No. 83-263 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1984 

SHERWOOD & ROBERTS, INC. , 

Plaintiff/Respondenki 

FIRST SECURITY BANK OF MISSOULA, 

Defendant-Third Party Plaintiff 

and Appellant, 

PROSPECT ASSOCIATES, INC., CHARLES W. ISALY, 

ISALY, THOANAS H. SCHIMKE, MARY 

, DAVID A. SCHIMKE, and TAMARA R. 

SCIIIMKE , 

Third Party Defendants an& Co-Appellants. 

APPEAL FROM: District Court of the Fourth Judicial District, 

In and for the County of Missoula, 

The Honorable James B. Wheelis, Judge presiding. 

COUiJSEL OF RECORD: 

For Appellants: 

Mulroney, Delaney & Scott; Dexter L. Delaney argued 

for First Security Bank, Missoula, Montana 

Donald Snavely argued for Prospect Associates, 

Missoula, Montana 

For Respondent: 

Garlington, Lohn & Robinson; George D. Goodrich argued, 

Missoula, Montana 

Submitted: January 16, 1984 

Decided: May 9, 1984 

Filed: . . .,, , , ; ' , 

r!: ..s . . .' "f 

Clerk 
Mr. Justice John C. Sheehy delivered the Opinion of the 

Court. 

The principle issue we determine in this case is that an 

instrument issued by a bank entitled "letter of credit," and 

containing language that it is a letter of credit must be 

enforced as a letter of credit, and not as an instrument of 

conditional guaranty. 

First Security Bank of Missoula appeals from a summary 

judgment against it entered by the District Court, Fourth 

Judicial District, Missoula County, holding that the Bank was 

liable according to the terms of a letter of credit issued in 

favor of Sherwood & Roberts, Tnc. 

Third party defendants, Prospect Associates, Inc., have 

appealed from an interlocutory order of the District Court 

denying Prospect's motion to intervene in the case. 

The procedure in the District Court is somewhat complex. 

Three actions have been filed in the District Court, all 

involving the fins-ncing of construction for Prospect 

Subdivision, on the west side of Missoula. 

In July, 1980, Sherwood & Roberts, Inc. (Sherwood) a 

Washington corporation, agreed to lend Prospect Associates, 

Inc. (Prospect) $826,500 to finance construction of a 

subdivision in the Grant Creek area near Missoula. Sherwood 

agreed to disburse loan proceeds to Prospect according to a 

budget, attached to the commitment letter, specifying the 

amounts of the total proceeds allocable to specific purposes, 

including payments of SID's, taxes and development costs. 

The commitment letter provided that the disbursements would 

be made in 30 day increments to reimburse Prospect for costs, 

but not to exceed the budgeted a.mounts. 
As part of the security for the loan from Sherwood, 

Prospect was required to obtain a $100,000 letter of credit 

with Sherwood as beneficiary. First Security Bank issued the 

document at the request of Prospect. The parties dispute 

authorship of the instrument. We set forth here the terms of 

the instrument, which was typed on the letterhead of the 

Bank. 

"IRREVOCABLE 

COMMERCIAL LETTER OF CREDIT 

Letter of Credit #85 

Sherwood & Roberts Inc. 

2806 Garfield 

Missoula, MT 59801 

Re: Prospect Associates, Inc. 

2806 Garfield, Suite D 

Missoula, Montana. 59801 

Gentlemen: 

At the request and for the account of Prospect 

Associates, Inc., of Missoula, Montana, First 

Security Bank of Missoula of Missoula, Montana, 

hereby guarantees the availability of funds in the 

amount of $100,000.00 for the purpose of securing 

Prospect Associates, Inc.'s, performance of its 

loan agreement with Sherwood & Roberts Inc., as 

well as its performance of that certain Mortgage 

and Promissory Note payable to Sherwood & Roberts 

Inc. 

This letter of credit shall expire on midnight on 

the 15th day of July, 1982. This letter of credit 

shall be exercisable by Sherwood & Roberts Inc. 

only upon the unremedied default by Prospect 

Associates, Inc. in its performance of any of the 

following documents; that certain loan application 

agreement, loan commitment letter, promissory note, 

or mortgage, which documents evidence that certain 

loan transaction dated July 15, 1980 wherein 

Sherwood & Roberts Inc. is named as lender and 

mortgagee and Prospect Associates, Inc. is named as 

mortgagor and borrower. 

