Synergy Center, Ltd. v. Lone Star Franchising, Inc. ( 2001 )

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN
NO. 03-01-00259-CV
Synergy Center, Ltd., Appellant
v.
Lone Star Franchising, Inc., Appellee
FROM THE DISTRICT COURT OF TRAVIS COUNTY, 200TH JUDICIAL DISTRICT
NO. GN1-01259, HONORABLE LORA J. LIVINGSTON, JUDGE PRESIDING
Appellant Synergy Center, Ltd. (“Synergy”) brings this interlocutory appeal from a
district-court order granting a temporary injunction enjoining Synergy from (1) declaring its tenant,
appellee Lone Star Franchising, Inc. (“Lone Star”), to be in default under a lease with Synergy and
(2) presenting and demanding payment under a letter of credit. Tex. Civ. Prac. & Rem. Code Ann.
§ 51.014(a)(4) (West Supp. 2001). This Court previously granted Synergy temporary, emergency
relief for the limited purpose of allowing Synergy to present the letter of credit. Synergy Ctr., Ltd.
v. Lone Star Franchising, Inc., No. 03-01-00259-CV (Tex. App.—Austin May 24, 2001, order) (not
designated for publication). We now address the merits of the interlocutory appeal and dissolve the
temporary injunction.
FACTUAL AND PROCEDURAL BACKGROUND
Synergy and Lone Star entered into a commercial lease agreement to be effective May
15, 1999. As a condition of the lease, Lone Star was required to establish “a credit line of
$100,000.00 . . . for the sole purpose of acting in lieu of a monetary guarantee in the event of [Lone
Star’s] default.” To satisfy this condition, Lone Star delivered to Synergy a $100,000 irrevocable
letter of credit issued by Chase Bank of Texas, N.A., naming Synergy as beneficiary. The expiry date
of the letter of credit was May 30, 2001.
Lone Star opened a restaurant in the leased space in December 1999. In March 2001,
Lone Star ceased daily operation of the restaurant but continued to pay monthly rent to Synergy.
Lone Star alleges that its cessation of operation was due to a drop-off in business resulting from road
construction fronting the leased premises. On April 19 Synergy notified Lone Star that it was in
default of the lease because Lone Star had (1) “moved out of the Retail Space without
authorization[,]” (2) “deserted or vacated a portion of the Retail Space[,]” and (3) “ceased to operate
for more than seven (7) consecutive days.” Synergy accelerated “all rent for the remainder of the
lease term” and demanded payment of $137,860. Synergy threatened that unless the accelerated rent
was paid within seven days, it would “pursue additional remedies available to [it] under the Lease.”
Lone Star responded by filing this action, claiming, inter alia, that the acceleration
clause was a penalty and void as a matter of law. The district court granted Lone Star’s request for
a temporary injunction and enjoined Synergy from (1) “attempting to declare [Lone Star] to be in
default of its payment obligations under the May 15, 1999 lease . . . on account of [Lone Star’s]
failure to pay all or any portion of accelerated rent . . . under the Lease” and (2) “presenting a draft
upon, or demanding payment under, Lone Star’s letter of credit with Chase Bank . . . for any
purported payment obligation that is premised upon [Synergy’s] acceleration of rents[.]”
By four issues, Synergy appeals the district court’s temporary injunction.
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DISCUSSION
Standard of Review
A temporary injunction’s purpose is to preserve the status quo between the parties
pending a trial on the merits. See Walling v. Metcalfe, 863 S.W.2d 56, 58 (Tex. 1993) (citing
Iranian Muslim Org. v. City of San Antonio, 615 S.W.2d 202, 208 (Tex. 1981)). In an appeal from
an order granting or denying a request for a temporary injunction, appellate review is confined to the
validity of the order that grants or denies the injunctive relief. Center for Econ. Justice v. American
Ins. Ass’n, 39 S.W.3d 337, 343 (Tex. App.—Austin 2001, no pet.). The decision to grant or deny
the injunction lies within the sound discretion of the trial court, and we will not reverse that decision
absent a clear abuse of discretion. Id. A trial court abuses its discretion when it acts arbitrarily and
unreasonably, without reference to guiding rules or principles, or when it misapplies the law to the
established facts of the case. See Beaumont Bank, N.A. v. Buller, 806 S.W.2d 223, 226 (Tex. 1991);
Downer v. Aquamarine Operators, Inc., 701 S.W.2d 238, 241 (Tex. 1985); see also SRS Prods. Co.
v. LG Eng’g Co., 994 S.W.2d 380, 383 (Tex. App.—Houston [14th Dist.] 1999, no pet.) (applying
abuse-of-discretion standard to application to enjoin presentment and payment of letter of credit).
When considering the propriety of a temporary injunction, this Court may neither substitute its
judgment for that of the trial court nor consider the merits of the lawsuit. Center for Econ. Justice,
39 S.W.3d at 344.
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The Letter of Credit
By its second issue, Synergy contends that Texas law prohibits enjoining presentment
of a letter of credit absent proof of material fraud that vitiates the entire transaction. A letter of credit
is “a definite undertaking . . . by an issuer to a beneficiary at the request or for the account of an
applicant . . . to honor a documentary presentation by payment or delivery of an item of value.” Tex.
