Heritage Bank v. Redcom Laboratories

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_______________
m 00-10835
_______________
HERITAGE BANK,
FORMERLY KNOWN AS BRAZOS BANK, N.A.,
Plaintiff-
Counter Defendant-
Appellant,
VERSUS
REDCOM LABORATORIES, INC., ET AL.,
Defendants,
REDCOM LABORATORIES, INC.,
Defendant-
Counter Claimant-
Appellee.
_________________________
Appeal from the United States District Court
for the Northern District of Texas
_________________________
May 14, 2001

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Before REAVLEY, SMITH, and DeMOSS,
Circuit Judges.
JERRY E. SMITH, Circuit Judge:
Heritage Bank issued a letter of credit to
Fiber Wave Telecom, Inc. (“Fiber Wave”),
which used it to purchase electronics from
Redcom Laboratories, Inc. (“Redcom”), which
delivered the goods and made presentment to
the bank for payment. Fiber Wave believed
the goods defective and successfully petitioned
a Texas court to enjoin the bank from
honoring Redcom’s presentment.1 Redcom
made another demand on the bank during the
pendency of the injunction, but the bank
refused to honor the presentment and sought
a declaratory judgment exonerating it from
liability.
Redcom sued the bank for wrongful dis-
honor, and the district court granted summary
judgment for Redcom. The bank appeals, ar-
guing that the court erred in exercising
diversity jurisdiction and in granting summary
judgment. Finding no reversible error, we
affirm.
I.
On February 3, 1998, the bank issued Ir-
revocable Commercial Letter of Credit No.
9518 for $215,729 to Fiber Wave, naming
Redcom as the beneficiary. The letter of credit
was subject to the Uniform Customs and
Practice for Documentary Credits, 1993
Revision, ICC Publication No. 500 (“UCP”),
and was good for one year. It had no special
conditions or unusual provisions. Redcom
shipped goods to Fiber Wave on March 27,
1998, and made a presentment on April 24,
1998, which the bank received on May 1.
Before the bank determined whether the
presentment complied with the letter of credit,
Fiber Wave sued the bank and Redcom in state
court and obtained a temporary restraining
order (“TRO”) that enjoined the bank from
honoring the presentment. On May 6, the
bank, because of the TRO, dishonored the
presentment. On June 5, the state court
converted the TRO into a temporary
injunction.
On November 20, while the injunction was
in effect, Redcom made another presentment
to the bank for payment under the letter of
credit. On November 25, the bank again dis-
honored the presentment, citing the injunction.
On January 27, 1999, Redcom filed a motion
to dissolve the injunction and a motion to
enjoin the expiration of the letter of credit.
The court granted nonsuit to Fiber Wave and
denied Redcom’s motions.
The letter of credit expired on February 3,
and on March 3, Redcom made another
demand to the bank for payment, alleging that
the injunction had been dissolved when Fiber
Wave non-suited its claims against the bank.
The bank filed a declaratory judgment action
against Fiber Wave and Redcom in state court,
and Redcom removed the action to federal
court.
Redcom claimed that the bank had
fraudulently joined Fiber Wave to destroy di-
versity jurisdiction, and the bank moved to re-
mand, arguing that Fiber Wave was properly
joined. The district court determined that
Fiber Wave was improperly joined, and both
parties moved for summary judgment. The
district court granted summary judgment for
1 Fiber Wave and Redcom have sought to
resolve their differences over the goods through a
separate lawsuit in state court.

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Redcom, concluding, inter alia, that (1) the
bank waived discrepancies in the November
20 presentment; (2) any presentments made
after the expiration of the letter of credit
would be ineffective;2 and (3) the bank wrong-
fully dishonored the November 20
presentment, because the injunction only
prohibited the bank from honoring improper
presentments.
II.
Redcom removed this action to federal
court on the basis of diversity of citizenship.
Removal is proper only if that court would
have had original jurisdiction over the claim.