FIRST SECURITY BANK OF MISSOULA 
By /s/ Duane G. Scheeler 

Duane G. Scheeler, President" 

In the fall of 1980 various subcontractor bills, tax 

payments and interest payments went unpaid. Consequently 

construction of the subdivision was halted preventing 

completion of the subdivision and the sale of lots. The 

resulting loss of revenue led to Prospect's failure to make 

the payments required by the loan agreement and promissory 

note. 

Prospect alleges, and filed in the District Court 

aff j-davits supporting its allegations, that this chain of 

events was triggered by Sherwood's failure to disburse loan 

funds on schedule as required by the agreement. It alleges 

that Sherwood decided to pull out of the western Montana real 

estate financing market midway in the disbursement process 

and unjustifiably refused to honor Prospect's proper request 

for disbursements. Prospect contends that had it received 

the requested loan proceeds, it would have been able to 

perform its obl-igations under the various loan agreements. 

After demanding payment, Sherwood filed a mortgage 

foreclosure action against Prospect and a separate action 

against the Rank to collect the face amount of the letter of 

credit. 

In the bank action, First Security asserted that the 

document was not in fact a letter of credit, but was a 

conditional instrument of guaranty. Bank submitted evidence 

that the parties intended the instrument to be an instrument 

of guaranty. Sherwood's evidence was to the contrary. 

The Rank and Prospect also claimed that Prospect's 

nonperformance was caused by Sherwood's nonperformance and 

was therefore not a default. Thus they argued the condition 
for payment was not met and Sherwood could not recover on the 

letter of credit. First Security and Prospect have filed 

affidavits that the parties intended by use of the phrase 

"unremedied default" that the note would be payable only if 

Sherwood had fulfilled all of its obligations and Prospect 

then failed to perform. They emphasize that the term 

"default" was used rather than simply "nonperformance." 

Prospect, already defendants in the mortgage foreclosure 

action brought by Sherwood, moved in the bank action to 

intervene, or for consolidation of the foreclosure action 

with the letter of credit action. Both motions were denied. 

Thereafter, the Bank filed against Prospect as a third party 

defendant. Sherwood moved for summary judgment on the letter 

of credit in the bank action. After a hearing on the motion 

for summary judgment, the District Court issued a order 

granting the same. In the order, the court stated that the 

letter of credit issued by the Bank was a valid letter of 

credit under section 30-5-102 (1) (c) , MCA. In addition, the 

court found that the condition necessary for Sherwood to 

collect on the letter of credit was Prospect's unremedied 

default on the promissory note. The court concluded that 

mere nonpayment by Prospect of the promissory note 

constituted "unremedied default," regardless of whether 

Sherwood caused it. The court thus found the Bank liable for 

the face amount of the letter plus interest to Sherwood. 

The District Court certified the summary judgment 

against the Bank as one proper for appeal under Rule 54(b), 

M.R.Civ.P. The third party action between the Bank and 

Prospect is still pending in the District Court. 

I. 
If the instrument issued by the Bank is a letter of 

credit, the Bank must honor a proper demand for payment of 

$100,000 under the instrument regardless of whether the 

documents conform to the underlying contract between the 

customer (Prospect) and the beneficiary (Sherwood). Section 

30-5-114, MCA. If the instrument is a guaranty, what 

d.ifference in legal effect the Bank could hope to gain 

thereby is not clear. It would depend on whether the 

guaranty is absolute. 

". . . Where the contract promise of the guarantor 

is absolute--that is, subject to no condition 

except the default of the principal debtor--or 

where the promise has become absolute by the 

occurrence of the named conditions, the guarantor 

is obligated to pay the debt of the principal 

debtor. In such a situation, the creditor may 

maintain an action against the guarantor 

imrned.iately upon default of the debtor . . . and 

without first having proceeded against the 

debtor.. . . The question as to whether the debtor 

or a.ny part thereof is collectible from the debtor 

does not effect the liability of the guarantor, the 

latter being unconditionally bound to satisfy the 

obligation.. . . " 38 Arn.Jur.2d 1116 Guaranty, S 

110. 

And see General Finance Company v. Powell (1943), 114 Mont. 

473, 138 P.2d 255. 

A guaranty is to be deemed unconditional unless its 

terms import some condition precedent to the liability of the 

guarantor. Section 28-11-107, MCA. Generally a guaranty is 

conditional when by its terms it requires the creditor to 

pursue first and unsuccessfully the principal debtor. 38 

Arn.Jur.2d 1118 Guaranty, cS 113. 