Bus. & Com. Code Ann. § 5.102 (a)(10) (West Supp. 2001). It is “an engagement by its issuer to
honor demands for payment by the beneficiary upon compliance with the conditions specified in the
letter.” SRS Prods., 994 S.W.2d at 384. Typically, a letter of credit is the last contract in a series
of three contracts. Philipp Bros. v. Oil Country Specialists, Ltd., 787 S.W.2d 38, 40 (Tex. 1990)
(citing Republic Nat’l Bank v. Northwest Nat’l Bank, 578 S.W.2d 109, 112 (Tex. 1979)). The first
contract is between the parties to the underlying obligation. Id. The second contract is between the
bank and the account party. Id. A letter of credit is a contract between the bank and the beneficiary
that the bank will make payment upon presentment of the letter and such accompanying documents
as may be prescribed in the letter. Id. In other words, the letter of credit is a separate contract
between the bank and the beneficiary that is independent of the underlying obligations. See id. This
principle, the “independence doctrine,” is designed to preserve the commercial vitality of letters of
credit. Philipp Bros., 787 S.W.2d at 40. With certain exceptions not applicable here, the bank must
determine whether payment is due the beneficiary without regard to whether the account party and
beneficiary have discharged their respective obligations to one another. Sun Marine Terminals, Inc.
v. Artoc Bank & Trust, Ltd., 797 S.W.2d 7, 10 (Tex. 1990).1
1
In the transaction we examine here, Lone Star is the account party and applicant for, Synergy
is the beneficiary of, and Chase Bank is the issuer of the letter of credit. Lone Star and Synergy are
4
Here the letter of credit is addressed to Synergy, as beneficiary, and provides:
This letter of credit is available by your draft drawn at sight on Chase Bank of Texas,
N.A. duly signed, endorsed and marked: “Drawn under Chase Bank of Texas, N.A.
Letter of Credit No. D-289120 dated May 28, 1999” accompanied by the following
document:
1. Beneficiary’s manually signed statement on its letterhead reading exactly as
follows:
“The undersigned, an authorized representative of [Synergy], hereby certifies that
[Lone Star] is in default of its payment obligations under that certain lease
between [Synergy] and [Lone Star].”2
The supreme court has held that presentment of a letter of credit may not be enjoined
unless there is evidence of fraud by the beneficiary. Philipp Bros., 787 S.W.2d at 40. 3 To justify
enjoining the presentment of a letter of credit, the fraud must be extreme. A trial court may enjoin
presentment only if “the wrong doing 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.” Id.
the parties to the underlying transaction, the lease agreement.
2
The original letter of credit is typed in all capital letters.
3
Letters of credit are generally governed by chapter 5 of the business and commerce code.
Tex. Bus. & Com. Code Ann. §§ 5.101-.118 (West 1994 & Supp. 2001). Chapter 5 was amended
in 1999. Lone Star contends that the pre-1999 version of the code should apply because the letter
of credit was issued May 28, 1999, before the effective date of the amendments. See Act of March
23, 1999, 76th Leg., R.S., ch. 4, § 10, 1999 Tex. Gen. Laws 7, 21 (amendments applicable only to
letters of credit issued on or after September 1, 1999). The 1999 amendments would appear to
increase the applicant’s burden to show entitlement to injunctive relief when asserting fraud against
the other party to the underlying transaction. Compare Act of May 29, 1983, 68th Leg., R.S., ch.
442, § 13, 1983 Tex. Gen. Laws 2511, 2576, with Tex. Bus. & Com. Code Ann. § 5.109 (West
Supp. 2001). However, given the supreme court’s interpretation of the prior law’s fraud standard,
see Philipp Bros. v. Oil Country Specialists, Ltd., 787 S.W.2d 38, 40-41 (Tex. 1990), we find no
substantive difference in the application of the two provisions.
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(quoting GATX Leasing Corp. v. DBM Drilling Corp., 657 S.W.2d 178, 182 (Tex. App.—San
Antonio 1983, no writ)); SRS Prods., 994 S.W.2d at 384-85 (wrongdoing must be “egregious,
intentional, and unscrupulous”). But see Goldome Credit Corp. v. University Square Apartments,
828 S.W.2d 505, 509 (Tex. App.—Amarillo 1992, no writ) (holding that presentment of documents
signed by officer of corporation when corporation did not exist posed risk of double payment on debt,
thereby constituting fraud, which vitiated transaction).
