Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-89-02278/USCOURTS-ca10-89-02278-0/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 

---

. FILED 

Umced &aces Court of Appeals 

Tenth Cfrcuit 

UNITED STATES COURT OP APPEALS 

FOR THE TENTH CIRCUIT 

MAY S • 1991 

ROBERT L. HOECKER 

Clerk 

EDDINS-WALCHER COMPANY, 

Plaintiff-Appellee, 

v. 

THE FIRST NATIONAL BANK OF ARTESIA, a 

national banking corporation, 

Defendant-Appellant. 

) 

) 

) 

) 

) No. 89-2278 

) (D.C. No. 87-754-JC) 

) (D. N.M.) 

) 

) 

) 

ORDER AND JUDGMENT* 

Before ANDERSON and TACHA, Circuit Judges, and KANE,** District 

Judge. 

**Honorable John L. 

District Court for 

designation. 

Kane, Senior District Judge, United States 

the District of Colorado, sitting by 

After examining the briefs and appellate record, this panel 

has determined unanimously that oral argument would not materially 

assist the determination of this appeal. ~ Ped. R. App. P. 

34(a); 10th Cir. R. 34.1.9. 

submitted without oral argument. 

* 

The case is therefore ordered 

This order and judgment has no precedential value and shall 

not be cited, or used by any court within the Tenth Circuit, 

except for purposes of establishing the doctrines of the law of 

the case, res judicata, or collateral estoppal. 10th Cir. R. 

36.3. 

Appellate Case: 89-2278 Document: 010110106485 Date Filed: 05/06/1991 Page: 1 
This is an action seeking recovery under a letter of credit. 

Plaintiff Eddins-Walcher Company (Eddins) sued defendant First 

National Bank of Artesia (FNBA) seeking payment for supplies it 

provided contractor Yucca Drilling Company at a construction site 

in Ruidoso, New Mexico. After a bench trial, the district court 

ruled in favor of Eddins and awarded $22,599.71 in damages and 

$7,133.35 in attorney's fees. We affirm. 

Background 

Eddins is a fuel and petroleum products supplier. Beginning 

in 1982, the company supplied materials to Yucca Drilling on an 

"open account" basis. During the course of their relationship, 

Eddins provided Yucca Drilling with petroleum products for use in 

several construction projects. In late 1983, however, Yucca 

Drilling fell behind in making payments on the account. Beginning 

in early 1984, Eddins' president made various attempts to collect 

the outstanding balance. 

In July 1984, Yucca Drilling obtained a public works contract 

to drill water wells for the village of Ruidoso, New Mexico. 

Pursuant to requirements set forth under New Mexico statute, Yucca 

Drilling obtained a labor and materials bond for the job from 

Allied Fidelity Surety Company. See N.M. Stat. Ann. S 13-4-18(A) 

(1978). At the request of Allied Fidelity and Yucca Drilling, 

FNBA then issued an irrevocable letter of credit providing 

indemnity in the event the surety was forced to make payment under 

the bond. Yucca Drilling was a customer of FNBA. 

2 

Appellate Case: 89-2278 Document: 010110106485 Date Filed: 05/06/1991 Page: 2 
At the time the letter of credit was issued, Yucca Drilling 

owed substantial amounts on several outstanding loans with FNBA. 

The bank believed those loans could be repaid with the infusion of 

capital from the Ruidoso project. Therefore, it issued the letter 

of credit to Allied Fidelity for $366,813.00. Thie amount 

represented Yucca Drilling's bid on the project. FNBA also opened 

a line of credit for Yucca Drilling in that same amount. 

Performance on the project began in August 1984 and was 

substantially completed in February 1985. 

During the course of the Ruidoso project, Eddins supplied 

Yucca Drilling approximately $45,000 worth of materials. In turn, 

between August and December 1984, Yucca Drilling made four 

payments on the Eddins open account totaling $45,000. These 

payments were applied to the oldest outstanding balance at the 

time. Due to the prior balance on the account, however, Yucca 

Drilling still owed Eddins $22,599.71 at the completion of the 

Ruidoso project. In August 1985, Eddins initiated steps to make a 

claim for this amount to Allied Fidelity under the labor and 

materials bond. 

On August 19, 1985, Allied Fidelity made a demand on FNBA to 

comply with the letter of credit in the amount of $366,813.00. On 

August 29, 1985, the president of the bank responded. His letter 

read, in part, "The First National Bank of Artesia will not send 

any funds on the anticipation of claims being filed. If there has 

been a claim filed, please send a copy of the claim or claims and 

we will handle them on a claim-by-claim basis." See Addendum to 

3 

Appellate Case: 89-2278 Document: 010110106485 Date Filed: 05/06/1991 Page: 3 
Appellant's Brief In Chief at 54. Allied Fidelity agreed to this 

arrangement. 

