APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA (D.C. Civil No. 76-1564)
Before Aldisert, Rosenn, and Garth, Circuit Judges.
This appeal in a diversity case presents for our consideration two issues requiring interpretation under Pennsylvania law of Article Five of the Uniform Commercial Code dealing with letters of credit. We are asked first to determine whether a particular credit arrangement between a bank and a seller of goods qualifies as a "letter of credit" for Article Five purposes and second, if such a letter of credit exists, whether the seller is required to mitigate any damages it incurs by virtue of a wrongful dishonor of drafts submitted pursuant to the letter of credit.
The present controversy arose in connection with a credit arrangement between Citizens National Bank of Evans City, Pennsylvania (CNB) and Toyota Industrial Trucks, U.S.A., Inc., (Toyota Industrial or Toyota). Under the arrangement, CNB would honor drafts submitted to it by Toyota for shipments of trucks to Toyota's distributor in the Pittsburgh, Pennsylvania area, Promat Corporation, (Promat) not exceeding $50,000 on any one business day. When CNB subsequently dishonored two drafts of approximately $24,000 each, Toyota brought a diversity action, 28 U.S.C. § 1332(a)(1) (1976),*fn1 in the district court claiming that CNB wrongfully dishonored the drafts because the credit arrangement was a "letter of credit" under Article Five of the Uniform Commercial Code. CNB responded that the credit arrangement was a "line of credit" and that no wrongful dishonor had occurred. Alternatively, it argued that if the arrangement was held to be a letter of credit, Toyota was required to mitigate its damages by protecting the collateral shipped to its distributor Promat. The district court found that the credit arrangement was a letter of credit and that no duty to mitigate damages exists under Article Five. We agree that a valid letter of credit existed, and that Toyota had no duty to mitigate its damages in this case.*fn2 We therefore affirm.
The facts of this case are not in dispute and were stipulated to by the parties in the district court. Toyota Industrial Trucks U.S.A., Inc., was incorporated in September 1974 as a division of Toyota Motors Distributors, Inc. (Toyota Motors), a California corporation. In the spring of 1973, Toyota Motors was interested in retaining a distributor in the Pittsburgh, Pennsylvania area for its forklift trucks. Promat Corporation was selected by Toyota Motors to be its dealer, but before the dealership could be formalized, Toyota Motors required a line of credit to secure payment for its shipment of trucks to Promat. Toyota Motors subsequently entered into negotiations with CNB to establish such a line of credit. Vice-president and branch manager of CNB, Richard Shelton, wrote to Toyota Motors' authorized representative, Ray Tanner, on April 18, 1973, offering to extend a line of credit to Promat in the amount of $50,000. Toyota Motors, however, objected to the form of the agreement and wrote to CNB on May 1, 1973, asking CNB to issue a letter in conformity with Toyota Motors' standard bank revolving credit agreement with other distributors of its trucks. CNB cooperated and executed a letter on May 7, 1973, conforming to Toyota Motors' suggested terms. It is this letter which is the subject of the present controversy.
The letter of May 7, 1973, established a "line of credit" on behalf of Promat as a dealer in Toyota forklift trucks and required CNB to honor drafts covering shipments not "in excess of $50,000 on any one business day." Further, the letter required Toyota to attach to the drafts invoices and bills of sale evidencing title to the vehicles. CNB reserved the right to cancel the agreement by written notice at any time.
Toyota Motors sold its forklift truck product line to Toyota Industrial on December 31, 1974. As a part of this sale, Toyota Motors assigned all its rights arising under the credit arrangement with CNB dated May 7, 1973. Notice was sent to CNB evidencing such an assignment. From 1973 to 1976 CNB subsequently honored nineteen drafts submitted pursuant to the May 7, 1973 letter. CNB honored all of these drafts within thirty days of their presentment. From the first quarter of 1974 through 1975, CNB, without Toyota's knowledge, only paid the drafts After Promat had deposited sufficient funds with CNB to cover them. CNB also without Toyota's knowledge unilaterally altered the credit line available to Promat by reducing its maximum available credit from $50,000 to $25,000. CNB apparently altered both the procedure for honoring the drafts and the amount of available credit because of Promat's worsening financial position.