Lone Star argues that the acceleration clause in the lease agreement operates as a
penalty, is void as a matter of law, and should therefore constitute material fraud triggering the
temporary injunction. We disagree. In Philipp Bros., the supreme court specifically disapproved
language of the court of appeals implying that a trial court may enjoin presentment of a letter of credit
where the beneficiary’s actions excused the credit account party from its underlying contractual
liability. 787 S.W.2d at 40. “The purpose of a letter of credit is to assure payment when its own
conditions have been met, irrespective of disputes that may arise between the parties concerning
performance of other agreements which comprise the underlying transaction.” Sun Marine
Terminals, 797 S.W.2d at 10. The fact that there is a dispute between the parties regarding the lease
terms cannot bar Synergy from presenting the letter of credit to the bank for payment. Synergy and
Lone Star agreed to the lease terms. Even if the acceleration clause is ultimately held to be an
unenforceable penalty, as urged by Lone Star, we cannot say that Synergy has committed anything
approaching the intentional or unscrupulous conduct that would deprive Lone Star of any benefit of
the lease agreement and transform the letter of credit into a means for perpetrating a fraud. See
GATX Leasing, 657 S.W.2d at 183. Simply stated, if the acceleration clause is unenforceable,
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Synergy’s reliance on it does not constitute the fraud required by the business and commerce code
to justify enjoining Synergy from presenting the letter of credit. See Philipp Bros., 787 S.W.2d at
40-41. Lone Star and Synergy negotiated the terms of the lease agreement at arm’s length. The
record before us reflects that neither party occupied a dominant bargaining position with regard to
the other. They both agreed to the clause that Lone Star now asserts cannot be enforced against it.
The “viability of a letter of credit as a payment device depends upon its independence from the
transaction of which it is a part.” Sun Marine Terminals, 797 S.W.2d at 10. We hold that the district
court abused her discretion in enjoining Synergy from presenting the letter of credit.
Acceleration Clause
The district court also temporarily enjoined Synergy from “directly or indirectly
attempting to declare [Lone Star] to be in default of its payment obligations under the . . . lease.”
Lone Star argues that the district court did not abuse her discretion in so enjoining Synergy because
Lone Star established a probable right of recovery on its allegation that the lease’s acceleration clause
is an unenforceable penalty. See Walling, 863 S.W.2d at 58 (citing Sun Oil Co. v. Whitaker, 424
S.W.2d 216, 218 (Tex. 1968)) (holding that trial court may grant temporary injunction if applicant
demonstrates “probable right to recover damages and probable injury in time before trial”); Universal
Health Servs., Inc. v. Thompson, 24 S.W.3d 570, 576 (Tex. App.—Austin 2000, no pet.). We
disagree in two respects.
Synergy’s April 19, 2001 letter to Lone Star specifically declared the lease in default,
accelerated the rent for the remainder of the lease term, and demanded immediate payment of the
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accelerated amount.4 To receive payment under the letter of credit, Synergy must present the letter
accompanied by a statement that Lone Star “is in default of its payment obligations” under the lease.
Enjoining Synergy from declaring Lone Star in payment default of the accelerated rent serves no
purpose other than to deny Synergy the ability to present to the bank the signed statement required
in order to receive payment upon presentment of the letter of credit and avail itself of a remedy to
which it is arguably entitled under the terms of the lease. This is but another way of barring Synergy
from presenting the letter of credit and is prohibited under the Philipp Bros. standard. 787 S.W.2d
at 40.
Furthermore, in order to obtain a temporary injunction, Lone Star must also establish
that it will suffer probable injury. Thompson, 24 S.W.3d at 577. To establish probable injury, Lone
Star must demonstrate that it has no adequate remedy at law. Id. In other words, Lone Star “must
show an injury for which there can be no real legal measure of damages or none that can be
determined with a sufficient degree of certainty, i.e., a noncompensable injury.” Id. (citing Texas
Indus. Gas v. Phoenix Metallurgical Corp., 828 S.W.2d 529, 533 (Tex. App.—Houston [1st Dist.]
1992, no writ); Martin v. Linen Sys. for Hosps., Inc., 671 S.W.2d 706, 710 (Tex. App.—Houston
4
The letter reads, in pertinent part:
As a result of [Lone Star’s] default [Synergy] has elected to exercise the remedy available
to [Synergy] under . . . the Lease, being the acceleration of all rent for the remainder of
the lease term. The accelerated rent through the remainder of the lease term totals
$137,869.00 (the “Amount Due”). This letter will serve as notice of acceleration of the
rent to [Lone Star]. The Amount Due is due and payable by [Lone Star] to [Synergy]
immediately. [Synergy] hereby demands that [Lone Star] pay the Amount Due. In the
event [Lone Star] fails to pay the Amount Due within seven (7) days after the date of this
written demand, [Synergy] will pursue additional remedies available to [Synergy] under
the Lease.
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[1st Dist.] 1984, no writ)). Lone Star has an adequate remedy at law: a suit for money damages
against Synergy for wrongful presentment of the letter of credit on the underlying lease agreement.
See GATX Leasing, 657 S.W.2d at 183.
Therefore, we hold that the district court abused her discretion in effectively barring
presentment by enjoining Synergy from declaring Lone Star in default of its payment obligations on
the accelerated rent.
CONCLUSION
We sustain Synergy’s second issue, reverse the order of the district court, and dissolve
the temporary injunction. 5
Lee Yeakel, Justice
Before Justices Kidd, Yeakel and Patterson
Reversed and Remanded
Filed: December 6, 2001
Publish
5
Because we sustain Synergy’s second issue and dissolve the temporary injunction, we do not
reach its other issues. See Tex. R. App. P. 47.1 (opinion to be as brief as practicable to decide issues
necessary to final disposition).
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