Case Title: Security State Bank of Basin v. Basin Petroleum Services, Inc.,

Citation: 

Docket Number: 85-69

State: wyoming

Court: Wyoming Supreme Court

Date: 1986-02-06T00:00:00Z

Document:
Security State Bank of Basin v. Basin Petroleum Services, Inc.,1986 WY 36713 P.2d 1170Case Number: 85-69Decided: 02/06/1986Supreme Court of Wyoming
SECURITY STATE BANK OF 
BASIN, WYOMING, APPELLANT (DEFENDANT), 

 
 
v. 

 
 
BASIN PETROLEUM SERVICES, 
INC., A WYOMING CORPORATION, APPELLEE (PLAINTIFF).

 
 
Appeal from the District 
Court, Big HornCounty, John T. Dixon, 
J.

 
 
 
 
Representing 
Appellant:

George E. Powers, Jr. and 
Julie Nye Tiedeken of Godfrey & Sundahl, Cheyenne.

 
 
Representing 
Appellee:

Joseph E. Darrah, 
Powell.

 
 
Before THOMAS, C.J., and 
ROSE,* ROONEY,** BROWN and CARDINE, 
JJ.

* Retired November 1, 
1985.

 
 
** Retired November 30, 
1985.

 
 

ROONEY, 
Justice.

 
 

[¶1.]     Appellee Basin 
Petroleum Services, Inc. brought suit to recover on a letter of credit issued by 
appellant Security State Bank of Basin, Wyoming. This appeal is from a judgment 
in favor of appellee.

 
 

[¶2.]     We 
reverse.

 
 

[¶3.]     Appellant words the 
issues on appeal:

 
 
"1. Whether the Court 
erred as a matter of law in determining that Security State Bank of Basin was 
estopped to require strict compliance with the letter of 
credit.

 
 
"2. If the Court finds 
that the bank is estopped to require strict compliance because of its actions on 
previous purchase orders, whether it is then entitled to credits for payments 
made on previous purchase orders.

 
 
"3. Whether incidental 
damages should have been allowed and whether Security State Bank should have 
been given credit for machines sold and payments made by Round Bail [sic] Rail, 
Inc."

 
 

[¶4.]     On November 12, 1982, 
appellee entered into an agreement to manufacture hay baling equipment for Round 
Bale Rail, Inc. (RBRI). The agreement required RBRI to provide appellee with a 
letter of credit from a qualified banking institution guaranteeing payment for 
the equipment. In accordance with the agreement, RBRI obtained a letter of 
credit from appellant on November 18, 1982. The letter provided as 
follows:

 
 
"Please be advised that 
this irrevocable letter of credit # 005 is issued on behalf of Round Bale Rail, 
Inc. (hereinafter referred to as RBRI) doing business as Big Valley Interprises 
in the amount of $100,000. This letter of credit will guarantee payment on 
purchase orders submitted by RBRI to Basin Petroleum Services, Inc. (hereinafter 
referred to as Basin). Each purchase 
order should carry its own number and refer to this letter of credit dated 
November 18, 1982.

 
 
"For the letter of credit 
to be honored by Security Bank, we must have a copy of each purchase order 
submitted by RBRI to Basin prior to production commencing on any new 
machinery.

 
 
"If RBRI fails to pay 
Basin under the terms of their separate agreement dated September 12, 1982, then 
upon written request from Basin to Security Bank with reference to the purchase 
order not paid by RBRI, Security Bank will remit to Basin the amount of that 
purchase order.

 
 
"This letter of credit 
will expire at midnight on December 31, 1983, and shall cover any and all 
purchase orders up to a cumulative total not to exceed $100,000. "Security State 
Bank reserves the right to cancel this letter of credit at any time with written 
notice to RBRI, Basin Petroleum Services, Inc. and First National Bank of Powell 
at their mailing addresses. Such cancellation would not affect or be binding 
against purchase orders already received by Basin." (Emphasis 
added.)

