In re: CRM Collateral II, Inc., et al v. Tri-County Metropolitan Transp, et al
FILED OPINION (A. WALLACE TASHIMA, M. MARGARET MCKEOWN and RICHARD C. TALLMAN) REVERSED AND REMANDED. Judge: RCT Authoring. FILED AND ENTERED JUDGMENT. 
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UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
CRM COLLATERAL II, INC., a
RICHARD ALTORFER; MARK
GUETZKO; LISA GUETZKO; SEEDORFF
MASONRY, INC.; DALE KARTMAN;
SUSAN KARTMAN; SEEDORFF
TRANSPORTATION DISTRICT OF
OREGON, an Oregon municipal
KEYBANK NATIONAL ASSOCIATION,
Appeal from the United States District Court
for the District of Oregon
Paul J. Papak, Magistrate Judge, Presiding
Argued and Submitted
December 5, 2011—Seattle, Washington
Filed January 20, 2012
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594 CRM COLLATERAL II v. TRICOUNTY METROPOLITAN TRANS.
Before: A. Wallace Tashima, M. Margaret McKeown, and
Richard C. Tallman, Circuit Judges.
Opinion by Judge Tallman
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CRM COLLATERAL II v. TRICOUNTY METROPOLITAN TRANS. 597
Joel A. Mullin, Esq., Stoel Rives LLP (argued); Timothy
Snider, Esq., Leonard J. Feldman, Esq., Stoel Rives LLP,
for defendant-intervenor-appellant Tri-County Metropolitan
Transportation district of Oregon.
Timothy S. DeJong, Esq., Stoll Stoll Berne Lokting &
Shlachter P.C. (argued); Keith A. Ketterling, Esq., Jacob S.
Gill, Esq., Stoll Stoll Berne Lokting & Shlachter P.C., for
plaintiff-intervenor-appellee CRM Collateral II, Inc.
TALLMAN, Circuit Judge:
Appellant Tri-County Metropolitan Transportation District
of Oregon (“TriMet”) provides bus, light rail, and commuter
rail service in the Portland metropolitan area. TriMet contracted with Colorado Railcar Manufacturing, LLC
(“Colorado Railcar”) for the manufacture of light railcars. The
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598 CRM COLLATERAL II v. TRICOUNTY METROPOLITAN TRANS.
contract (“Railcar Contract”) required Colorado Railcar to
secure a $3 million standby letter of credit, which Colorado
Railcar arranged through CRM Collateral II, Inc. (“Collateral
II”), a bankruptcy remote entity.1 TriMet certified Collateral
II’s default and drew on the Letter of Credit when Colorado
Railcar defaulted. We consider whether Collateral II was a
surety to Colorado Railcar, entitled to the defense of discharge. We hold that it was not.
Because the standby letter of credit issued by KeyBank
National Association (“KeyBank”) required TriMet to certify
Collateral II’s default, TriMet sought clarification that should
Colorado Railcar default, TriMet’s authority to certify Collateral II’s default would be triggered. In response to TriMet’s
concern, Collateral II agreed to become a part of the Railcar
Contract via Modification No. 1, but it undertook no new
obligation nor did it subject itself to any additional liability
beyond what it previously undertook by securing the Letter of
Credit at Colorado Railcar’s direction. Thus, no suretyship
was created. Because Collateral II is not entitled to the protections of a surety, it was error for the district court to grant
summary judgment in its favor. We reverse and remand.
In November 2005, TriMet entered into the Railcar Contract with Colorado Railcar to build and deliver three light
railcars and one trailer for TriMet’s use in connection with its
new Westside Express Service between Beaverton and Wilsonville, Oregon. The final price for the railcars and trailer
was $17,299,135. The Contract required Colorado Railcar to
maintain an irrevocable standby letter of credit in the amount
of $3 million from the time Colorado Railcar issued notifica1
A bankruptcy remote entity is a type of single purpose entity formed
with the intent that it be “walled off” from its corporate parent or sibling,
such that if the parent files for bankruptcy, the remote entity is unaffected.
