Thе two parties before us — Westates and Charter One — signed a “charter air service” contract. As the contract required, Charter One arranged for a bank to issue a $50,000 “standby” letter of credit in Wes-tates’ favor, a letter designed, in part, to make certain Westates would not suffer harm should Charter One fail to carry out its contractual obligations.
See generally Itek Corp. v. First National Bank of Boston,
Westates, the beneficiary of the letter of credit, would now like to “call” the letter, thereby obtaining the $50,000, which it hopes to keep, at least while the courts litigate the parties’ various “breach of contract” claims. The federal district court, however, has issued an injunction, forbidding Westates to call the letter of credit.
Westates appeals from the issuance of the injunction. It says that the law prohibits a court from enjoining a call on a stand
*1270
by letter of credit, at least in a typical case, where the beneficiary’s position in the underlying contract dispute is colorable and where the beneficiary can satisfy the terms that the letter of credit itself sets forth as conditions for its call.
See, e.g., Trans Meridian Trading, Inc. v. Empresa Nacional de Comercializacion de Insumos,
I. Background
We set forth several background circumstances so that the reader can see that this case (as far as the record here reveals) is one in whiсh commercial law normally would prohibit an injunction. That is to say, the underlying contract is a simple, typical commercial contract; Westates’ claim that Charter One broke the contract is at least “colorable;” and Westates seems able to satisfy the terms that the letter of credit itself sets forth as conditions for its call.
1. The contract. Westates provides airplanes and related services for charter flights. Charter One sells charter flights to travelers. In mid-1989 Westates and Charter One signed a contract under which Westates promised to provide planes and crews for Charter One’s new service between Providence, Rhode Island, and Atlantic City, New Jersey, and also (by later amendment to the contract) for its new service between Worcester, Massachusetts, and Atlantic City. The contract required Charter One to pay Westates each month a fee calculated on the basis of the number of hours flown, with a minimum fee of about $105,000 (based on 70 hours flown), which was increased to about $209,000 (150 hours flown) when the Worcester service was added. The contract contained a special “default” clause, which says,
upon any default by Charter One as defined in this agreement, Westates may immediately terminate all service.... Westates shall immediately notify Charter One of the default.... If the default is not cured by Charter One within tеn (10) days from the date of mailing the notice of default, Westates shall have the right to immediately declare Charter One’s default to be a material breach of this agreement and declare this agreement to be terminated without further notice to Charter One.
(Emphasis added.) The contract also required speedy transmission of each monthly payment. It said that late payment was “considered a default.”
2. The contract dispute. Each party now says that the other party broke this contract. The record reveals a dispute that began in August 1989, when the contract was less than one month old. Charter One’s president says that Westates’ owner called him and threatened to cancel the contract unless Charter One would pay a higher minimum fee. Charter One refused. Westates then sent Charter One a “ten day default” notice, under the contract’s special “default” provision. The “ten day notice” said that Westаtes would not provide planes for Charter One’s Worcester/Atlantic City service after September 4. Wes-tates, even before September 4, provided only one plane, rather than two planes (as the contract required), but Westates says *1271 that maintenance problems, not contract-cancellation efforts, were responsible.
Subsequently, Westates, apparently under pressure from Charter One, changed its mind abоut cancelling the contract. Charter One’s attorney wrote to Westates suggesting that “Westates reconsider its decision to cancel the contract and instead perform its obligations as required.” The letter adds:
Please advise the undersigned by close of business on Wednesday, August 30, 1989, whether Westates intends ... cancellation of the Worcester program. If we do not hear from [you] ... by that time, we will assume that Westates does not intend to аbide by its contract, and Charter One will take such measures as are necessary to protect its rights.
On August 30 a Westates attorney, in California, called Charter One’s attorney, in Washington, D.C. She says that she told Charter One that Westates indeed intended to abide by the contract and that it rescinded its cancellation. She did not call, however, until 3 p.m. California time, which was 6 p.m. Washington, D.C., time. Charter One then decided that it would not go through with the contract; аnd it wrote back to Westates that Westates’ call had come “too late” (apparently meaning that the call had arrived after “close of business”). The letter added that Charter One would therefore “reject your verbal offer to rescind cancellation of the Worcester program....”
