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Nature of Suit Code: 140
Nature of Suit: Negotiable Instruments
Cause of Action: 

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ROBERTL, HO.!OOKER 

CT.ERK 

UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT 

UNITED STATES COURTHOUSE 

DENVER, COLORADO 80294 

May 25, 1990 

TO ALL RECIPIENTS OF THE CAPTIONED OPINION 

Re: 88-1813, Ward Petroleum v. FDIC 

(Lowez: docket: CIV-87-259-A,) 

Attached is a new page 1 to be substituted for page 1 in the 

original opinion which was sent to you on May 21, 1990. 

RLH:oac 

Enclosure 

Sincerely, 

ROBER . HOEC~R · .... 

1 r , .. Jltuif\ . ~~~ By: atrick Fisher 

hief Deputy Clerk 

( 303) 844--3167 

FIS 564-3167 

Appellate Case: 88-1813 Document: 010110560519 Date Filed: 05/25/1990 Page: 1
PUBLISH 

UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT 

WARD PETROLEUM CORPORATION, ) 

) 

Plaintiff-Appellant, ) 

) 

V • ) 

) 

FEDERAL DEPOSIT INSURANCE CORPORA-) 

TION, as Receiver for the FIRST ) 

NATIONAL BANK AND TRUST COMPANY ) 

OF OKLAHOMA CITY, N.A.; FEDERAL ) 

DEPOSIT INSURANCE CORPORATION, as ) 

Insurer of deposits at FIRST ) 

NATIONAL BANK AND TRUST COMPANY ) 

OF OKLAHOMA CITY, N.A.; CONTIN- ) 

ENTAL ILLINOIS NATIONAL BANK & ) 

TRUST COMPANY OF CHICAGO, N.A., ) 

) 

Defendants-Appellees. ) 

MAY 21189'CO 

ROBE1,:r L .. .a.oEcJ@R 

Cf@rir 

No. 88-1813 

Appeal from the United States District Court · for the Western District of Oklahoma 

(D.C. No. CIV-87-259-A) 

J. Randall Robinson (Martha L. Marshall with him on the briefs) of 

Musser, Bunch, Robinson & Hirsch, Oklahoma City, Oklahoma, for 

Plaintiff-Appellant. 

Pamela s. Anderson (Theodore Q. Eliot and Olivers. Howard with 

her on the brief) of Gable & Gotwals, Tulsa, Oklahoma, for 

Defendant-Appellee Federal Deposit Insurance Corporation. 

Mack J. Morgan III of Crowe & Dunlevy, Oklahoma City, Oklahoma, 

for Defendant-Appellee Continental Illinois National Bank and 

Trust Company of Chicago, N.A. 

Before LOGAN, BARRETT, and EBEL, Circuit Judges. 

LOGAN, Circuit Judge. 

Appellate Case: 88-1813 Document: 010110560519 Date Filed: 05/25/1990 Page: 2
PUBLISH 

UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT 

WARD PETROLEUM CORPORATION, ) 

) 

Plaintiff-Appellant, ) 

) 

V • ) 

) 

FEDERAL DEPOSIT INSURANCE CORPORA-) 

TION, as Receiver for the FIRST ) 

NATIONAL BANK AND TRUST COMPANY ) 

OF OKLAHOMA CITY, N.A.; FEDERAL ) 

DEPOSIT INSURANCE CORPORATION, as ) 

Insurer of deposits at FIRST ) 

NATIONAL BANK AND TRUST COMPANY ) 

OF OKLAHOMA CITY, N.A.; CONTIN- ) 

ENTAL ILLINOIS NATIONAL BANK & ) 

TRUST COMPANY OF CHICAGO, N.A., ) 

) 

Defendants-Appellees. ) 

FI LED 

Uoited Scares Court of Appeals 

Tenth Cirrui! 

MAY 21 1990 

:ROBERT L. HOECKER 

Clerk 

No. 88-1813 

Appeal from the United States District Court 

for the Western District of Oklahoma 

(D.C. No. CIV-87-259-A) 

Brinda White of Linn & Helms, Oklahoma City, Oklahoma, (J. Randall 

Robinson and Martha L. Marshall of Musser, Bunch, Robinson & 

Hirsch, Oklahoma City, Oklahoma, on the briefs) for PlaintiffAppellant. 

Pamela S. Anderson (Theodore Q. Eliot and Oliver S. Howard with 

her on the brief) of Gable & Gotwals, Tulsa, Oklahoma, for 

Defendant-Appellee Federal Deposit Insurance Corporation. 

Mack J. Morgan III of Crowe & Dunlevy, Oklahoma City, Oklahoma, 

for Defendant-Appellee Continental Illinois National Bank and 

Trust Company of Chicago, N.A. 