See Steven Seidenberg, The Pain Spreads, 96 A.B.A. J. 53, 53 (Jan. 2010).
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CRM COLLATERAL II v. TRICOUNTY METROPOLITAN TRANS. 599
tion that manufacture would begin to the final delivery of the
railcars and trailer to TriMet. The parties had considered other
methods of securing the contract, such as a performance bond.
But, due to Colorado Railcar’s credit history and financial
health, TriMet agreed that a letter of credit would be an attainable and less expensive form of security.
Collateral II was formed, in part, for the purpose of fulfilling Colorado Railcar’s letter of credit obligation under the
contract. Thomas Rader, CEO of Colorado Railcar, was
named one of Collateral II’s corporate directors along with
Scott State, who was also Collateral II’s sole corporate officer, serving as both President and Treasurer. John Thompson,
Colorado Railcar’s CFO, was Collateral II’s registered agent
at the time of incorporation.
Colorado Railcar, Collateral II, and certain investors
entered into an Investment Agreement whereby Colorado
Railcar provided quarterly interest payments to the investors
for pledging collateral as security for the purchase of a letter
of credit in satisfaction of Colorado Railcar’s obligation to
provide the standby letter of credit. As a result, Collateral II
purchased Irrevocable Standby Letter of Credit No. 312084
(“Letter of Credit”) from KeyBank for the benefit of TriMet.
The Letter of Credit provided that $3 million was available to
TriMet upon its presentation of a sight draft accompanied by
a signed and dated document “stating the amount requested
and containing a statement that reads as follows: ‘The undersigned Officer or Director of TriMet hereby certifies that the
Applicant is in default under Contract . . . .’ ” The Letter of
Credit was initially set to expire on November 15, 2007.
TriMet first learned that Collateral II, and not Colorado
Railcar, was the applicant on the Letter of Credit several
months after arrangements were finalized with KeyBank. TriMet initially requested that Collateral II and Colorado Railcar
obtain a new corrected Letter of Credit, but they refused to do
so. As an alternative solution, TriMet, Colorado Railcar, and
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600 CRM COLLATERAL II v. TRICOUNTY METROPOLITAN TRANS.
Collateral II agreed to a written modification of the Railcar
Contract (“Modification No. 1”), under which Collateral II
became a party to the Railcar Contract for the sole purpose of
equating a default by Colorado Railcar under the Railcar Contract to a default by Collateral II for purposes of drawing on
the Letter of Credit. The modification was clear that Collateral II had no rights under the Railcar Contract, nor did it
undertake any new obligations.
In January 2008, TriMet and Colorado Railcar entered into
a separate Project Monitoring Agreement (“PMA”), which
modified their rights and obligations under the Railcar Contract in an effort to address Colorado Railcar’s continuing
financial problems. TriMet feared that Colorado Railcar’s
financial woes would jeopardize its ability to complete the
light railcars. After evaluating the feasibility of engaging substitute contractors, TriMet determined that it would be less
costly and would reduce delay to financially support Colorado
Railcar to the extent needed to ensure completion of the railcars. Thus, under the PMA, TriMet was to make “special contract payments” to or on behalf of Colorado Railcar, including
payments not previously provided for under the Railcar Contract. Under the PMA, TriMet was authorized to draw on the
Letter of Credit to fund these payments or to compensate
itself for any special payments that Colorado Railcar failed to
repay. Additionally, the PMA appointed a financial monitor
to oversee Colorado Railcar’s operations and TriMet was
given authority to approve or disapprove Colorado Railcar’s
budgets and expenditures. Lastly, Colorado Railcar acknowledged in the PMA that it had defaulted under the Railcar Contract and expressly agreed that it would further be in default
if it was unable to repay the special contract payments.