In August of 1975, Shelton was replaced by William T. Elliot as vice-president and branch manager of the CNB office with which Promat did business. In January of 1976, Promat's outstanding indebtedness to CNB was in excess of $32,000. Toyota presented a draft on January 7, 1976, in the amount of $24,425.52 with invoices for three forklift trucks that had been shipped to Promat. CNB did not honor this draft. Over a month passed without payment and on February 17, 1976, Toyota presented another draft in the amount of $24,330.75 with invoices representing shipment of three more forklift trucks to Promat. Up to this time, CNB had given Toyota no notice that it intended to dishonor any submitted drafts. The January 7 draft was apparently not paid because Promat failed to deposit sufficient funds to cover it. Similarly, Promat failed to deposit sufficient funds to cover the February 17 draft and Elliot, apparently without knowledge of the May 7, 1973 letter agreement with Toyota, dishonored both drafts and returned them unpaid to Toyota. Toyota objected to the dishonor of the two drafts and brought the letter agreement of May 7, 1973, to Elliot's attention at a meeting on March 8, 1976. CNB subsequently exercised its right to cancel the May 7, 1973 letter on March 17, 1976.
Promat advised both Toyota and CNB that it anticipated selling the six forklift trucks, which were the subject of the January and February dishonored drafts, to 84 Lumber Company and that the payment for those trucks was anticipated to cover the two drafts. Toyota and CNB apparently relied on Promat's assurances of payment and did nothing to prevent the sale to 84 Lumber. At the time of the March 8, 1976 meeting between Toyota and CNB, three forklift trucks were still on the premises of Promat. At this time, Toyota knew that CNB did not intend to honor the drafts. CNB had perfected Article Nine security interests in Promat's accounts receivable and inventory and Toyota had a repurchase option in its dealer contract with Promat. Toyota's representative, Tanner, recommended to his corporate superiors on April 8, 1976, that the three lift trucks not yet shipped to 84 Lumber Company be repossessed, but this recommendation was rejected by Toyota. Tanner's recommendation was based on his perception of Promat's poor financial condition. Toyota took no steps to assure payment directly to it for the three trucks yet to be delivered to 84 Lumber Company. No arrangement existed with 84 Lumber for direct payment of the trucks to CNB. Toyota's eventual attempt on June 23, 1976, to collect directly from Promat proved unsuccessful.
Toyota brought a diversity action in the district court seeking to hold CNB for the wrongful dishonor of the two unpaid drafts. Asserting that the letter of May 7, 1973, was a letter of credit under Pennsylvania's codification of Article Five of the Uniform Commercial Code, 12A P.S. §§ 5-101-5-117 (Purdon 1970), Toyota demanded judgment in the amounts covered by the above dishonored drafts plus interest. CNB defended on the ground that the credit agreement was only a "line of credit" which did not qualify as a letter of credit under Article Five. Even if the document was a letter of credit, CNB contended that Toyota was required to mitigate its damages under U.C.C. § 5-115 by preventing further shipments of trucks to Promat and by Promat to its customer 84 Lumber Company. CNB also joined Promat as a third party defendant and upon Promat's failure to appear, a default judgment was entered against it. The district court subsequently rejected CNB's defenses and entered judgment for Toyota in the amount of $24,425.52 plus six percent interest from January 7, 1976 to the date of the court's order and $24,330.75 plus six percent from February 17, 1976, to the date of the order, plus costs.
Letters of credit have been commonly used in commercial transactions for centuries.*fn3 A letter of credit is essentially a promise by the "issuer," (commonly a bank) to the "beneficiary," (usually a seller of goods) to extend credit on behalf of the beneficiary's customer, (usually a buyer of goods).*fn4 A credit arrangement between a bank and a seller need not state that it is a letter of credit before the ...