See 28 U.S.C. § 1441(a), (b). The bank and
Fiber Wave are citizens of Texas; Redcom is a
citizen of New York. For diversity
jurisdiction, the parties must be citizens of
different states, and the amount in controversy
must exceed $75,000. See 28 U.S.C.
§ 1332(a)(1). The amount in controversy is
$195,729, and Redcom and the bank are
diverse.
Joining Fiber Wave as a defendant,
however, destroys diversity.3 If Fiber Wave
was properly joined as a party, diversity
jurisdiction is destroyed, because the bank and
Fiber Wave are not diverse. But if Fiber Wave
was fraudulently joined, as Redcom asserts,
then the case was properly in federal court.
We review de novo the denial of a motion
to remand. Medina v. Ramsey Steel Co., 238
F.3d 674, 680 (5th Cir. 2001). To establish
that Fiber Wave was joined fraudulently to de-
feat diversity, Redcom must demonstrate ei-
ther fraud in the recitation of jurisdictional
facts or the absence of any possibility that the
bank has stated a claim against Fiber Wave.
Rodriguez v. Sabatino, 120 F.3d 589, 591 (5th
Cir. 1997). Redcom has not alleged fraud.
The bank contends that it sued under the
Uniform Declaratory Judgments Act, which
states that “[w]hen declaratory relief is sought,
all persons who have or claim any interest that
would be affected by the declaration must be
made parties.” TEX. CIV. PRAC. & REM. CODE
§ 37.006. Thus, claims the bank, because Fi-
ber Wave will be liable to the bank for
reimbursement if the bank has to honor Red-
com’s presentment under the letter of credit,
Fiber Wave has an interest that would be
affected by the declaration.4
Redcom correctly notes that the declaratory
judgment cannot itself trigger Fiber Wave’s re-
imbursement obligation, which, instead, is
imposed only when the bank honors a
presentment under the letter of credit. The
declaratory judgment cannot order the bank to
pay Redcom anything; it merely resolves
questions regarding the rights of the parties.
See In re City of Dallas, 977 S.W.2d 798, 804
2 Neither party challenges this finding on
appeal.
3 See Strawbridge v. Curtiss, 7 U.S. (3 Cranch)
267 (1806) (finding that a controversy is between
“citizens of different states” within the meaning of
the statute only if no plaintiff is a citizen of the
same state as any defendant).
4 TEX. BUS. & COM. CODE § 5.114(c) (Vernon
1998) governs Fiber Wave’s liability:
Unless otherwise agreed an issuer which has
duly honored a draft or demand for payment
is entitled to immediate reimbursement of
any payment made under the credit and to
be put in effectively available funds not later
than the day before maturity of any
acceptance made under the credit.

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(Tex. App.SSFort Worth 1998, no writ).
Indeed, Texas law prohibits a court from
ordering a bank to honor an letter of credit in
the context of a declaratory judgment. See
TEX. CIV. PRAC. & REM. CODE § 37.003(a)
(Vernon 1997).
Texas law further requires that “a
justiciable controversy must exist before a
party can be properly joined” in a declaratory
judgment action. Sub-Surface Constr. Co. v.
Bryant-Curington, Inc., 533 S.W.2d 452, 456
(Tex. Civ. App.SSAustin 1976, writ ref’d
n.r.e.). If the resolution of a controversy
“depends upon contingent or hypothetical
facts, or upon events that have not yet come to
pass,” it is not ripe for review. Patterson v.
Planned Parenthood, 971 S.W.2d 439, 443
(Tex. 1998).
The bank’s claim against Fiber Wave for
reimbursement is contingent on a finding that
it improperly dishonored Redcom’s
presentments. Thus, even though Fiber Wave
has an interest in the outcome, it has no
interest in the current controversy. Because
the claim against Fiber Wave is not presently
justiciable, the district court properly
determined that the bank could establish no
claim against Fiber Wave.