Colorado Railcar and TriMet did not inform Collateral II of
these negotiations nor obtain its consent to the PMA. The
PMA was amended in February 2008, primarily to add Alaska
Railroad Corporation as an additional party.2 Collateral II was
Alaska Railroad Corporation had also contracted with Colorado Railcar
for the manufacture of railcars, completion of which was similarly in jeopardy given the deteriorating financial condition of Colorado Railcar.
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CRM COLLATERAL II v. TRICOUNTY METROPOLITAN TRANS. 601
not a party to this amendment, nor was the amended PMA
disclosed directly to Collateral II.
Without knowledge of the PMA or amended PMA, Mr.
State—on behalf of Collateral II—agreed to an extension of
the Letter of Credit to November 15, 2008. State reviewed the
amended PMA in June 2008. He did not contact TriMet to
discuss the PMA or Collateral II’s obligations at that time, but
later contacted KeyBank to urge it not to honor any draw as
he believed any certification by TriMet to draw on the Letter
of Credit would be fraudulent.
Between the date of the amended PMA and the completed
manufacture of the railcars and trailer in October 2008, TriMet advanced more than $5.5 million in special contract payments to Colorado Railcar. On October 22, 2008, TriMet
attempted to draw on the Letter of Credit to reimburse itself
for $3 million of those special contract payments. In response,
Collateral II filed an action against TriMet and KeyBank in
the District of Oregon (the “lead action”). Collateral II alleged
TriMet had fraudulently secured Collateral II’s consent to the
extension of the Letter of Credit, sought to enjoin KeyBank
from honoring the draw, asked for a declaration that the Letter
of Credit was unenforceable, and requested rescission of the
amendments to the Letter of Credit. Subsequently, Collateral
II voluntarily dismissed KeyBank from the action. TriMet
filed a counterclaim in the lead action, requesting a declaration that the Letter of Credit was valid and enforceable, that
TriMet’s draw request was enforceable, that Collateral II was
in default on the underlying contract, and that TriMet was
entitled to draw $3 million on the Letter of Credit.
Contemporaneously, a group of Collateral II investors filed
a motion to enjoin KeyBank from honoring the letter of credit
in the state court for Clayton County, Iowa (the “member
action”).3 KeyBank did not oppose the motion and a tempo3
Per the Investment Agreement, the individual investors’ assets secured
Collateral II’s obligation to reimburse KeyBank for any TriMet draw on
the Letter of Credit and those assets were to be foreclosed upon if Collateral II failed to reimburse KeyBank.
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602 CRM COLLATERAL II v. TRICOUNTY METROPOLITAN TRANS.
rary injunction was granted on November 7, 2008, enjoining
KeyBank from honoring any draw request by TriMet. KeyBank removed the member action to the United States District
Court for the Northern District of Iowa on the basis of diversity. TriMet intervened and filed a motion to dissolve the
injunction. Collateral II also intervened. The member action
was transferred to the District of Oregon and consolidated
with the lead action presided over by United States Magistrate
Judge Paul Papak.
That court granted TriMet’s renewed motion to dissolve the
temporary injunction enjoining KeyBank from honoring TriMet’s draw requests. TriMet then successfully drew on the
Letter of Credit in the amount of $3 million on December 1,
In the proceedings that followed, the district court held that
Modification No. 1 created a suretyship between the parties
whereby Collateral II became secondarily liable for Colorado
Railcar’s obligations under the Railcar Contract. Given Collateral II’s status as a surety, the court concluded as a matter
of law that the surety defense of discharge was available
because the PMA had materially increased the risk Collateral
II faced as a surety without Collateral II’s consent. On these
grounds the court granted summary judgment in Collateral
II’s favor on TriMet’s counterclaim for a declaration that Collateral II was in default on the Railcar Contract.
Meanwhile, KeyBank had filed a counterclaim against Collateral II in the member action, seeking reimbursement for the
funds it paid to TriMet. The plaintiffs in the member action
settled with KeyBank, agreeing that Collateral II was liable
for the payment on the Letter of Credit.