The Bank contends in this case that the instrument is a 

conditional guaranty, the condition being that before the 

Bank is liable there should be an "unremedied default" of 

Prospect, which requires the determination of a factual 

dispute before its liability can arise, and that it was the 
intention of the parties that such condition existed before 

the Bank was liable in this case. The Bank submitted to the 

District Court affidavits from its attorney and its president 

stating the i-ntention of the Bank was to that effect, and the 

Bank contends that an issue of material fact existed before 

the District Court which should have prevented the entry of a 

summary judgment. 

We hold that the instrument before us is indeed a letter 

of credit issued by the Bank. We are literally compelled to 

such holding by the provisions of the Uniform Commercial Code 

defining a letter of credit: 

"30-5-102. Scope. (1) This chapter applies: 

"(a) to a credit issued by a bank if the credit 

requires a documentary draft or a documentary 

demand for payment; and 

" (b) to a credit issued by a person other than a 

bank if the credit requires that the draft or 

demand for payment be accompanied by a document of 

title; and 

added. 1 

Here the instrument, within its terms, calls itself a 

letter of credit, and it is conspicuous1.y entitled 

"Irrevocable Commercial Letter of Credit." It is referred to 

as "Letter of Credit tf85." Thus, the instrument is within 

the definition of section 30-5-102 (1) (c) , above. 

Regardless of its conformance to the statutory 

definition of a letter of credit, the Bank contends that the 

instrument requires the factual determination of an 

"unremedied default," and that one must examine evidence 

outside the instrument to make that determination. It relies 

on the holding in Republic National Rank of Dallas v. 
Northwest National Bank of Fort Worth (Tex. 1978), 578 S.W.2d 

109, and Wichita Eagle and Beacon Publishing Company, Inc. v. 

Pacific National Bank of San Francisco (9th Cir. 1974), 493 

In Republic, above, the instrument before the Texas 

court was entitled "Irrevocable Letter of Credit," wherein 

the bank agreed to honor a draft for $50,000 if certain 

promissory notes by a third party were not paid according to 

their terms. The notes were not paid, and the beneficiary of 

the letter of credit made demand upon the bank for payment of 

the $50,000. The bank took the position tha.t the instrument 

was not a letter of credit, but rather a guaranty, and that 

since the issuance of guaranties are ultra vires with respect 

to banks, the bank could not be held on the guaranty. The 

Texas court analyzed the modern trend of banks to issue 

standby letters of credit, and noted that a standby credit is 

used primarily to finance or secure an underlying intangible 

or monetary indebtedness undertaken by the account party 

"such as a promissory note." 578 S.W.2d at 113. The court 

held that the instrument was indeed a letter of credit, 

without mentioning that the instrument was entitled 

"Irrevocable Letter of Credit." 

In Wichita Eagle, above, the Court of Appeals for the 

Ninth Circuit had before it an instrument which in its text 

referred to itself as a "letter of credit." The instrument 

was given to secure performance of a lease. The Ninth 

Circuit noted that: 

". . . The instrument neither evidences an intent 

that payment be made merely on presentation on a 

draft nor specifies the documents required for 

termination or payment. To the contrary, it 

requires the actual existence in fact of most of 

the conditions specified: for termination or 

reduction, that the city have refused a building 
permit; for payment, that the lessee have failed to 

perform the terms of the lease and have failed to 

correct that default, in addition to an affidavit 

of notice." 493 F.2d at 1286. 

The Ninth Circuit Court recognized that letters of 

credit for commercial uses have expanded far beyond the 

international sales context in which they originally 

developed, but found that here the instrument strayed too far 

from the basic purposes of a letter of credit, namely to 

provide a means of assuring payment cheaply by eliminating 

the need for the issuer to police the underlying contract. 

The Ninth Circuit Court went on to say that if the letter of 

credit concept is to have value in new situations, "the 

instrument must be tightly drawn to strictly and clearly 

limit the responsibility of the issuer." 59a- F.2d at 1287. 

493 

The Ninth Circuit Court held that the instrument was in fact 

an instrument of guaranty, which meant that the bank would be 

able to interpose defenses to the instrument that were 

available to the lessee. If we considered the instrument in 

the case at bar to be an obligation of guaranty, the same 

result would obtain: the obligation of the guarantor is not 

to exceed that of the principal. Section 28-11-201, MCA. 