Before LOGAN, BARRETT, and EBEL, Circuit Judges. 

LOGAN, Circuit Judge. 

Appellate Case: 88-1813 Document: 010110560519 Date Filed: 05/25/1990 Page: 3
Plaintiff Ward Petroleum Corporation (Ward) appeals from 

summary judgment in favor of defendants Federal Deposit Insurance 

Corporation (FDIC), as receiver for First National Bank and Trust 

Company of Oklahoma City (First), and Continental Illinois 

National Bank and Trust Company of Chicago (Continental) on Ward's 

claim for wrongful dishonor of its draft under a standby letter of 

credit. 

Ward was the operator on various oil leases, and in this 

capacity sold crude oil to Oklahoma Refining Company (ORC). To 

insure payment for these sales Ward required ORC, as the account 

party, to obtain an irrevocable standby letter of credit with Ward 

as beneficiary from First, with Continental participating in the 

issue. The letter of credit provided that Ward could draw under 

it upon presentation of a sight draft accompanied by the 

following: 

"(l] A signed statement by an officer of Ward Petroleum 

Corporation that the amount currently drawn hereunder 

represents balance proper and legally past due to Ward 

Petroleum Corporation by Oklahoma Refining Company for 

sales of crude oil. 

(2) Invoices must reference purchase from one or more of 

the following Leases: [forty-nine specified leases and 

wells]." 

IR. tab 1, exhibit A. 

After ORC obtained the letter of credit, it filed a 

bankruptcy petition on or about September 14, 1984. In the 

following month, Ward made a series of draws under the credit, and 

on October 30, 1984, the day before expiration of the credit, Ward 

submitted a draft for $586,616.89, accompanied by a certification 

that the "amount drafted represents the now known balance proper 

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Appellate Case: 88-1813 Document: 010110560519 Date Filed: 05/25/1990 Page: 4
and legally past due for sales of crude oil to Oklahoma Refining 

Company by Ward Petroleum Corporation as described in the attached 

invoice." I R. tab 1, exhibit B, at 1. The attached invoice 

listed only leases specified in the letter of credit and contained 

the following statement: "This invoice is for the amount due Ward 

Petroleum Corporation for the purchase of production from the 

following wells by Oklahoma Refining Company ... that was held 

in suspense trust accounts as of September 14, 1984." Id. at 3 

(emphasis added). First did not honor this draft, contending that 

"[t]he documents . indicate on their face that the amount 

drawn does not 'represent balance proper and legally past 

due to Ward Petroleum Corpora~ion by Oklahoma Refining Company for 

sales of crude oil.'" Id. at 7. 

Ward sued the FDIC, as receiver of First, and Continental for 

wrongul dishonor of the draw and fraudulent inducement, and for 

deposit insurance from the FDIC as insurer of First. All parties 

moved for summary judgment, and the district court granted summary 

judgment against Ward on all claims. This appeal addresses only 

the wrongful dishonor claim. 1 

I 

First's dishonor of Ward's draft was wrongful only if the 

draft complied with the terms of the letter of credit. See Arbest 

Constr. Co. v. First Nat'l Bank & Trust Co., 777 F.2d 581, 584 

1 Ward abandons its fraudulent inducement claim on appeal. The 

district court did not address Ward's claim for deposit insurance, 

because it is dependent upon success on the wrongful dishonor 

claim. Since we reverse the district court's summary judgment on 

the wrongful dishonor claim, on remand the district court should 

reconsider Ward's claim for deposit insurance. 

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Appellate Case: 88-1813 Document: 010110560519 Date Filed: 05/25/1990 Page: 5
(10th Cir. 1985) (Oklahoma law); Okla. Stat. Ann. tit. 12A, § 5-

114(1). In this regard, the issuer's duties are limited and 

straightforward. "An issuer must examine documents with care so 

as to ascertain that on their face they appear to comply with the 

terms of the credit .••. " Okla. Stat. Ann. tit. 12A, § 5-

109(2). "The duty of the issuing Bank is ministerial in nature, 

confined to checking the presented documents carefully against 

what the letter of credit requires." American Coleman Co. v. 

Intrawest Bank, 887 F.2d 1382, 1386 (10th Cir. 1989). 

In this case, a ministerial review of the letter of credit 

and documents presented thereunder reveals that, as required by 

the credit, Ward certified the amount of the draft as past due 

from ORC for sales of crude oil and the supporting invoice 

referred only to leases and wells set forth in the credit. 

Nonetheless, defendants argue, and the district court agreed, the 

statement in the invoice that the·amounts were held in suspense 

trust accounts contradicted Ward's certification that the amounts 

were past due to Ward, citing Int'l Chamber of Commerce, Pub. No. 