Westates then stopped providing Worcester/Atlantic City service. It continued, however, to provide Providence/Atlantic City sеrvice. In mid-September Charter One withheld about $32,000 from the monthly fees due Westates for that Providence service. Westates said that the contract did not permit Charter One to withhold this money. On September 22 it sent Charter One another “ten day default” notice. After ten days it cancelled the contract.
The parties have not yet litigated the merits of their contract disputes. We therefore need not decide whether Wes-tates did, or did nоt, break the contract in mid-August, or whether it successfully reinstated the contract on August 30, or whether, irrespective of the status of the Worcester/Atlantic City portion of the contract, the Providence/Atlantic City portion remained in effect, or whether Charter One did, or did not, have the right to withhold $32,000 in mid-September. We need only decide that the record, so far, indicates that Westates’ position, in respect to the contract disputе, is not obviously without merit, that its position is “colorable,” and that, in arguing that it was entitled to receive the $32,000 and (not having received the money) to send a “ten day default” letter, Westates is not acting “fraudulently.”
3. The letter of credit. The letter of credit here at issue is a typical, commercial letter designed to guarantee a beneficiary against harm caused by a contractual “default.” The air service contract described above requires Charter Onе to arrange for a “letter of credit” as a “default guarantee.” It says specifically in the section dealing with “default” that
Charter One must provide Westates with a Irrevocable Letter of Credit acceptable to Westates in the amount of $50,000....
It adds that:
Upon termination of the agreement by Westates ... it is agreed that Westates may take the irrevocable Letter of Credit as liquidated damages for the breach of this agreement by Chаrter One.
Charter One arranged for a Michigan bank to issue the letter. The letter itself says that Westates may “call” the letter and obtain the money by asking the bank for the money and providing the bank with a copy of the ten day default notice. It reads:
the credit amount is available to you [Westates] by your drafts on us at sight accompanied by: Dated notarized copy of the ten (10) day notice described in [the Westates/Charter One contract].
The record indicates that Westates can easily meet the terms in this letter of credit. It can provide the bank with a draft and with the “dated notarized copy of the ten ... day notice” that it sent to Charter One on September 22.
*1272 II. Ordinary Principles of Commercial Law
As we have previously explained, parties to commercial contracts often arrange for “standby” or “guarantee” letters of credit. The beneficiary of such a letter typically wants to makе certain that, if the other party to the contract defaults, the beneficiary can gain access to a secure fund of money which he can use, say, to satisfy the other party’s debt to him (if he is a “seller”), or to purchase a substitute performance (if he is a “buyer”). He may also wish to make certain that, should any contractual dispute arise, it will “wend [its] way towards resolution with the money in [his] pocket, rather than in the pocket” of his adversary.
Itek, 730
F.2d at 24. In order to permit the parties to agree to achieve these objectives, courts have typically considered the letter of credit as “independent” of the contract. That is to say, they have considered it a separate agreement with, say, the issuing bank, that permits the beneficiary to present the documents that satisfy the “call” conditions, and that requires the bank to honor the letter when the beneficiary does so.
See, e.g., Emery-Waterhouse Co. v. Rhode Island Hospital Trust National Bank,
We have said throughout that courts may not
“normally”
issue an injunction because of an important exception to the general “no injunction” rule. The exception, as we also explained in
Itek,
Unless otherwise agreed when documents appear on their face to comply with the terms of a credit but a required document ... is forged or fraudulent or there is fraud in the transaction:
(b) [except in certain circumstances listed in subsection (a) not here applicable] an issuer acting in good faith may honor the drаft or demand for payment despite notification from the customer of fraud, forgery or other defect not apparent on the face of the documents but a court of appropriate jurisdiction may enjoin such honor.
U.C.C. 5-114(2) (emphasis added).