Treating the instrument as an instrument of guaranty, 

the Ninth Circuit Court went on in Wichita Eagle to assess 

the liquidated damages provided in the guaranty against the 

issuing bank. 

We distinguish Wichita Eagle from the case at bar. In 

Wichita Eagle, as the Ninth Circuit Court noted, the 

instrument strayed too far from the basic purpose of a letter 

of credit. In the case at bar, the obligation of the 

principal, Prospect, is easily discernible. The letter of 

credit is exercised by Sherwood upon the unremedied default 
Sy Prospect in its performance of any of the following 

documents: that certain loan application agreement, loan 

commitment letter, promissory note, or mortgage. The 

instruments are set out in the disjunctive; that is, 

nonperformance of any one of the instruments triggers the 

liability on the letter of credit. The promissory note is 

one of those instruments. Since Prospect defaulted in 

payment on the promissory note the liability of First 

Security Bank was triggered without more. 

Moreover, Wichita Eagle, above, has to be read in the 

light of a later case decided by the Court of Appeals for the 

Ninth Circuit, First Empire Bank v. Federal Deposit Insurance 

Corporation (1978), 572 F.2d 1361. One of the judges who 

participated in Wichita Eagle also participated in First 

Empire Bank. In First Empire Rank, the United States 

National Bank of San Diego had become insolvent, and F.D.I.C. 

had become the receiver of the bank's insolvent estate. 

First Empire Bank had made loans to customers of U.S.N.B. 

relying on standby 1ett.ers of credit issued by U.S.N.B. The 

receiver refused to honor the letters of credit when 

presented by First Empire Bank, contending that the 

instruments were conditional letters of guaranty rather than. 

letters of credit. The contention of F.D.I.C. as receiver of 

the insolvent estate was that since the claims had not 

ripened. on the date of insolvency, the receiver was not bound 

to honor them. The Ninth Circuit Court held that the 

instrument before it was indeed a letter of credit because it 

"creates an absolute, independent obligation and payment must 

be made upon presentation of the proper documents regardless 

of any dispute between the buyer and seller concerning their 

agreement, such as a dispute over the quality of the goods 
delivered." 572 F.2d at 1366. The Ninth Circuit Court 

commented on the nature of letters of credit in modern usage, 

and the comment is worth repeating in part: 

"In recent years instruments operating as letters 

of credit (in that they operate to create an 

absolute obligation upon presentation of specified 

documents) and termed 'standby' to distinguish them 

from the traditional letters of credit have been 

used as security devices in a variety of contexts 

outside the traditional area of the international 

sale of goods. They have been used to insure 

construction loans, as quasi--performance bonds, to 

support the issuance of commercial paper and to 

secure the performance of purely monetary 

obligations such a.s those involved in this case. 

(Citing authority.) Standby letters are convenient 

and inexpensive and are being adapted to many uses 

at this time. (Citing authority.) The principle 

difference between the traditional letter of credit 

and these newer standby letters is that 'whereas in 

the classical setting, the letter of credit 

contemplates payment upon performance, " the 

standby". . . "contemplates payment upon failure to 

perform."' (Citing authority.) 

"This has created an awkward situation for nationa.1 

banks, since the standby letter of credit possesses 

more of the characteristics of a guaranty and 

national banks are not authorized to enter into 

guarantees [sic] . (Citing authority.) No 

contention is made here, however, that issuance of 

the letters of credit in question was ultra 

vires.. . ." 

In Boise Cascade Corporation v. First Security Bank 

(1979), 183 Mont. 378, 389, 600 P.2d 173, 180, we refused to 

give letter of credit status to an instrument that did not 

evince a clear intention on the part of the hank to be 

primarily liable to the beneficiary upon compliance with the 

terms of the instrument, irrespective of the underlying 

agreements between the beneficiary and the account party. In 

this case, the instrument is the opposite: it evinces a 

clear intention on the part of First Security Bank to he 

primarily liable upon the nonperformance by the account party 

of the instruments named, particularly the payments on the 

promissory note. The Bank here could determine its liability 
by merely examining the instruments named, and it was not 

necessary for the Bank to undertake a factual determination 

as to performance of the underlying instruments. 