In a later order, the district court granted summary judgment in favor of Collateral II on the narrow question of TriMet’s liability for breach of statutory warranty for certifying
Collateral II’s default in the member action, leaving open the
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CRM COLLATERAL II v. TRICOUNTY METROPOLITAN TRANS. 603
question of damages in connection with that claim. Subsequently, the court entered a consent judgment against Collateral II on KeyBank’s counterclaim against it in the member
action. Collateral II paid $3,180,082.50 to KeyBank in satisfaction of the judgment and then amended its pleading in the
member action to re-file its cross-claims against TriMet for
unjust enrichment, money had and received, and breach of
In its final order in this matter, the district court determined
there was no question of fact as to Collateral II’s damages or
as to whether the damages were a consequence of TriMet’s
breach of its statutory warranty because TriMet did not offer
evidence to dispute that Collateral II incurred damages when
it tendered payment to KeyBank for reimbursement of the
draw on the Letter of Credit. The court awarded Collateral II
$3,180,082.50 plus prejudgment interest and denied the
remainder of both Collateral II and TriMet’s cross-motions
for summary judgment as moot.
TriMet appeals, asserting that its draw did not violate the
statutory warranty of Oregon Revised Statute § 75.1100(b)(1)
(2009); the district court erred in concluding that Collateral II
was a surety to the Railcar Contract; and alternatively, even
assuming that Collateral II was a surety, genuine issues of
material fact exist that preclude summary judgment in Collateral II’s favor.
We have jurisdiction pursuant to 28 U.S.C. § 1291. We
review de novo a district court’s ruling on cross-motions for
summary judgment. Trunk v. City of San Diego, 629 F.3d
1099, 1105 (9th Cir. 2011). We view the evidence in the light
most favorable to the nonmoving party and determine
“whether there are any genuine issues of material fact and
whether the district court correctly applied the relevant substantive law.” Id. (citation and internal quotation marks omit-
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604 CRM COLLATERAL II v. TRICOUNTY METROPOLITAN TRANS.
ted). When the district court disposes of a case on crossmotions for summary judgment, we may review both the
grant of the prevailing party’s motion and the corresponding
denial of the opponent’s motion. Id.; see Jones-Hamilton Co.
v. Beazer Materials & Servs., Inc., 973 F.2d 688, 694 n.2 (9th
TriMet contends that Collateral II should not have been
characterized as a surety, and thus was not entitled to the
surety defense of discharge. Review of the law of letters of
credit and the structure of letter of credit transactions is necessary for proper evaluation of the parties’ relationships.
 Oregon Revised Statute § 75.1020 (2009) defines “letter of credit” as a “definite undertaking . . . by an issuer to a
beneficiary at the request or for the account of an applicant or,
in the case of a financial institution, to itself or for its own
account, to honor a documentary presentation by payment or
delivery of an item of value.” An applicant is the “person at
whose request or for whose account the letter of credit is
issued[,]” sometimes also referred to as the customer. Id. The
issuer is the bank or other party that issues the letter of credit.
Id. The beneficiary is the party entitled to payment on the letter of credit upon proper presentation of documents. Id. In our
case, Collateral II is the applicant, KeyBank the issuer, and
TriMet the beneficiary.
 At issue here is a standby letter of credit. Unlike a traditional commercial letter of credit, which is commonly used
in commercial sales to reduce the risk of nonpayment for
goods, standby letters of credit are used in the non-sale setting
and serve to reduce the risk of nonperformance under a performance contract. John F. Dolan, The Law of Letters of
Credit ¶ 1.04 (4th ed. 2007). To draw on the letter, the beneficiary is typically required to produce documents certifying the
applicant has defaulted on its underlying obligation to the
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CRM COLLATERAL II v. TRICOUNTY METROPOLITAN TRANS. 605
beneficiary. Ochoco Lumber Co. v. Fibrex & Shipping Co.,
994 P.2d 793, 795 n.5 (Or. Ct. App. 2000). The letter of credit
transaction typically involves two contracts and the letter of
credit. First, there is the underlying contract for services or
goods between the applicant and beneficiary. Second, there is
a reimbursement contract between the applicant and issuer,
requiring the applicant to reimburse the issuer for any payments made on the letter of credit. Lastly, there is the issuer’s
obligation under the letter of credit itself.