In addition, the rationale underlying letters
of credit weighs in favor of finding that Fiber
Wave was improperly joined. Commercial
parties use letters of credit for the purpose of
reducing the risk of dealing with unknown en-
tities. A letter of credit permits a seller to
transact with a known credit source (such as a
bank) rather than with an unknown buyer. E.
Girard Sav. Ass’n v. Citizens Nat’l Bank &
Trust Co., 593 F.2d 598, 601 (5th Cir. 1979).
This type of arrangement creates three distinct
relationships: (1) the transaction between buy-
er and seller; (2) the buyer’s (applicant’s)
agreement to reimburse the bank for extension
of credit; and (3) the letter of credit,
representing the bank’s promise to pay the
seller (the beneficiary) when it presents certain
documents. Id.
The entire arrangement exists to allow the
credit issuer’s obligation to the beneficiary to
operate independently of its underlying
agreement with the applicant. Id. at 602.5
Therefore, although the declaration of the
rights of the bank and Redcom under the letter
of credit ultimately may affect Fiber Wave, it
has no legal interest in the current dispute.
The district court did not err in finding
fraudulent joinder and asserting diversity
jurisdiction over the declaratory judgment
claim.
III.
The bank contends that the court erred in
granting summary judgment for Redcom on
the wrongful dishonor claim. The bank argues
that (1) Redcom made an untimely, deficient
presentment; and (2) even if it were proper,
the injunction prevented the bank from
honoring it. Redcom contends that (1) the
bank waived its right to raise discrepancies;
and (2) the injunction prohibited only improper
presentments. To prevail on a wrongful dis-
honor claim, Redcom must demonstrate
(1) the issuance of a letter of credit; (2) timely
presentation of the required documents; and
(3) a failure to pay on the letter of credit.
Voest-Alpine Trading USA Corp. v. Bank of
China, 142 F.3d 887, 892 (5th Cir. 1998).
5 Indeed, the bank’s complaint asks the court to
declare that it “has no liability to Redcom or Fiber-
wave [sic] under the letter of credit.” Fiber Wave
is not a beneficiary of the letter of credit, so the
bank has no liability to it as the issuer.

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Summary judgment is appropriate “if the
pleadings, depositions, answers to
interrogatories, and admissions on file,
together with the affidavits, if any, show that
there is no genuine issue as to any material fact
and that the moving party is entitled to
judgment as a matter of law.” FED. R. CIV. P.
56(c). We review a grant of summary
judgment de novo, applying the same
standards as did the district court. Sherrod v.
Am. Airlines, Inc., 132 F.3d 1112, 1119 (5th
Cir. 1998).
A.
The bank and Redcom dispute whether the
bank waived its right to raise discrepancies in
the November 20 presentment. The parties
agree that the April 24 presentment was
improper, and Redcom has not appealed the
decision that the bank did not have to honor it.
The November 20 presentment, however, was
an attempt to correct deficiencies in the earlier
one. We must determine whether Redcom
made a proper presentment under the terms of
the letter of credit and, if not, whether the
bank waived its right to object.
1.
We first must examine whether Redcom
complied with the terms of the letter of credit.
An issuer’s liability on a letter of credit is con-
tingent on proper presentment. See Westwind
Exploration Inc. v. Homestead Sav. Ass’n,
696 S.W.2d 378, 381 (Tex. 1985). The
question of proper presentment encompasses
whether (1) Redcom provided appropriate
documentation; (2) Redcom delivered its
documents in a timely fashion; and (3) the
bank had an obligation to notify Redcom of
the deficiencies even in the presence of the
injunction.
Redcom presented various documentation
to the bank as required by the letter of credit,
including an invoice, sworn statements as to
the delivery of the goods, and Federal Express
receipts signed by Fiber Wave. At issue is
whether Redcom complied with the letter of
credit’s requirement that Redcom present “one
copy of the invoice/bill of lading upon receipt
of each shipment as well as notification from
Fiber Wave Telecom, Inc. stating that such
equipment has been or is in the process of
being delivered.” Redcom claims that its sub-
mission of an invoice, affidavits stating that the
goods were delivered, and signed Federal
Express receipts meets this requirement; the
bank argues that Redcom needed to submit a
bill of lading.