Although every letter of credit appears to function as a. 

guaranty, there are important distinctions. Republic 

National Bank, 578 S.W.2d at 114. A true guaranty creates a 

secondary obligation whereby the guarantor promises to answer 

for the debt of another and may be called upon to perform 

once the primary obligor has failed to perform. Since a 

guaranty is ancillary to the underlying contract, a dispute 

as to the rights and obligations of a guarantor can only be 

resolved by a factual determination of the rights and 

obligations of the parties of the underlying contract. A 

bank that issues a credit however creates a primary 

obligation as principal, not as an agent of the account 

party. On the issuance of a credit the bank assumes a 

primary obligation independent of the underlying contract. 

From either of two aspects therefore, (I) the instrument 

is by its terms clearly a letter of credit, or (2) the 

instrument conspicuousl-y states that it is a letter of credit 

and is conspicuously so entitled, the District Court was 

correct in granting summary judgment thereon. 

Prospect assigns error in the order of the District 

Court denying Prospect's motion to intervene in the letter of 

credit action brought by Sherwood against the Bank. Prospect 

claims error in the refusal of the District Court to 

consolidate the letter of credit action with the foreclosure 

action, and with a separate action brought by one John Warner 

against Prospect and Sherwood & Roberts, Inc., for the 
foreclosure of a mechanic's lien relating to the Prospect 

subdivision. 

No statute gives Prospect the right to intervene in the 

letter of credit action. Under Rule 24(a), M.R.Civ.P., an 

applicant who claims an interest relating to the transaction 

which is the subject of the action must be allowed to 

intervene. Under Rule 24(b), M.R.Civ.P., he may be permitted 

to intervene when the applicant's claim or defense and the 

main action have a question of law or fact in common. In the 

letter of credit action however, though Prospect was bound by 

the underlying instruments, Prospect was not a party to the 

letter of credit. The obligation of the letter of credit was 

owed by the Bank to Sherwood upon the occurrence of the event 

triggering liability. The Bank's liability arose without 

regard to the underlying instruments, and therefore Prospect 

had no claim or defense which would have a common question of 

law or fact to the main action in the suit involving the 

letter of credit. The District Court was clearly correct in 

refusing Prospect the right to intervene in the letter of 

credit action. 

In like manner, the letter of credit action could not be 

consolidated with the other two actions for the same reason; 

there was no common question of law or fact between the 

letter of credit action and the actions between the other 

parties respecting the independent obligation on the letter 

of credit. Here again the District Court was correct in 

denying consolidation. 

The matter does not end there however. In the letter of 

credit action, the Bank exercised its right of third party 

practice under Rule 14 (a) , M. R.Civ.P., to file a third party 

complaint against Prospect for indemnity on Sherwood's claim 
against the Bank. However Prospect, as a third party 

defendant in the letter of credit action, has the right to 

"assert any claim against the plaintiff arising out of the 

transaction or occurrence that is the subject matter of the 

plaintiff's claim against the third-party plaintiff." Rule 

14(a). The occurrence which is the subject matter of the 

letter of credit action is the default in the payment of the 

promissory note by Prospect to Sherwood. Therefore, under 

Rule 14(a), Prospect has the right in the letter of credit 

action now, as a third party defendant, to assert its cla-ims 

against Sherwood in that action. The sentence which gives 

Prospect that right was inserted in the federal counterpart 

to our rule, Rule 14(a), F.R.Civ.P., by virtue of the 1946 

amendment . The committee noted with respect to that 

amendment: 

". . . A new sentence has also been inserted giving 

the third party defendant the right to assert 

directly against the original plaintiff any claim 

arising out of the transaction or occurrence that 

is the subject matter of the plaintiff's claim 

against the third party plaintiff. This permits 

all claims arising out of the same transaction or 

occurrence to be heard and determined in the same 

action. See Atlantic Coast Line R. Co. v. United 

States Fidelity & Guaranty Co. (MD Ga 1943), 52 

F.Supp. 177.. . ." 1 Moore's Federal Practice 

Rules Pamphlet (1984) at 138. 

The purpose of the enabling provision in Rule 14(a), 

M.R.Civ.P., is to provide a fina.1 determination in one suit 

of all the issues that might otherwise take several suits. 

The indemnity a-ction by the Bank against Prospect as 

third party defendant is still pending in the District Court. 