 
 

[¶5.]     Over the next four 
months, appellee manufactured hay baling equipment for RBRI pursuant to four 
separate purchase orders. None of the purchase orders strictly complied with the 
requirements of the letter of credit. They did not refer to the letter of 
credit. No demand was made by appellee for payment under the letter of credit 
because appellant extended credit on four occasions directly to RBRI to pay for 
the equipment listed on the four purchase orders. Then, on June 30, 1983, 
appellant received a copy of a fifth purchase order dated May 3, 1983, and a 
demand for payment of the purchase price.

 
 

[¶6.]     Claiming that appellee 
had not complied with the requirements of the letter of credit in that a copy of 
the purchase order was not sent to appellant prior to commencement of production 
and that the copy of the purchase order which was furnished did not contain a 
reference to the letter of credit, appellant refused to honor appellee's demand, 
and, on July 1, 1983, appellant cancelled the letter of credit. Appellee brought 
suit to recover the $100,000 guaranteed by appellant in the letter of 
credit.

 
 

[¶7.]     The trial court found 
that the issuer of a letter of credit is entitled to demand strict compliance 
with the conditions stated therein and that none of the five purchase orders 
strictly complied with the requirements of the letter of credit. However, the 
trial court found that appellant had failed to object to the lack of compliance 
in the first four purchase orders, and it concluded that appellant should not 
now be entitled to insist on strict compliance in the fifth purchase order. It, 
therefore, held appellant to be estopped from demanding strict compliance with 
the terms of the letter of credit.

 
 

[¶8.]     Letters of credit are 
governed by Article 5 of the Uniform Commercial Code, § 34-21-101 et seq., W.S. 
1977. Section 34-21-514(a), W.S. 1977, provides in part:

 
 
"An issuer must honor a 
draft or demand for payment which complies with the terms of the relevant 
credit * * *." (Emphasis added.)

 
 

[¶9.]     A substantial number of 
courts have adopted the rule that strict compliance is required by the statute; 
e.g., Tosco Corporation v. Federal 
Deposit Insurance Corporation, 723 F.2d 1242 (6th Cir. 1983); Mount Prospect State Bank v. Marine 
Midland Bank, 121 Ill. App.3d 295, 76 Ill. Dec. 844, 459 N.E.2d 979 (1983). 
The rule is based on the belief that:

 
 
"`If courts deviate from 
the rule of strict compliance and insist in certain undefined situations that 
banks make payments notwithstanding the fact that the beneficiary failed to 
comply with the terms stipulated in the letter of credit, the certainty that 
makes this device so attractive and useful may well be undermined, with the 
result that banks may become reluctant to assume the additional risks of 
litigation.'" First National Bank of 
Council Bluffs v. Rosebud Housing Authority, 
Iowa, 291 N.W.2d 41, 45 (1980), quoting from Insurance Company of North America v. 
Heritage Bank, 595 F.2d 171, 176 (3rd Cir. 1979).

 
 

[¶10.]  Although strict compliance is the 
majority rule, at least two courts have taken the position that substantial or 
reasonable compliance is sufficient. First National Bank of Atlanta v. Wynne, 149 Ga. App. 811, 256 S.E.2d 383 (1979); First Arlington National Bank v. 
Stathis, 90 Ill. App.3d 802, 46 Ill.Dec. 175, 413 N.E.2d 1288 (1980). These courts rely on the proposition that the requirement of rigid 
adherence to the conditions of a letter of credit must be balanced against the 
need for reasonable flexibility in commercial transactions. First National Bank of Atlanta, 
supra.

 
 

[¶11.]  We agree with the majority of courts. To 
adopt a rule which becomes a vehicle for purely subjective judgments as to that 
which constitutes compliance would be inconsistent with the need to maintain a 
high level of predictability in commercial transactions. Requirements placed in 
a letter of credit by the parties must be taken to express the intent of the 
parties to anticipate compliance with them.