Unlike the typical letter of credit transaction, in this transaction there was no underlying contract for goods or services
between Collateral II and TriMet. Instead the performance
contract was between Colorado Railcar and TriMet. Because
Colorado Railcar fulfilled its obligation to secure a letter of
credit by employing Collateral II as applicant, Collateral II
and TriMet did not initially contract with each other. Instead,
each separately contracted with a third-party: Colorado Railcar. This fourth relationship is the basis for Collateral II’s
claim that it should be characterized as a surety.
 We first note that a standby letter of credit itself does
not create a suretyship. A standby letter of credit functions
somewhat like a guaranty, given that it is the applicant’s
default that triggers the beneficiary’s ability to draw on the
letter of credit. James J. White & Robert S. Summers, Uniform Commercial Code § 26-1 (5th ed. 2002). “But a true letter of credit arrangement is not a guaranty.” Id. at § 26-2. First
and foremost, the issuer’s obligation to pay upon presentation
of conforming documents is a primary obligation, not a secondary one. Although default may trigger a draw, it is only
upon proper certification of the applicant’s default that the
issuer is obligated to pay. See Ronald A. & Caroline Olson,
Inc. v. U.S. Nat’l Bank, 689 P.2d 1021, 1022 (Or. Ct. App.
1984) (“[I]ssuer’s liability on a letter of credit is controlled
solely by the terms of that letter.”) (citation and internal quotation marks omitted).
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606 CRM COLLATERAL II v. TRICOUNTY METROPOLITAN TRANS.
 Furthermore, the independence principle controls the
relationship between the issuer and beneficiary. Under this
principle, the issuer must pay upon proper certification—with
limited exceptions for fraud—even if the beneficiary has
breached the underlying contract with the applicant. Id. (“A
beneficiary’s non-compliance with the underlying contract
does not affect the issuer’s liability unless a reference to the
underlying contract explicitly creates a condition for honoring
a draft.”) (citation and internal quotation marks omitted).
Given these distinct features of the letter of credit, it is widely
recognized that the issuer is not a guarantor. See In re
Hamada, 291 F.3d 645, 650-51 (9th Cir. 2002) (collecting
 Here, however, it is not the issuer that is claiming
surety status. It is the applicant—Collateral II. Oregon courts
look to the Restatement (Third) of Suretyship & Guaranty as
authoritative on suretyship law. See N. Marion Sch. Dist. #15
v. Acstar Ins. Co., 169 P.3d 1224, 1229 n.12 (Or. 2007)
(applying Rest. (Third) Sur. & Guar. § 73); Marc Nelson Oil
Prods., Inc. v. Grim Logging Co., Inc., 110 P.3d 120, 124 n.5
(Or. Ct. App. 2005) (noting Rest. (Third) Sur. & Guar. superseded Restatement Security). The Restatement states:
(1) [A] secondary obligor has suretyship status
(a) pursuant to contract (the “secondary
obligation”), an obligee has recourse
against a person (the “secondary obligor”)
or that person’s property with respect to the
obligation (the “underlying obligation”) of
another person (the “principal obligor”) to
that obligee; and
(b) to the extent that the underlying obligation or the secondary obligation is per-
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CRM COLLATERAL II v. TRICOUNTY METROPOLITAN TRANS. 607
formed the obligee is not entitled to
performance of the other obligation; and
(c) as between the principal obligor and the
secondary obligor, it is the principal obligor
who ought to perform the underlying obligation or bear the cost of performance.