Article 21 of the Uniform Customs and
Practice for Documentary Credits (“UCP
500") requires that the letter of credit stipulate
what types of documents will be accepted:
When documents other than transport
documents, insurance documents and
commercial invoices are called for, the
Credit should stipulate by whom such
documents are to be issued and their
wording or data content. If the Credit
does not so stipulate, banks will accept
such documents as presented, provided
that their data content is not inconsistent
with any other stipulated document
presented.
Uniform Customs and Practice for
Documentary Credits, 1993 Revision, ICC
Pub. No. 500. Thus, if the letter of credit does
not have specific requirements, the bank
should accept anything not inconsistent with
other documents presented.
The bank argues that a bill of lading is a
specific form of document that Redcom failed

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to provide. The plain language of the letter of
credit drafted by the bank indicates otherwise.
The letter of credit requires an “invoice/bill of
lading.” The virgule separating the two terms
signifies that Redcom may provide either an
invoice or a bill of lading.6 Redcom provided
an invoice; under the terms of the letter of
credit, it has complied.
2.
The bank claims that Redcom did not pre-
sent its documents within twenty-one days
after the date of shipment as required by article
43(a) of the UCP 500. The goods were
shipped to Fiber Wave on March 27, 1998.
Redcom made a deficient presentment on April
24, twenty-eight days after the date of
shipping, and a corrected presentment on No-
vember 20, which was 200 days after the
shipment. If the twenty-one-day provision ap-
plies, Redcom’s presentment seems both de-
ficient and untimely.
Apparently for the first time on appeal,
Redcom contends that it first made a defective
presentment on April 5, 1998, well within the
twenty-one-day period, and that subsequent
presentments were merely attempts to correct
this timely presentment. We may not consider
an issue raised for the first time on appeal
unless it is a purely legal issue and a failure to
consider it will result in a miscarriage of
justice. Heci Exploration Co. v. Holloway,
862 F.2d 513, 518 & n.7 (5th Cir. 1988).
Even assuming the point is not waived,
Redcom still had an obligation to correct all
deficiencies within the twenty-one-day period
unless the letter of credit specifically overrode
the UCP. 7 As discussed below, an untimely
presentment is an incurable defect, and the
bank had no duty to notify Redcom of it.
Thus, if the April 24 presentment was
untimely, Redcom could make no subsequent
presentment that would trigger the bank’s pay-
ment, and a finding that Redcom failed to
make a proper presentment in a timely fashion
under the UCP would dispose of the case.
Redcom argues that the parties specifically
contracted around the twenty-one-day
provision, which says that the bank will honor
any proper presentment “on delivery of
documents as specified if presented at our
counters on or before the expiration date.”
The bank suggests that this language may be
interpreted merely to affirm the period for
which the credit was good. “[A] significant
showing would have to be made before parties
to a letter of credit governed by the UPC
would be found to have waived its express
terms.” Banco Gen. Runinahui, 97 F.3d at
486.
The terms of the letter of credit and the ac-
tions of the parties suggest that the parties in-
tended to contract around the UPC default
rule. The bank notified Redcom after the April
24 and the November 20 presentment that it
planned to dishonor it because of the
injunction. Even though the bank need not
have notified Redcom of the deficiency of un-
timeliness, it seems surprising that, if the UCP
6 See AMERICAN HERITAGE DICTIONARY OF
THE ENGLISH LANGUAGE 1922 (4th ed. 2000)
(defining “virgule” as “[a] diagonal mark (/) used
especially to separate alternatives”).
7 Cf. Banco Gen. Runinahui, S.A. v. Citibank
Int’l, 97 F.3d 480, 484 (11th Cir. 1996) (rejecting
plaintiff’s argument that where the letter of credit
gave a party fifteen days to present conforming
documents, the party had fifteen days to submit
some documents, then had until the expiration date
to present corrected ones).