The “fraud” exception does not apply in this case, however, for the record shows nothing “fraudulent” about Westates’ demand for payment, nor did the district court find to the contrary. As our earlier discussiоn of the contract dispute makes clear, see pp. 1270-71 supra, the record reveals that Westates’ claims and defenses are, at the least, “colorable.”
Since the letter of credit at issue is an ordinary “standby” or “guarantee” letter, since Westates can readily fulfill the letter’s expressed “call” conditions, and since, in doing so, Westates’ call would not amount to “fraud,” commercial law, as embodied in the law of most states, would forbid a сourt to enjoin Westates from calling the letter, whether or not that court believed that eventually Westates would lose its case on the underlying contract. See cases cited at p. 1272 supra. The only remaining question on this appeal is whether California’s law significantly deviates from the norm.
III. California Law
California letter of credit law quite obviously differs from the norm in one important respect, but in a respect that must make a court more reluctant, not less reluctant, to issue an injunction. When California adopted the Uniform Commercial Code, it consciously refused to adopt the language permitting an injunction that we italicized when we quoted U.C.C. 5-114(2) at p. 1273,
supra.
By omitting this language, California underscored the principle of the “independence” of the letter of credit. The California Code’s drafters explicitly stated that the U.C.C.’s “provision for a protective injunction was omitted because: ‘By giving the courts power to enjoin the honor of drafts drawn upon documents which appear to be regular on their face, the Commissioners on Uniform State Laws do violence to one of the basic concepts of the letter of credit, to wit, that the letter of credit agreement is independent of the underlying commercial transaction.’ ” Cal. Com.Code § 5114, comment 6 (West 1989) (citations omitted);
see Agnew v. FDIC,
In order to bring this case outside ordinary principles of commercial law, which seem tо preclude an injunction, and outside a California version of the U.C.C. that would seem even more hostile to an injunction, Charter One points to two intermediate California appellate court opinions.
See Mitsui,
The first of these cases,
Mitsui,
does not offer Charter One much help. The
Mitsui
court enjoined a beneficiary of a letter of credit from calling that letter, but it did so because it believed that the beneficiary could not satisfy a term
contained in the letter itself,
namely a term that required the beneficiary, a bank, to state that а borrower had failed to repay certain “loans drawn ... in connection with drilling of oil wells for [a company named] Simon.”
See Mitsui,
“a court should not resort to ... underlying agreements in interpreting a letter of credit_ [NJoncompliance with the underlying contrаct does not affect the issuer’s liability unless a reference to the underlying contract explicitly creates a condition for honoring a draft. General references to underlying agreements are surplusage and should not be considered in deciding whether the beneficiary has complied with the terms of the letter of credit.”
Mitsui,
The case before us is unlike Mitsui in that, here, Westates, the beneficiary, can truthfully say that it satisfied the letter of credit’s express conditiоns; it mailed a ten day notice to Charter One on September 22, 1989. More importantly, since Westates has at least a “colorable” claim that it acted lawfully under the contract in doing so, Westates’ call would not fall within the traditional exception for forgery or fraud.
Charter One’s second case,
Steinmeyer,
offers it more support. The
Steinmeyer
court enjoined a letter of credit beneficiary, Warner, from calling the letter. In doing so, the court said that the terms of the letter itself “must ... be construed together” with thе underlying contract, and it based its injunction upon its belief that the “call” would violate Warner’s duty of “good faith and fair dealing” contained in that underlying contract.
See Steinmeyer,
Despite its language, however, the facts of
Steinmeyer
are too special to make it strong precedent for Charter One. The underlying contract involved a sale of stock by Warner to Steinmeyer in return for Steinmeyer’s promissory notes; the letter of credit guarаnteed Steinmeyer’s pay
*1275
ments on the notes; the letter’s terms conditioned Warner’s call on Warner’s statement that Steinmeyer was in default.
See Steinmeyer,
Regardless, were Charter One’s interpretation correct, we would not follow
Steinmeyer.
We should not follow an intermediate state appellate court opinion in a diversity case when we are convinced that the state’s supreme court would not do so.
See, e.g., Commissioner v. Estate of Bosch,
For these reasons the judgment of the district court is
Reversed.