(2) An obligee has recourse against a secondary obligor . . . whenever:
(b) pursuant to the secondary obligation,
(I) the secondary obligor has a duty to
effect, in whole or in part, the performance that is the subject of the underlying obligation; or
(ii) the obligee has recourse against the
secondary obligor or its property in the
event of the failure of the principal obligor to perform the underlying obligation[.]
Rest. (Third) Sur. & Guar. § 1.
The district court concluded that “it [was] clear as a matter
of law that [Collateral II] has the status of surety . . . by not
later than the date the parties executed Modification 1 to the
Contract.” The court went on to note that “[Collateral II] was
at all material times a secondary obligor [and] . . . [a]rguably,
[Collateral II] became a surety at the time KeyBank issued the
Letter of Credit . . . .” The district court erred for three reasons.
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608 CRM COLLATERAL II v. TRICOUNTY METROPOLITAN TRANS.
 First, the district court erred when it stated that Collateral II “arguably became a surety” when KeyBank issued the
Letter of Credit. As we outlined above and as the district court
correctly noted, the law on letters of credit is clear that simply
entering into a letter of credit transaction does not a suretyship
make. The hallmark of the surety is a secondary obligation.
When we examine the three relationships in a letter of credit
transaction there is typically no secondary liability. Instead,
the applicant and beneficiary owe each other primary obligations on the underlying contract, the issuer is primarily obligated to honor the beneficiary’s proper draw request, and the
applicant is primarily obligated to reimburse the issuer for any
payments made to the beneficiary. Under normal circumstances, and as contemplated by the Railcar Contract, Colorado Railcar would be the applicant and TriMet the
beneficiary. Despite the fact that this transaction does not mirror normal circumstances, Collateral II’s status as the applicant (on behalf of Colorado Railcar) on the Letter of Credit
does not make it a surety because it has undertaken no secondary obligation in connection with the transaction. Agreeing to purchase the Letter of Credit for Colorado Railcar only
resulted in a primary liability to Colorado Railcar, just as purchasing the Letter only made Collateral II primarily liable for
reimbursing KeyBank if it honored a draw on the Letter.
Second, the court erred in cursorily relying upon Ochoco
Lumber without adequately evaluating the substance of the
relationship there between the parties. In Ochoco Lumber,
Fibrex entered a loan contract with West One Bank under
which it was required to provide a letter of credit for the benefit of West One Bank as security. 994 P.2d at 794. Fibrex then
entered a sales contract with Ochoco Lumber. As part of their
agreement, Ochoco Lumber purchased the necessary letter of
credit for the benefit of West One Bank. Id. West One Bank
subsequently drew on the letter of credit in partial satisfaction
of the debt Fibrex owed it, and Ochoco Lumber was required
to reimburse the issuer, First Interstate Bank. Id. Ochoco
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CRM COLLATERAL II v. TRICOUNTY METROPOLITAN TRANS. 609
Lumber then sought to subrogate to West One’s rights against
Fibrex in an attempt to be made whole. Id.
The issue was whether the applicant could be subrogated to
the beneficiary’s rights against the common third-partydebtor. The Oregon Court of Appeals adopted what it characterized as the minority position that the issuer was a de facto
surety because that result was “consistent with the general
practice on standby letters of credit—that the issuer’s obligation to pay on the letter of credit only arises if there is
default.” Id. at 797. The court went on to note it was also consistent with the general principle that once the issuer honored
the draw on the letter of credit, “the issuer (and the applicant
if it has reimbursed the issuer) should be able to step into the
beneficiary’s shoes and assert its rights.” Id.
While the multiparty transaction is similar to the one present here, nothing in Ochoco Lumber dictates a finding that
Collateral II was a surety. Holding that issuers and applicants
may step into the shoes of beneficiaries in order to assert a
right to performance or payment is wholly different from
holding that an applicant is a surety to a third-party contract.
