft or demand for payment despite notification from the customer of fraud, forgery or other defect not apparent on the face of the documents but a court of appropriate jurisdiction may enjoin such honor." [Emphasis supplied.]
Sec. 405.114(2)(b), Stats.
The trial court in this case considered this statute as controlling as to whether an injunction enjoining the honoring of a letter of credit may be issued. We agree that sec. 405.114(2)(a), Stats., here controls. The test for granting injunctive relief is whether or not appellants have shown "fraud, forgery or other defect not apparent on the face of the documents." The "fraud" of which appellants complain is what they term the "equitable fraud" of the respondent's seeking payment under a letter of credit after rejecting the M I bank loan, allegedly in bad faith, thereby causing the conditions precedent for payment under the credit to come about. To accept so broad a definition of the word "fraud" would make "fraud" a synonym for "breach of contract," the underlying claim made in this complaint.
Sec. 405.114(2)(b), Stats.
One court has said that the circumstances which will justify an injunction against the honor of a letter of credit under the Uniform Commercial Code "must be narrowly limited to situations of fraud in which the wrongdoing of the beneficiary has so vitiated the entire transaction that the legitimate purposes of the independence of the issuer's obligation could no longer be served." Another court recently has held that the type of fraud contemplated by the code provision must be "fraud in the factum and not fraudulently calling the letter of credit." A third court has held that fraud sufficient to enjoin honoring a letter of credit must be "fraud in the formation of the underlying contract." In the case before us, the only condition attached to the issuance of the letter of credit was failure to comply with the conditions stated in the letter of commitment, i.e., a failure to complete a building by a day certain. Compliance with all of the legal obligations of the parties under the various contracts between them was neither an express nor implied condition for demand, under the letter of credit. Neither in the allegations of the complaint nor in the testimony at the hearing do we find any foundation for a claim of that species of fraud on the part of the respondent which, under the statute, would authorize a court from enjoining the honor of the credit. The trial court concluded that the appellants did not show fraud, forgery, or other defect not apparent on the face of the documents, and we uphold its conclusion. There is no showing of reasonable probability that the requirements of sec. 405.114(2)(b), Stats., are met.
Intraworld Industries, Inc. v. Girard Trust Bank, 336 A.2d 316, 324 (Pa. 1975).
Bossier Bank Trust Co. v. Union Planters Nat. Bank, 550 F.2d 1077, 1082 (6th Cir. 1977).
Baker v. National Boulevard Bank of Chicago, 399 F. Supp. 1021, 1024 (N.D. Ill. 1975).
Compare: Dynamics Corp. of America v. Citizens Southern Nat. Bank, 356 F. Supp. 991 (N.D. Ga. 1973), where compliance with a legal obligation of the underlying contract was a condition for demands under the credit and where a temporary injunction against honor of the credit was upheld. In that case the insolvency of the plaintiff and the necessity of suing a foreign government to recover on the underlying contract were facts making the remedy at law inadequate.
Even if the requirements of the statute had been met, granting an injunction is not mandatory. The statute says "may," not "must." These appellants still had the burden of showing that their demand for injunctive relief is within the court's guidelines for that form of relief. These include an "inadequate remedy at law" and "irreparable injury." As the trial court pointed out, they did not succeed in so doing. Since the appellants can under the trial court's order amend their complaint to include the amount of $12,560 which they must reimburse the bank upon its payment of the draft, their damage is not "irreparable" and their remedy at law is "adequate." The trial court's order denying a temporary injunction is affirmed.
See: Sec. 405.114(3), Stats. See also: Sec. 405.111(1), Stats., imposing on the respondent the warranty of presentment, i.e., a warranty that upon presentment "the necessary conditions of the credit have been complied with." Since this warranty runs in favor of "all interested parties," including the customer of the bank, it gives an issuer who wrongfully honors a demand a remedy against the beneficiary.
By the Court. — Order affirmed.