In January 1986, Eddins began communicating directly with 

FNBA regarding the claim. Supporting documents were filed 

initially with Allied Fidelity in September 1985 and with the bank 

in January 1986. From January through May 1986, Eddins made 

various attempts to have the claim paid. On May 29, 1986, FNBA 

sent Eddins a letter requesting further information. Sometime 

after June 13, 1986, FNBA denied Eddins' claim on the basis that 

suit was not filed within one year of completion of the project as 

is required under New Mexico statute. See N.M. Stat. Ann. 

S 13-4-19(C) (1978)(also known as the Little Miller Act). Allied 

Fidelity went into receivership in March 1986. Yucca Drilling 

filed for bankruptcy later that same year. This lawsuit was filed 

on June 27, 1987. 

In the district court, FNBA contended it stepped into the 

shoes of the surety company and, therefore, could assert the 

one-year suit limitation as a defense. Further, it argued the 

bank had no obligation under the bond because neither the surety 

nor the contractor ever sustained a loss on this claim. In the 

alternative, FNBA argued that 

Eddins' accounting methods 

appropriate. 

even if the claim was timely, 

were improper, making denial 

Eddins argued that FNBA's actions following Allied Fidelity's 

demand on the letter of credit took the claim outside the 

restrictions of the Little Miller Act and constituted a novation 

of the letter of credit contract. Eddins asserted it was a 

4 

Appellate Case: 89-2278 Document: 010110106485 Date Filed: 05/06/1991 Page: 4 
third-party beneficiary to the letter of credit. The district 

court agreed with Eddins and awarded the full amount of the claim. 

The court also awarded attorney's fees. 

Discussion 

When the myriad of contractual relationships and factual 

underpinnings in this case are distilled, we are left with the one 

question which is central to our disposition. That is, whether 

Eddins may recover under the irrevocable letter of credit the bank 

issued to Allied Fidelity. This issue involves mixed questions of 

law and fact. See Supre v. Ricketts, 792 F.2d 958, 961 (10th Cir. 

1986). "[W]hen a finding on a question of law is made by the 

district court upon the presentation of evidence, the finding 

becomes properly a mixed question of law and fact." Mullan v. 

Quickie Aircraft Corp., 797 F.2d 845, 850 (10th Cir. 1986). 

In this case, the standard for determining when a third party 

may recover under a letter of credit is essentially legal, and, 

therefore, calls for de novo review. See Supre, 792 F.2d at 961. 

Any pure findings of fact, however, are subject to the clearly 

erroneous standard. See Anderson v. City of Bessemer City, 470 

U.S. 564, 573 (1985); Fed. R. Civ. P. 52(a). 

The letter of credit is a unique device in the law of 

commercial transactions. The "standby" credit at issue here is 

designed to act as a back up against customer default on both 

monetary and nonmonetary obligations. See 2 J. White & 

R. Summers, Handbook of the Law Under the Uniform Commercial Code, 

Practitioner's Edition, S 19-1, at 4 (3d ed. 1989)(hereinafter 

5 

Appellate Case: 89-2278 Document: 010110106485 Date Filed: 05/06/1991 Page: 5 
l 

White & Summers). When procured for a construction project, the 

surety's standby letter of credit usually arises in the following 

context: 

Suppose owner insists on a conventional ... bond 

from an actual surety. [Contractor] procures one, but 

now surety wants protection that (contractor] will make 

surety whole, if owner calls the bond for [contractor's] 

performance failure. So [contractor] again asks his 

bank to write a standby letter. [Contractor] is still 

the customer and his bank still the issuer, but now the 

standby letter's beneficiary is surety. And now bank 

engages to pay beneficiary-surety upon his presentment 

of a sight draft and a statement certifying that 

surety's bond stands to be called by owner (who has no 

rights under the letter of credit itself). 

Id. at 5. (Footnote omitted.)! 

The various contractual relationships involved in the 

construction project are legally distinct for purposes of 

evaluating obligations under the letter of credit. See Arbest 

Constr. Co. v. First Nat'l Bank & Trust Co., 777 F.2d 581, 583 

(10th Cir. 1985). "Thus, ... the [credit] issuer need not be 

concerned about the underlying contract or its terms. The two are 

separate and distinct agreements." Wood v. R.R. Donnelley & Sons 

Co., 888 F.2d 313, 318 (3rd Cir. 1989). The letter of credit 

contemplates an absolutely independent obligation on the part of 

the issuer. American Ins. Ass'n v. Clarke, 656 F. Supp. 404, 412 

(D.D.C. 1987)(citing First Empire Bank-New York v. FDIC, 572 F.2d 

1361, 1366 (9th Cir.), cert. denied, 439 U.S. 919 (1978)), aff'd, 

865 F.2d 278 (1988). To this extent, the issuer is obligated to 

comply with a proper demand under the letter of credit even if 

1 In this case, the scenario is altered slightly, as 

is one for labor and materials. The potential claimants 

bond, therefore, are contractor's suppliers, rather 

owner. 