In Ochoco Lumber, Fibrex owed both West One Bank and
Ochoco Lumber a debt. Via the letter of credit Ochoco Lumber essentially paid Fibrex’s debt to West One Bank; it is
therefore only reasonable that it could step into the shoes of
West One Bank, the beneficiary, and assert its right to any
remaining debt owed to West One Bank in an effort to be
made whole. Here, Collateral II advocates the opposite result.
It is not asserting subrogated rights against the third party—
Colorado Railcar—to be repaid for its reimbursement to KeyBank after KeyBank honored the draw on the Letter of Credit.4
We note that pursuant to the Investment Agreement, Colorado Railcar
specifically agreed to reimburse Collateral II’s investors to the extent the
collateral they pledged to secure the Letter of Credit was foreclosed upon.
Thus, it seems Collateral II would be well within its rights to seek repayment from Colorado Railcar. The fact that Colorado Railcar closed its
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610 CRM COLLATERAL II v. TRICOUNTY METROPOLITAN TRANS.
Instead it seeks to completely avoid any payment to the beneficiary, TriMet, by asserting the surety defense of discharge.
This difference is fatal to Collateral II’s argument that it
should be characterized as a surety. Thus, the district court’s
reliance on Ochoco Lumber was misplaced. It should have,
and we must, examine the nature of the relationship more
closely to determine if a suretyship existed.
In conducting this examination, the district court stated the
law correctly; however, it went on to conclude that the letter
of credit was simply the instrument used to make Collateral
II a surety as Modification No. 1 made Collateral II answerable for Colorado Railcar’s default. Contrary to the district
court’s conclusion, Modification No. 1 does not indisputably
create a surety relationship.
 When we look to the definition of a surety, what is
lacking here is recourse. Although Collateral II purchased the
Letter of Credit and its investors pledged their property as
security, these obligations run strictly to KeyBank. Collateral
II owes no duty to TriMet under either the Letter of Credit or
Modification No. 1. The only right those instruments give TriMet is the right to draw on the Letter of Credit provided by
KeyBank; they do not give TriMet recourse against Collateral
II for Colorado Railcar’s default on its primary obligations for
TriMet’s loss in excess of the $3 million stipulated in the Letter of Credit.
 Being bound to the principal obligation is the defining
feature of a surety:
doors in December 2008 and liquidated its assets to satisfy debts owed to
secured lenders no doubt explains why Collateral II is not looking to it for
collection of its unsecured claims. See Colorado Railcar has Closed, Denver Bus. J., Dec. 29, 2008, available at http://www.bizjournals.com/
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CRM COLLATERAL II v. TRICOUNTY METROPOLITAN TRANS. 611
Although the relation of principal and surety generally springs from some agreement by which one person becomes personally bound for the debt of
another, it may likewise grow out of a transaction
whereby a person’s property becomes security for
payment of a debt or the performance of an act by
another. . . . Conversely, the parties to an instrument
given as collateral security for the payment of a debt
due by others are not subject to the law which governs sureties since they are not bound for the principal debt and their engagement is independent of it.
74 Am. Jur. 2d Suretyship § 10 (2005).
 Modification No. 1 could not have created a surety
relationship because it does not bind Collateral II to the primary obligations of Colorado Railcar. If, for example, the
Letter of Credit had not been extended, but had expired in
November 2007, TriMet would have had no right to pursue
Collateral II for the $3 million in the later event of Colorado
Railcar’s default on the Railcar Contract. Nothing in Modification No. 1 changes this. Collateral II’s participation was
independent of Colorado Railcar’s duties under the Railcar
Contract because it had no additional duties to perform or fulfill if Colorado Railcar failed to perform its primary obligation. Simply purchasing a letter of credit for security as part
of another’s performance contract does not raise the purchaser
to the status of surety, entitled to assert attendant defenses.5
 This modification was entered into for the purpose of
allowing “TriMet to draw on the [letter of credit] in the event
of default under [the Railcar] contract by [Colorado Railcar].”