400, Uniform Customs and Practice for Documentary Credits art. 15 

(1983 rev.) ("Documents which appear on their face to be 

inconsistent with one another will be considered as not appearing 

on their face to be in accordance with the terms and conditions of 

the credit."); see also 2 J. White & R. Summers, Uniform 

Commercial Code§ 19-5, at 35-36 (3d ed. 1988) [hereinafter White 

and Summers on the UCC]. We are not so persuaded. 

The parties agree that proceeds from the sale of oil or gas 

are placed in suspense trust accounts when there is uncertainty as 

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Appellate Case: 88-1813 Document: 010110560519 Date Filed: 05/25/1990 Page: 6
to the person or entity entitled to receive the proceeds. Based 

upon this, the district court concluded that First was entitled to 

dishonor Ward's draft, because invoicing amounts held in suspense 

"at least raises serious questions concerning whether the amount 

certified was a 'balance proper and legally past due' to Ward as 

certified by Ward," IR. tab 68, at 8, apparently relying upon 

the standard set forth in Breathless Assocs. v. First Sav. & Loan 

Ass'n, 654 F. Supp. 832, 837 (N.D. Tex. 1986) ("A discrepancy 

..• should not warrant dishonor unless it reflects an increased 

likelihood of defective performance or fraud on the part of the 

beneficiary."), criticized in J. Dolan, The Law of Letters of 

Credit ,1 6.0~, at 86-5 (Supp. 1990). The error in this approach 

is that it violates the independence principle, which is the 

cornerstone of the commercial vitality of letters of credit. 

The independence of the letter of credit from the underlying 

commercial transaction facilitates payment under the credit upon a 

mere facial examination of documents; it thus makes the letter of 

credit a unique commercial device which assures prompt payment. 

See generally J. Dolan, The Law of Letters of Credit 1111 2. 01, 3. 07 

(1984) [hereinafter Letters of Credit]; 2 White and Summers on the 

UCC § 19-2, at 8. Moreover, it is often the existence of a 

dispute over the underlying transaction that prompts the 

beneficiary to draw on a standby letter of credit, because "[t]he 

letter of credit is an instrument designed to enable the 

beneficiary to collect money to which it believes itself entitled 

and to hold such sums while any disputes are pending." Andy 

Marine, Inc. v. Zidell, Inc., 812 F.2d 534, 537 (9th Cir. 1987); 

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Appellate Case: 88-1813 Document: 010110560519 Date Filed: 05/25/1990 Page: 7
see also Federal Deposit Ins. Corp. v. Liberty Nat'l Bank & Trust 

Co., 806 F.2d 961, 968 (10th Cir. 1986); Arbest, 777 F.2d at 585. 

Therefore, that there was uncertainty or a dispute as to whether 

Ward was actually entitled to the amounts held in suspense is 

irrelevant to First's obligation under the letter of credit. 

"When proper documents are presented, the issuer must honor the 

draft, even though the underlying contract has been breached." 

Okla. Stat. Ann. tit. 12A, § 5-114 Okla. comment 1. First must 

take Ward's certification that it was entitled to the amounts held 

in suspense at face value. See Liberty Nat'l, 806 F.2d at 969; 

Letters of Credit~ 1.07(2]. 

Defendants also argue that ORC had an obligation to 

. distribute proceeds to the various interest owners in the wells 

Ward operated, and the invoice reference to suspense accounts was 

evidence that Ward was attempting to collect amounts to which only 

the interest owners ·were entitled. Ward replies that it acted as 

agent for the interest owners in acquiring the letter of credit to 

assure payment in the event ORC defaulted in its obligation to 

distribute proceeds, and that its demand on behalf of the interest 

holders is standard practice. In considering its duty to pay 

under the demand on the credit, First must ignore these arguments, 

as must we, because they concern the underlying transaction, not 

the face of the documents; thus they violate the independence 

principle. Issuers cannot look to the underlying transaction to 

supplement or interpret the terms of the letter of credit. See 

Andy Marine, 812 F.2d at 537; Pringle-Associated Mortgage Corp. v. 

Southern Nat'l Bank, 571 F.2d 871, 874 (5th Cir. 1978). Moreover, 

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Appellate Case: 88-1813 Document: 010110560519 Date Filed: 05/25/1990 Page: 8
issuers need not be familiar with trade practices or usage in 

order to resolve such disputes. See Marino Indus. Corp. v. Chase 

Manhattan Bank, 686 F.2d 112, 115 (2d Cir. 1982); Okla Stat. Ann. 

tito 12A, § 5-109(l)(c). 