6 

the bond 

under the 

than the 

Appellate Case: 89-2278 Document: 010110106485 Date Filed: 05/06/1991 Page: 6 
both the customer and the beneficiary are insolvent, leaving the 

issuer without recourse for reimbursement. See Wood, 888 F.2d at 

318. The letter of credit is unique in that it is premised on the 

concept of "pay now, argue later." See Eakin v. Continental Ill. 

Nat'l Bank & Trust Co., 875 F.2d 114, 116 (7th Cir. 1989). 

Therefore, to the extent Allied Fidelity made a proper demand 

on the letter of credit, the bank was obligated to pay, regardless 

of its conclusions as to the merit of the claim. 2 See Arbest, 777 

F.2d at 584 ("(T]he general rule is that the issuer may not 

consider problems with the underlying transaction when deciding 

whether to honor a demand.")(footnote omitted); 

N.M. Stat. Ann. S 55-5-114(1) (1978)(regarding obligation to honor 

demand on letter of credit). 

Moreover, because the letter of credit obligation is 

independent of the contractual relationship underlying the 

construction bond, the provisions of the Little Miller Act and the 

labor and materials bond are of no consequence in determining 

whether Eddins can make a claim as a beneficiary. The letter of 

credit contract is absolutely independent from the other contract 

documents underlying this action. See White & Summers, S 19-2, at 

8 (bank's obligation is independent of the beneficiary's 

performance on the underlying contract). Because the provisions 

of the Little Miller Act are not controlling, its one-year suit 

2 Here, the letter of credit obligated FNBA to pay Allied 

Fidelity $366,813.00 if, in the surety's judgment, a claim had or 

would be made. The bank was obliged to pay the entire amount, 

regardless of the amount of the claim. See Addendum to 

Appellant's Brief in Chief at 12 (letter of credit). 

7 

Appellate Case: 89-2278 Document: 010110106485 Date Filed: 05/06/1991 Page: 7 
limitation does not apply. Thus, the district court did not err 

in ruling Eddins made a timely claim. 

This assessment does not, however, end our inquiry. We still 

must address the question whether Eddins is a proper beneficiary 

of the letter of credit. In this regard, the determinative 

question is whether FNBA and Allied Fidelity's actions following 

the bank's wrongful dishonor altered the terms of the letter of 

credit, thus making Eddins a new beneficiary. 

issue below. 

We address this 

Normally, disappointed subcontractors cannot be third-party 

beneficiaries to a letter of credit absent proper assignment or 

transfer. See N.M. Stat. Ann. S 55-5-116(1) (1978)(right to draw 

under letter of credit cannot be transferred or assigned unless 

the credit expressly allows it); Arbest, 777 F.2d at 584-85; see 

also Ahmed v. National Bank of Pak., 572 F. Supp. 550, 553 

(S.D.N.Y. 1983)(holding that beneficiary's agents could not be 

third-party beneficiaries under the letter of credit); M. Golodetz 

Export Corp. v. Credit Lyonnais, 493 F. Supp. 480, 487 (C.D. Cal. 

1980)(holding that seller of goods to beneficiary could not 

maintain action on credit). But~ Midstates Excavating, Inc. v. 

Farmers & Merchants Bank & Trust, 410 N.W.2d 190, 194-95 (S.D. 

1987)(holding that third parties may enforce letter of credit). 3 

Here, there was no proper assignment or transfer. Therefore, the 

3 Letter of credit authorities have criticized the Midstates' 

opinion, finding it a "significant departure from letter of 

credit principles." J. Dolan, The Law of Letters of Credit, 

S 1.05[1], at 1-20 through 1-21 (2d ed. 1991). 

8 

Appellate Case: 89-2278 Document: 010110106485 Date Filed: 05/06/1991 Page: 8 
district court erred when it determined Eddins could be a 

third-party beneficiary to this letter of credit. 

This error does not, however, require reversal. FNBA never 

raised this issue in the district court. The first time the bank 

cited the Arbest decision, which holds that third parties 

generally cannot be beneficiaries to a letter of credit, was in 

its reply brief before this court. We will not consider arguments 

raised for the first time in the litigation in a reply brief on 

appeal where they were not raised in the district court. See 

Hirschfeld v. New Mexico Corrections Dep't, 916 F.2d 572, 578 

(10th Cir. 1990); United States v. Jenkins, 904 F.2d 549, 554 n.3 

(10th Cir. 1990). 

Accordingly, the judgment of the United States District Court 

for the District of New Mexico is AFFIRMED. 

9 

Entered for the Court 

Stephen H. Anderson 

Circuit Judge 

Appellate Case: 89-2278 Document: 010110106485 Date Filed: 05/06/1991 Page: 9