Lumbermans Acceptance Co. v. Security Pacific National Bank

Opinion

CHRISTIAN, J.

Lumbermans Mortgage Company, Lumbermans Acceptance Company and Ian T. Allison appeal from a summary judgment determining that Security Pacific National Bank is entitled to recover

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payments made on a $700,000 irrevocable letter of credit which Security Pacific had issued to Union Bank upon the application of Lumbermans Mortgage Company. Lumbermans Acceptance and Ian T. Allison were held liable as guarantors of the obligation of Lumbermans Mortgage.

The affidavits presented on the motion for summary judgment establish without conflict the following events. Lumbermans Mortgage Company was engaged in developing a real estate project called “San Jose Medical Arts Plaza.” Short term financing for construction of the project was provided by Union Bank. It was planned that after the project was completed the debt to Union Bank would be paid out of the proceeds of a long term loan to be made by Massachusetts Mutual Life Insurance Company. It was anticipated that this long term loan might not be sufficient to retire in full Lumbermans’ indebtedness to Union Bank. To cover this anticipated gap, Lumbermans obtained from Security Pacific an irrevocable letter of credit in favor of Union Bank payable “up to the aggregate sum of $700,000.00” upon presentation of Union Bank’s draft accompanied by Union Bank’s “signed statement that Lumberman’s Mortgage Company, 306 Mendocino Ave., Santa Rosa, CA 95404, on November 1, 1975, has not repaid the Union Bank the U.S. $700,000.00 gap construction financing loan on the San Jose Medical Arts Plaza.” The letter of credit was issued upon continuing guaranties executed by appellants Lumbermans Acceptance and Ian T. Allison.

After the project was completed, Massachusetts Mutual declined to issue a long term loan. Lumbermans informed Security Pacific of this development, stating the view that “the events required to implement the . . . letter of credit never transpired, and therefore this letter of credit should be declared null and void.” Security Pacific responded by letter that it felt obligated “to honor the Letter of Credit when it is presented for payment.”

By letter dated November 1, 1975, Union Bank presented the letter of credit for payment, certifying that Lumbermans had not “repaid the Union Bank the $700,000.00 gap construction financing loan on the San Jose Medical Arts Plaza.” On November 20, Security Pacific honored Union Bank’s draft and paid it $700,000 under the letter of credit.