The corrollary to the beneficiary's right to payment only 

upon strict compliance with the terms of the letter of credit is 

that the letter of credit must explicitly set forth all 

preconditions for payment. Marino Indus., 686 F.2d at 115. "The 

duties of a bank under a letter of credit are created by the 

document itself, the bank being deprived of any discretion not 

granted therein." Dulien Steel Prods., Inc. v. Bankers Trust Co., 

298 F.2d 836, 840 (2d Cir. 1962). In the case at bar, the letter 

of credit did not speak to whether Ward could draw for amounts 

held in suspense; therefore, First must presume that it could. 

Cf. East Girard Sav. Ass'n v. Citizens Nat'l Bank & Trust Co., 593 

F.2d 598, 602-03 (5th Cir. 1979) (parties have option of making 

actual default on underlying contract an express term of credit); 

Okla. Stat. Ann. tit. 12A, § 5-109(1) (same). 

The district court also accepted the defendants' argument 

that the course of dealing or course of performance between Ward 

and First regarding amounts held in suspense indicated that First 

was justified in dishonoring Ward's draft. But we will not allow 

an issuer to look to a course of dealing or performance to justify 

dishonor of a facially conforming demand. To do so would inject a 

complex litigable issue into every wrongful dishonor case. 

Although the letter of credit is often loosely referred to as a 

contract between the issuer and the beneficiary, "the relationship 

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between the issuer and the beneficiary is statutory, not 

contractual." Arbest, 777 F.2d at 583. 

"Letters of credit evolved as a mercantile specialty 

entirely separate from common law contract concepts and 

they must still be viewed as entities unto themselves ••.• 

[A]ttempts to avoid payment premised on 

extrinsic considerations--contrary to the instruments' 

formal documentary nature--tend to compromise their 

chief virtue of predictable reliability as a payment 

mechanism." 

Voest-Alpine Int'l Corp. v. Chase Manhattan Bank, 707 F.2d 680, 

682 (2d Cir. 1983). When a letter of credit is unambiguous on its 

face, courts should resolve questions of wrongful honor and 

dishonor as a matter of law, without resort to factual inquiries 

such as course of dealing or performance. See Delta Brands, Inc. 

v. MBank Dallas, N.A., 719 S.W.2d 355, 360 (Tex. Ct. App. 1986); 2 

White and Summers on the UCC § 19-5, at 39 n.60; cf. Okla. Stat. 

Ann. tit. 12A, § 2-208(2) (express terms of agreement should be 

construed as consistent with course of dealing and performance, if 

possible; if not, express terms control). 

II 

The FDIC argues that First was entitled to dishonor Ward's 

draft because the certification that the amounts held in suspense 

were past due to Ward was fraudulent. There is an exception to 

the independence principle for cases of fraud. See Okla. Stat. 

Ann. tit. 12A, § 5-114(2); 2 White and Summers on the UCC § 19-7, 

at 59. But this ·exception must be narrowly construed or it will 

swallow up the rule. Roman Ceramics Corp. v. Peoples Nat'l Bank, 

714 F.2d 1207, 1212 (3d Cir. 1983). Consequently, Ward's 

certification was fraudulent only if its claim to the funds held 

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in suspense was not even colorable or had absolutely no basis in 

fact. See Andy Marine, 812 F.2d at 538; Itek Corp. v. First Nat'l 

Bank, 730 F.2d 19, 25 (1st Cir. 1984); Roman Ceramics, 714 F.2d at 

1214. 

Whether Ward had a good faith claim to the funds held in 

suspense appears to present a factual question which cannot be 

resolved on summary judgment. See Banque Paribas v. Hamilton 

Indus. Int'l, Inc., 767 F.2d 380, 385 (7th Cir. 1985); VoestAlpine, 707 F.2d at 686. Also, a problem exists here in that in a 

suit for wrongful dishonor, fraud is an affirmative defense which 

the issuer must plead and prove, Roman Ceramics, 714 F.2d at 1214; 

see Okla. Stat. Ann. tit. 12, § 2008(C) (9); Fed. R. Civ. P. 8(c), 

and neither the FDIC nor Continental raised fraud as a defense in 

their answers. The record does not reveal whether the parties 

otherwise addressed this defense before the district court. 

Nonetheless, on remand the district court may allow defendants to 

amend their pleadings if "justice so requires." Fed. R. Civ. P. 

15(a); see City of Columbia v. Paul N. Howard Co., 707 F.2d 338, 

341 (8th Cir.), cert. denied, 464 U.S. 893 (1983); 6 C. Wright, 

A. Miller & M. Kane, Federal Practice and Procedure§ 1489, at 

698-99 (2d ed. 1990). 

REVERSED AND REMANDED. 

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