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applied, it chose to use the injunction rather
than the UCP as the basis for dishonor. Based
on its own actions, the bank apparently
believed that the letter of credit overrode the
UCP’s requirements. Therefore, Redcom
made a timely presentment.
3.
Even if Redcom had made a timely, defi-
cient presentment, the bank waived its right to
raise the discrepancies. The general rule is
that “where an issuer formally places dishonor
on a specific ground, the issuer is held to have
waived all others.” Siderius, Inc. v. Wallace
Co., 583 S.W.2d 852, 862 (Tex. Civ.
App.SSTyler 1979, no writ). Moreover, to re-
tain its ability to raise discrepancies, the bank
must prove the existence of an incurable de-
ficiency or that the failure to notify resulted in
no prejudice. See Wing On Bank Ltd. v. Am.
Nat’l Bank &Trust Co., 457 F.2d 328, 328-29
(5th Cir. 1972).
The letter of credit is subject to article 13 of
the UCP 500, which requires that banks
examine draw documents within seven banking
days. If the bank decides to refuse the draw,
article 14 requires that it give notice no later
than the close of the seventh day. Article
14(e) establishes that if the bank does not give
such notice within the time allotted, it waives
its right to claim that the documents are not in
compliance.
The bank expressly dishonored Redcom’s
presentment on account of the injunction on
November 25, within the seven-day period.
The dishonor, however, did not notify Redcom
of any deficiencies in the presentment. Be-
cause the bank gave no notice of any other
deficiencies, we must address whether the
alleged defects were incurable, or whether
Redcom suffered no prejudice from the failure.
The bank argues t hat the defects were in-
curable, because the document was not timely
presented, and that Redcom suffered no
prejudice, because the injunction prevented it
from honoring the presentment. If the
presentment were untimely, no cure would be
possible, and the bank had no duty to notify
Redcom of the defect. See Siderius, 583
S.W.2d at 862. Redcom’s presentment was
timely, because the letter of credit contracted
around the UCP default rules. Thus, Redcom
could have cured any defects and would suffer
prejudice if the bank failed to notify it.
We address, below, whether the injunction
prevented the bank from honoring the
presentment. Even if the injunction prevented
payment at the time of presentment, it did not
excuse the bank from its duty to notify Red-
com of discrepancies. Thus, the bank has
waived all discrepancies related to the
November 20 presentment.
B.
The bank and Redcom dispute whether the
injunction prevented the bank from honoring
the November 20 presentment. Because the
bank waived its right to raise discrepancies, we
must assume that the presentment was proper.
The bank may still prevail, however, if the
injunction prevented it from honoring any
presentment.8
8 Redcom believes that the bank specifically
should have pleaded an affirmative defense of legal
impossibility under FED. R. CIV. P. 8(c). The bank
rightly excoriates this argument as exalting form
over substance. The bank’s original complaint
states that “the Temporary Injunction . . .
specifically enjoined the bank from honoring the
(continued...)

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1.
The parties dispute the scope of the
temporary injunction, which states that it “is
granted as requested . . . rest raining and
enjoining defendant . . . from honoring” the
letter of credit (emphasis added). This
language seems plainly to mean that the bank
cannot honor any presentment for a draw on
the letter of credit.
An injunction, however, cannot issue on
matters outside the parameter of the request.
Fairfield v. Stonehenge Ass’n Co., 678
S.W.2d 608, 611 (Tex. App.SSHouston [14th
Dist.] 1984, no writ). Counsel for Fiber Wave
stated in oral argument before the injunction-
issuing court that it requested an injunction
only for improper presentments:
Your Honor, we’re not here asking that
Redcom be enjoined from doing
anything. If they can gather the
appropriate documentation and present
it to the bank, then the letter of credit
should be paid. What we’re asking for
an injunction and what we got a TRO
against was only the bank paying on
improper presentment.