 
 

[¶12.]  The trial court made a factual finding 
that there was not strict compliance with the letter of credit in this case, but 
it then held that appellant was estopped to demand compliance with the 
requirements of the letter of credit. It based this holding on the fact that 
appellant raised no objection to the alleged lack of compliance throughout its 
course of dealings with appellee. The record further demonstrates that appellant 
was fully aware of the purchases made by RBRI from appellee and, in fact, 
independently extended credit to RBRI to facilitate payment for those purchases, 
and that despite this knowledge and involvement, appellant raised no objection 
to the fact that it did not receive copies of each purchase 
order.

 
 

[¶13.]  We have said that for estoppel to apply 
it must be shown: (1) that the party asserting estoppel lacked the knowledge of 
the facts; (2) that he was without means to discover them; (3) that he relied 
upon the actions of the parties sought to be charged; and (4) that he changed 
his position in reliance thereon. Roth v. 
First Security Bank of Rock Springs, Wyoming, Wyo., 684 P.2d 93, 96 (1984); 
Cheyenne Dodge, Inc. v. Reynolds and 
Reynolds Company, Wyo., 613 P.2d 1234 (1980).

 
 

[¶14.]  The facts here do not satisfy these 
elements and therefore are not sufficient to support the application of 
estoppel. Appellee was not without knowledge of the facts. Appellant and 
appellee possessed equal knowledge as to the requirements of the letter of 
credit. Both parties knew that payment pursuant to the letter of credit was 
conditioned on receipt by the bank of a copy of each purchase order. In 
addition, while appellee may have relied on what is perceived as appellant's 
acceptance of less than full compliance with the letter of credit, there is no 
evidence that it changed its position because of that reliance. Garlach v. Tuttle, Wyo., 705 P.2d 828 (1985). The trial court erred in 
finding appellant estopped from demanding 
compliance.

 
 

[¶15.]  Reversed.

 
 

CARDINE, Justice, dissenting, 
with whom ROSE, Justice, Retired, 
joins.

 
 

[¶16.]  After trial to the court, appellee, Basin 
Petroleum Services, Inc., was awarded judgment against Security State Bank of 
Basin upon its letter of credit in the amount of $100,000 plus interest, 
damages, and costs. The bank appeals from the judgment contending that it is not 
liable because there was not strict compliance with requirements and terms of 
the letter of credit.

 
 

[¶17.]  The letter of credit, dated November 18, 
1982, was provided at Basin's request. The letter guaranteed payment for hay 
machines manufactured by Basin and sold to Round Bale Rail, Inc. (RBRI), a 
corporation, which at the time was obtaining financing from the bank. RBRI was a 
recently formed corporation. Basin required this irrevocable letter of credit to 
insure payment for the machines sold to RBRI.

 
 

[¶18.]  As stated by the trial court in its 
decision letter:

 
 
"The Letter of Credit, by 
its terms, required that a copy of any purchase order must be supplied to the 
Defendant prior to Plaintiff's commencing any production and that the purchase 
order should carry its own number and refer to the Letter of Credit. The 
testimony revealed that there were five separate purchase orders, that Defendant 
maintained that it received copies of only the first two prior to production and 
did not receive a copy of the fifth one * * * until June 30, 1983 * * 
*."

 
 
The trial court found 
from the testimony that appellee had supplied the bank with an invoice and 
purchase order for the 25 hay balers involved in this case (the fifth purchase) 
which, in the judgment of the court, "satisfied this requirement [sales price] 
of the Letter of Credit."

 
 

[¶19.]  There were five separate purchases of 
machinery by RBRI from appellee. The bank admits that there was substantial 
compliance with the requirements of the letter of credit with respect to the 
first two purchases. The bank, its customer RBRI, and appellee were in personal 
contact with respect to the next two purchases, and the bank was aware of the 
purchases, the amount that would be invoiced for them, had loaned money to its 
customer RBRI, and did not require more of appellee in their dealings. The bank 
knew all there was to know about the transactions and would have been in no 
better position if it had insisted upon strict compliance with the terms of the 
letter of credit. Accordingly, the bank did not insist upon strict 
compliance.

 
 

[¶20.]  The fifth purchase, the one involved in 
this case, was pursuant to a purchase order and invoice, both of which were 
delivered to the bank on June 30, 1983. The next day the bank gave notice of 
revocation of the letter of credit.