On remand Prospect should be given opportunity to make such 

claims against plaintiff Sherwood as Prospect has the right 

to make under Rule 14(a), M.R.Civ.P. 
We also point out to the District Court, in the exercise 

of its discretion if called on, the provision of Rule 62(h), 

M.R.Civ.P. as follows: 

"Rule 62(h). Stay of judgment upon multiple 

claims. When a court has ordered final judgment on 

some but not all the claims presented in the action 

under the conditions stated in Rule 54 (b) , the 

court may stay enforcement of that judgment until 

the entering of a subsequent judgment or judgments 

and may prescribe such conditions as are necessary 

to secure the benefit thereof to the party in whose 

favor the judgment is entered." 

The federal counterpart of Rule 62 (h) is identical. In 

a fairly recent case, Curtiss-Wright Corporation v. General 

Electric Company (1980), 446 U.S. 1, 100 S.Ct. 1460, 64 

L.Ed.2d 1, the Supreme Court noted that Rule 62(h) allows the 

court certifying a judgment under Rule 54(b) to stay its 

enforcement until the entering of a subsequent judgment or 

judgments. It also considered the language of the Rule that 

the court may "prescribe such conditions as are necessary to 

secure the benefit thereof to the party in whose favor the 

judgment is entered." Under this rule, the Supreme Court 

assumed that it would be within the power of the federal 

district court to protect all parties by having the losing 

party deposit the amount of judgment with the court, 

directing the clerk to purchase high yield government 

obligations and to hold them pending the outcome of the case. 

In this way, valid considerations of economic duress and 

solvency, which do not effect the judicial considerations 

involved in a Rule 54 (b) determination, can be provided for 

without preventing Rule 54(b) certification. 

The order of the District Court granting summary 

judgment in favor of Sherwood & Roberts is affirmed. The 
order of the District Court denying consolidation of the 

cases, and denying Prospect's motion to intervene is also 

affirmed. This cause is remanded for further proceedings 

consistent with this opinion. Costs of appeal shall be borne 

as incurred by the respective parties without recourse to 

other parties. 

We Concur: 

74& d, pda LJeM 

Chief Jhstice 

Justices 
I concur and dissent as follows: 

I fully concur in the holding by the majority that 

affirms the district court's entry of summary judgment in 

favor of Sherwood and Roberts, Inc. I dissent from the 

balance of the majority opinion. 

The majority goes forward to decide procedural issues 

which I do not believe are before this Court. 

The only appealable order in this case is the summary 

iudgment entered by the trial court in favor of Sherwood and 

Roberts, Inc. and against the First Security Bank of 

Missoula. The only order certified for finality under Rule 

54 (b) M.R.Civ.P., is that summary judgment. A notice of 

appeal was filed by First Security Bank and by Prospect 

appealing the granting of summary judgment against the First 

Security Bank. No issues are raised on appeal except the 

issue of whether the trial court erred in granting summary 

judgment on the "letter of credit". 

That portion of the majority opinion which deals with 

the procedural aspects of the case is entirely gratuitous. 

I would simply affirm the granting of summary judgment. 
Mr. Justice Fred J. Weber, dissenting: 

The letter of credit issued by First Security specifies 

that payment becomes due only upon unremedied default. I 

disagree with the majority's conclusion that under the facts 

of this case, mere non-payment by Prospect constitutes 

"unremedied default" and automatically triggers liability on 

the letter of credit. 

Section 30-5-114(1), MCA provides that an issuer must 

honor a demand for payment which complies with the terms of 

the relevant credit regardless of whether goods or documents 

conform to the underlying contract between the customer and 

beneficiary. Strict compliance with the terms of the letter 

of credit is required. Courtaulds North American, Inc. v. 

North Carolina National Bank (4th Cir. 1975), 53.8 F.2d 802, 

805-06; White & Summers, Uniform Commercial Code S18-6 (2d 

ed. 1980). 

As applied to the letter of credit involved here, 

section 30-5-114(1) creates a significant contradiction 

because the triggering term of the letter of credit requires 

occurrence of an event in the underlying transaction. Thus, 

a determination that a demand for payment complies with the 

terms of the letter of credit requires a legal and factual 

analysis of the underlying transaction to ascertain whether 

the triggering event of "unremedied default" has occurred. 

The majority has assumed that the triggering terms of the 

letter of credit are nonpayment by Prospect and notice of 

default to the Bank, even though the letter itself requires 

payment only upon unremedied default by Prospect. The letter 

of credit says "unremedied default," not "nonperformance." 