Thus, the district court correctly interpreted
the injunction as applying only to improper
presentments. Because the bank waived its
right to challenge the presentment as improper,
the injunction did not bar the bank from
honoring it.
2.
Nor did the expiration of the letter of credit
prevent the bank from honoring the
presentment. Although a court order may
excuse a party’s performance under a
contractual obligation,9 the presence of an
injunction, in and of itself, does not excuse
performance indefinitely. The injunction
“merely suspended [the bank’s] obligation to
honor or dishonor the drafts during the
pendency of the legal restraint,” and payment
on a proper presentment would come due
when the injunction was lifted. Kelley v. First
Westroads Bank, 840 F.2d 554, 558 (8th Cir.
1988).10
This rationale applies even where the letter
of credit had expired when the injunction was
lifted. Engel Indus., 798 F. Supp. at 15 (citing
Kelley). In Kelley, a TRO froze a timely pre-
sentment until the injunction was lifted, then
the issuing banks had to process the
presentment. Kelley, 840 F.2d at 558. Thus,
an injunction may provide a defense of
impossibility for as long as it stands, but once
it is lifted, the bank must honor or properly
dishonor the drafts. “[T]he obligation to pay
was fixed at the time the documents were
presented.” Id. at 559.
Therefore, because Redcom made a timely
presentment, and the bank waived its right to
assert deficiencies, the injunction did not ex-
8(...continued)
Letter of Credit,” so Redcom’s suggestion that the
bank has waived this argument is meritless.
9 See, e.g., Centex Corp. v. Dalton, 840
S.W.2d 952, 955-56 (Tex. 1992) (concluding that
a cease and desist order prevented payment of fees
to consultant); RSB Mfg. Corp. v. Bank of Baro-
da, 15 B.R. 650 (S.D.N.Y. 1981) (finding that a
third party’s injunction against a bank issuing a
letter of credit prevented it from paying the
beneficiary). Redcom correctly distinguishes these
cases on the basis that there, the injunction was
still in place at the time of judgment.
10 See also Engel Indus. v. First Am. Bank,
N.A., 798 F. Supp. 9, 15 (D.D.C. 1992).

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cuse the bank’s performance permanently.
The district court did not err in finding that the
bank had wrongfully dishonored the November
20 presentment.
IV.
The bank and Redcom dispute whether
Redcom judicially admitted that the injunction
excused the bank from paying on the letter of
credit. To qualify as a judicial admission, the
statement must be (1) made in a judicial pro-
ceeding; (2) contrary to a fact essential to the
theory of recovery; (3) deliberate, clear, and
unequivocal; (4) such that giving it conclusive
effect meets with public policy; and (5) about
a fact on which a judgment for the opposing
party can be based. See Griffin v. Superior
Ins. Co., 338 S.W.2d 415, 419 (Tex. 1960).
Redcom made statements concerning alter-
native arguments as to the legal effect of dis-
solving the injunction. In explaining that the
injunction was the but-for cause of its receipt
of payment, it said that unless the court
dissolved the order before the letter of credit
expired, it would be deprived of payment.
The bank points out the inconsistency in
that position and the one it takes here, that the
obligation to pay or dishonor vests when the
bank receives the presentment. Redcom ap-
parently stated that “[the bank] is restrained
from paying the Letter of Credit, thereby
causing irreparable harm to Redcom if such
restraint will allow the Letter of Credit to ex-
pire by its own terms during the pendency of
this action.” Because the letter of credit did in
fact expire before the injunction, the bank be-
lieves that Redcom should be held to its
admissions.
Even if the bank has correctly characterized
Redcom’s statements, they do not qualify as
judicial admissions. As we observed in
Universal Am. Barge Corp. v. J-Chem., 946
F.2d 1131, 1142 (5th Cir. 1991), “judicial
admissions are not conclusive and binding in a
separate case from the one in which the
admissions are made.” The statements were
made in a separate suit to dissolve the
injunction, so Redcom is not precluded from
raising them here.
AFFIRMED.

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