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ROMAN CERAMICS CORP. v. PEOPLES NATL. BANK

June 30, 1981

ROMAN CERAMICS CORPORATION, Plaintiff,
v.
PEOPLES NATIONAL BANK, Defendant



The opinion of the court was delivered by: HERMAN

I. INTRODUCTION

Plaintiff initiated this action on April 15, 1980 when it filed a complaint alleging that Defendant owes it money pursuant to an irrevocable letter of credit. Plaintiff is the Roman Ceramics Corporation (hereafter referred to as "Roman"), a Delaware corporation with principal place of business in Illinois, and Defendant is Peoples National Bank (hereafter referred to as "Peoples"), a Pennsylvania banking association with principal place of business in Pennsylvania. On May 30, 1980, Peoples filed its answer and counterclaim. Roman responded to the counterclaim by filing its reply on June 16, 1980. We held a non-jury trial on February 23-24, 1981.

 II. BACKGROUND

 On February 28, 1979, Peoples opened an irrevocable letter of credit for $ 65,000 conditioned upon the failure of Michter's Distillery, Inc. (hereafter referred to as "Michter's") to pay the beneficiary, Roman, for certain ceramic decanters. The letter of credit required two sets of documents to be presented with any drafts drawing on the credit: 1.) Roman's invoices to Michter's and 2.) a signed statement from Roman that Michter's had not paid Roman in full for the goods described in those invoices. Credit under the letter was available only for decanters invoiced and shipped to Michter's prior to September 1, 1979.

 On June 26, 1979, Michter's sold its assets to T.D. Veru, Inc. (hereafter referred to as "Veru"). Michter's changed its name to Distillery Road, Inc. and permission was granted to Veru to use the name Michter's Distillery. Peoples was assured by Veru that all obligations of Michter's incurred before July 26, 1979 would be paid by Veru.

 By early October 1979, Roman had delivered to Michter's goods costing more than $ 278,000. Mr. Theodore D. Veru, representing Veru, and Mr. Harold Roman, representing Roman, met on October 9, 1979 to work out differences between the two companies and to arrange payment for the decanters. Also present at the meeting was Mr. John V. Bower, controller of Veru. Subsequent to the meeting, Veru wired a certain sum of money to Roman that the latter allegedly allocated among various debts of Veru. On October 19, 1979, Roman presented a draft on the letter of credit to Peoples seeking payment for five invoices: Nos. 2915 (Aug. 14, 1979), 2952, 2953, 2954, and 2956 (Aug. 20, 1979).

 This action concerns the alleged failure of Michter's (through Veru) to pay Roman for the five shipments of decanters in August 1979. Based on that alleged failure, Roman drew on the letter of credit from Peoples, but Peoples refused to honor the draft. Peoples claims that it had notice that Roman had already been paid for the goods represented by the aforesaid invoices.

  On August 27, 1980, we denied Roman's motion for summary judgment because we lacked certain material facts. Roman Ceramics Corporation v. Peoples National Bank, C.A. No. 80-409 (M.D.Pa., Aug. 27, 1980) (hereafter referred to as "Roman I "). In that decision we ruled on a number of important issues. First, this matter is governed by the Uniform Commercial Code of Pennsylvania, 12A P.S. §§ 1-101 et seq. *fn1" Second, the documents submitted by Roman to Peoples with the draft on the letter of credit satisfied the requirements and conditions of the letter on their face. Third, the letter of credit covered the invoices representing shipments made in August 1979, despite the acquisition of Michter's assets by Veru. Finally, we construed one of Peoples' defenses (double payment) as raising the defense of fraud pursuant to 12A P.S. § 5-114. *fn2" Only that possibility of fraud could permit us now, and Peoples then, to look beyond the documents presented by Roman and to examine the underlying transactions. See Roman I, supra, slip op. at 10-11 (and cases cited therein).

 We adopted the definition of fraud under section 5-114 as espoused by the Pennsylvania Supreme Court in the nationally leading decision of Intraworld Industries, Inc. v. Girard Trust Bank, 461 Pa. 343, 336 A.2d 316 (1975). We ruled:

 
The circumstances that will justify a dishonor or an injunction against honor "must be narrowly limited to situations of fraud in which the wrongdoing of the beneficiary has so vitiated the entire transaction that the legitimate purposes of the independence of the issuer's obligation would no longer be served." 461 Pa. at 359 (336 A.2d 316). The court analyzed a leading case on what conduct justifies an injunction against honor, Sztejn v. J. Henry Schroder Banking Corporation, 177 Misc. 719, 31 N.Y.S.2d 631 (1941). The New York court ruled that when the beneficiary has intentionally shipped no goods at all, the documentation was not genuine and the predicate of the independence of the issuer's engagement was removed. The Pennsylvania Supreme Court concluded that an injunction is proper only if the beneficiary has "no bona fide claim to payment under the underlying (contract)." 461 Pa. at 361, 336 A.2d 316.