 
 

[¶21.]  It is clear from the facts, and the court 
found after trial, that initially there was compliance with the terms of the 
letter of credit; that the parties continued doing business and the bank did not 
thereafter require compliance with respect to the next two purchases of 
machines; that, with respect to the fifth purchase, there was compliance with 
the letter of credit; and that the bank then attempted revocation. The trial 
court held:

 
 
"The Defendant in this 
instance is likewise estopped to rely on any failure to strictly comply with the 
terms of the Letter of Credit. A purchase order was submitted to Defendant prior 
to the cancelation of the Letter of Credit and the Plaintiff otherwise 
substantially complied with the terms of the Letter."

 
 
In support of its 
decision, the trial court quoted Schweibish v. Pontchartrain State Bank, 
La. App., 389 So. 2d 731, 737 (1980):

 
 
"It is well settled * * * 
that when a party with full knowledge of the facts has acted or conducted 
himself in a particular manner, he cannot afterward assume a position 
inconsistent with his previous behavior to the prejudice of one who has acted in 
reliance on such conduct.

 
 
"The defendant bank was 
well acquainted with the legal and commercial practice applicable to letters of 
credit, and it was entitled to demand strict compliance with the conditions 
stated in the letters of credit issued to plaintiff. Nevertheless it chose not 
to require strict compliance with these conditions so long as mere substantial 
[compliance] did not conflict with the bank's own interest. However, after 
completing two or three transactions involving issuance of credits for 
International Metals to fund a sale from plaintiff, the bank assumed a position 
totally inconsistent with its prior actions by insisting on strict compliance 
with the conditions of the credit. Whether defendant received no consideration 
or anticipated receiving no consideration, its previous course of action in 
demanding only substantial [compliance] with conditions of earlier letters of 
credit caused plaintiff to act in reliance on the anticipation that the bank 
would not suddently insist on exact and precise requirements with the conditions 
of the credit. While the bank can impose conditions in the credit and demand 
complete compliance with them, it cannot, in a series of dealings based upon 
credits, arbitrarily select those credits which must conform to the requirements 
therein stated and those which may be paid without complete compliance. If it 
chooses to demand complete compliance with the stated conditions at a later 
date, its future intent should and must be conveyed in time for the beneficiary 
to comply therewith." (Footnote omitted.)

 
 

[¶22.]  In this case the bank, with full 
knowledge of the facts and the requirements of its letter of credit, conducted 
business over a period of time with its customer and with appellee engaging in a 
course of conduct that was acted upon by appellee; and the bank cannot now 
assume a position inconsistent with its previous behavior to the prejudice of 
appellee. I agree with the trial court, who listened to the testimony and 
observed the witnesses, that the bank is estopped by its course of conduct from 
now demanding strict compliance with the terms of the letter of credit. I also 
agree with the trial court that there was substantial compliance and that 
judgment should be awarded to appellee.

 
 

[¶23.]  This court, in its majority opinion, 
recites all of the elements necessary to estoppel when it 
states:

 
 
"The record further 
demonstrates that appellant was fully aware of the purchases made by RBRI from 
appellee and, in fact, independently extended credit to RBRI to facilitate 
payment for those purchases, and that despite this knowledge and involvement, 
appellant raised no objection to the fact that it did not receive copies of each 
purchase order."

 
 

[¶24.]  This court then states that appellee does 
not meet the requirements of estoppel because "[a]ppellee was not without 
knowledge of the facts." On the contrary, appellee did not have knowledge of the 
fact that the bank, with full knowledge of the purchases, transactions, and 
financial condition of RBRI, would engage in a course of conduct in its doing 
business with appellee which indicated that strict compliance with the terms of 
its letter of credit was not required, that the bank would then suddenly, 
without notice or warning, adopt a totally inconsistent position, demand strict 
compliance, and attempt to revoke the irrevocable letter of credit. No one 
claims that appellee was aware of the fact that the bank would act in this 
manner. This is the reason that estoppel ought to properly apply in this 
case.

 
 

[¶25.]  I would affirm the decision of the trial 
court.