The independent nature of the letter of credit means 

that liability of the issuer is determined by the terms of 

the letter of credit rather than according to the obligations 
and rights arising from the underlying transaction. However, 

the issuer and beneficiary may agree upon the triggering 

terms of the letter of credit and thus ma.y agree, as here, 

that the triggering event will be an occurrence in the 

underlying transaction which will require some element of 

performance by the beneficiary. This does not mean that 

these prerequisites to payment arise from the underlying 

transaction; rather, for purposes of the letter of credit, 

they arise from the choice of terms and terminology employed 

in the letter of credit by the issuer and beneficiary. Here, 

a consideration of Sherwood's alleged a-ctivity which caused 

nonperformance arises from the language of the letter of 

credit itself, rather than from the separate underlying 

transaction. Regardless of whether this document is a letter 

of credit rather than a guaranty, the issuer has available 

the defense of noncompliance with the terms of the letter of 

credit. 

Whether failure to pay is "default" is a question which 

can be answered only by further reference to the underlying 

agreements, which are specifically listed in the letter of 

credit, and principles of law. The majority has ignored this 

issue and has concluded that nonpayment is necessarily 

default, which is contrary to Montana law. 

The term "unremedied default" necessarily implies 

unexcused nonperformance. Where the act of a creditor 

prevents the debtor from performing, performance is excused. 

Section 28-1-1301, MCA provides in part: 

"When delay or failure to perform or offer to 

perform excused. The want of perforFa.nce of an 

obligation or of an offer of performance, in whole 

or in part, or any delay therein is excused by the 

following causes, to the extent to which they 

operate : 

" (1) when such performance or offer is prevented or 

delayed by the act of the creditor or by the 
operation of law, even though there may have been a 

stipulation that this shall not be an 

excuse . . . .'I 

This statute excuses Prospect's nonperformance if Sherwood in 

fact caused the failure of Prospect to perform. 

In Pioneer Engineering Works, Inc. v. McConnell (1949) , 

123 Mont. 1-71, 212 P.2d 641, the Court held that payment was 

excused under this statute where nonpayment was caused by 

actions of the other party to the contract. There, the 

failure of the seller of gravel-crushing equipment to provide 

conforming equipment prevented buyer from meeting obligations 

on a contract to provide gravel to the government for 

building Fort Peck Dam with a resulting inability to pay for 

the equipment. The Court held that seller could not recover 

where nonpayment was caused by seller's breach. 123 Mont. at 

192, 212 P.2d at 652. In Smith v. Gunniss (1943), 115 Mont. 

362, 144 P.2d 186, the Court stated that "'he who prevents a 

thing from being done shall never be permitted to avail 

himself of the non-performance which he himself has 

occasioned.'" 115 Mont. at 379, quoting 12 Am.Jur. section 

329. See also Gramrn v. Insurance Unlimited (1963), 141 Mont. 

456, 462, 378 P.2d 662, 665. 

Where performance is excused there is no default. An 

unjustified refusal by Sherwood to disburse loan monies which 

caused nonperformance by Prospect would excuse nonperformance 

under section 28-1-1301, MCA. This raises a factual question 

as to whether Sherwood caused Prospect's nonperformance. 

The majority suggests that Prospect's promissory note 

creates a.n obligation independent of Sherwood ' s performance 

in the underlying tra.nsaction. However, the promissory note 

expressly incorporates by reference the terms of Sherwood's 

commitment letter. The promissory note states that it is 

given for an actual loan of $826,500 (which Sherwood 
allegedly refused to fully disburse). It also states that it 

shall be construed with the other documents relating to the 

transaction and in accordance with Montana law. The 

promissory note therefore does not create an independent 

obligation of Prospect to pay. 

It is true that the commercial usability of letters of 

credit should be protected. Careful inquiry is required to 

determine if the standard of "unremedied default" has been 

met. This requires a careful and factual determination. It 

is true that in the ordinary letter of credit situation, the 

court will not consider the completion of the underlying 

transaction. However, that rule is not applicable to the 

present situation where the parties have required that the 

bank make payment only where an "unremedied default" occurs. 

The meaning of "unremedied default" in this case is a 

question of fact to be resolved at trial, not on summary 

judgment. 

I would reverse the conclusion of the District Court 

that nonperformance is necessarily "unremedied default", and 

would remand the case for trial to determine what was 

intended by "unremedied default" and whether Sherwood's 

nonperformsance caused and. therefore excused Prospect's 

nonperformance. 

I concur in the foregoing dissent. / 

f 

Jus ticei"