 Roman I, supra, slip op. at 12. *fn3" We ordered the parties to augment the record and file renewed motions if they chose.

 We reviewed a second motion for summary judgment on November 25, 1980. Roman Ceramics Corporation v. Peoples National Bank, C.A. No. 80-409 (M.D.Pa., Nov. 25, 1980) (as amended Jan. 9, 1981) (hereafter referred to as "Roman II "). We found controverted material facts and ordered the parties to prepare for a hearing to resolve those contested factual issues. In Roman II, we analyzed a legal commentator's recent arguments supporting an alternative definition of fraud under section 5-114. Symons, Letters of Credit: Fraud, Good Faith and the Basis for Injunctive Relief, 54 Tulane L.Rev. 338 (1980).

 Professor Symons suggests that fraud is limited to cases in which the beneficiary has intentionally misrepresented the state of affairs when he presents the draft and accompanying documents with his demand for payment under a letter of credit. Id. at 356, cited in Roman II, supra, slip op. at 4. The commentator explained the requisite elements of his suggested intentional fraud as follows:

 
In general, the type of conduct that subjects one to liability for deceit consists of 1) a false representation 2) fraudulently made 3) with the intention of inducing another to rely thereon. It is to be noted that only misrepresentations that are fraudulent are included; in other words, they must contain what the law designates as scienter. It is essential to emphasize that for one's actions to be fraudulent, scienter must be present. Scienter is not a question of motive or of intention to harm, but is rather a question of intention to mislead or to deceive; it is a question of the movant's state of mind.

 Symons, supra, 54 Tulane L.Rev. at 345.

 On February 23-24, 1981, we held a non-jury trial on the two remaining controverted issues of fact. In Roman II, we had specified for the parties which factual matters were unresolved. We concluded that the remaining issues were "the circumstances surrounding Veru's payment to Roman (especially the time of payment question) and the Bank's notice thereof...." Roman II, supra, slip op. at 12. This opinion shall constitute our findings of fact and conclusions of law drawn from the testimony and exhibits adduced at the hearing, from the uncontroverted documents and affidavits filed prior to trial, and from our inferences derived from that evidence.

 III. DISCUSSION

 A. The Meeting and Agreement

 On October 9, 1979, Mr. Roman, Mr. Veru, and Mr. Bower met to review the balances owed to Roman by Veru and to attempt to settle the debt. They also discussed existing and future damaged, returned decanters. (Bower, 27). *fn4" The meeting lasted some time between 45 minutes (N.T. 14) and two hours. (N.T. 76.)

 Although the three participants agree that Mr. Bower was in and out of the meeting periodically (N.T. 14, 86; Bower 26), they differ in their accounts of the role he played. Mr. Roman insisted that he did not know who Mr. Bower was and did not conduct any of the negotiations with him. (N.T. 14, 49, 50.) Mr. Veru testified that Mr. Bower worked out the details of the subsequent agreement with Mr. Roman and that he, Mr. Veru, merely approved the final agreement. (N.T. 92.) He also repeatedly remarked that Mr. Roman and Mr. Bower worked out the numbers and accounts that were due and owing to Roman. (N.T. 86, 97, 109.) Mr. Bower referred to instances in which he spoke directly with Mr. Roman about Veru's need to shuffle its finances to pay for the decanters. (Bower 46, 47, 51.) Mr. Veru testified that the surprise nature of the meeting left him unprepared. He left it to Mr. Bower and the other accounting people to get ready for the meeting and his recollection of precise details is therefore uncertain. (N.T. 85.)

 Plaintiff's counsel has seized upon a single remark of Mr. Veru, taken out of context, to claim that he and Mr. Roman were the only persons present during most of the meeting. Post-Trial Brief of Plaintiff, p.3 (filed April 13, 1981). Counsel refers to the last two lines of page 109 of the transcript as supporting his position. The full text of the relevant colloquy between Mr. Veru and Plaintiff's counsel follows:

 
Q. What list did John Bower have?
 
A. John had worked out I said to you before with Harold Roman, a list of things that we agreed to pay. And they paid them.
 
Q. Do you have personal knowledge of that?
 
A. I saw the list in the office, I don't remember the dates. When you asked me what was on there, but there was a list that John had and John said: Here's the money that's due up to now. And this is what I'm going to pay less certain whatever credits are involved and that's it. And I said: Fine, John.
 
Q. That's what John Bower said to you?
 
A. Right.
 
Q. Do you have any knowledge he said that to Mr. Roman?
 
A. Yes, after he and Mr. Roman agreed what was to be paid.
 
Q. Were you present when that took place, the whole time?
 
A. I was in there I think Harold and I were the only ones that were in there ...

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