It specifically limited Collateral II’s participation to define the
event triggering the right to draw and did not grant any rights
To be clear, we do not hold that a party may never be a surety where
a letter of credit is used as a security instrument. Here it is clear that the
parties never intended, nor structured the transaction to achieve that result.
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612 CRM COLLATERAL II v. TRICOUNTY METROPOLITAN TRANS.
or impose any additional obligations on Collateral II. Modification No. 1 did nothing more than give effect to the original
intent of TriMet and Colorado Railcar by clarifying the terms
of default under the Letter of Credit—Collateral II did not
undertake any new obligation to which it was not already
bound before Modification No. 1 was executed. With or without Modification No. 1, Collateral II was primarily obligated
to reimburse KeyBank for any payments made honoring a
proper draw on the Letter of Credit.
The fact that, prior to Modification No. 1, the Letter of
Credit required TriMet to certify Collateral II’s default without reference to Colorado Railcar does not change this result.
A disagreement over whether Collateral II could or could not
have actually been in default would not have relieved KeyBank of its duty to pay TriMet because disagreements
between the applicant and the beneficiary do not prevent the
issuer from honoring a proper draw in the absence of fraud.
Or. Rev. Stat. § 75.1030(4) (2009) (“Rights and obligations of
an issuer to a beneficiary . . . under a letter of credit are independent of the existence, performance or nonperformance of
a contract or arrangement out of which the letter of credit
arises or which underlies it, including contracts or arrangements between the . . . applicant and the beneficiary.”), Or.
Rev. Stat. §§ 75.1080, 75.1090 (2009). See also, W. Sur. Co.
v. Bank of S. Or., 257 F.3d 933, 936 (9th Cir. 2001) (“[I]n
determining an issuer’s liability for refusal to honor a letter of
credit, generally the court must look only to the terms of the
letter without regard to those in the underlying transaction.”).
Thus, even without Modification No. 1, upon proper certification of Collateral II’s default, KeyBank was obligated to
honor the draw—the very hallmark and beauty of letters of
credit. See Dolan, supra, at ¶¶ 1.05, 3.06 (noting the “paynow-argue-later” nature of standby letters of credit and the
relative ease and cheapness of obtaining them).
Undoubtedly, without Modification No. 1 litigation regarding the default term could have—and likely would have—
Page: 19 of 20
CRM COLLATERAL II v. TRICOUNTY METROPOLITAN TRANS. 613
ensued, given that Collateral II was not a party to the original
Railcar Contract. See White & Summers, supra, at § 26-7
(noting that once the issuer has honored the draw, the independence principle no longer controls and it would be acceptable for the applicant to sue the beneficiary for violations of
any underlying agreement). To give effect to the original
intent of the parties, and presumably in an attempt to avoid
delay and litigation if a draw was necessary, Modification No.
1 simply clarified that—for purposes of certifying Collateral
II’s default under the terms of the Letter of Credit—Collateral
II would be in default should Colorado Railcar fail to meet its
obligations. This does not create a secondary obligation to
TriMet or to KeyBank. Before and after Modification No. 1,
Collateral II was primarily liable on the reimbursement contract and nothing in the language of Modification No. 1
changed that obligation.
 Because the district court incorrectly concluded that
Collateral II was a surety, Collateral II was erroneously permitted to assert the defense of discharge. The district court
also erred when it concluded that the PMA materially
increased the risk Collateral II faced as a surety, thereby discharging Collateral II’s duty under Modification No. 1. Without an underlying duty, the district court found that TriMet
necessarily violated § 75.1100(1)(b)’s statutory warranty “[t]o
the applicant that the drawing does not violate any agreement
between the applicant and the beneficiary . . . .”
 Because Collateral II was not a surety, Collateral II
cannot invoke the defense of discharge to assert a violation of
the statutory warranty. Beyond this issue, the parties do not
contest the district court’s finding that TriMet’s draw on the
Letter of Credit was proper and, therefore, Collateral II is not
entitled to the award of damages.
Page: 20 of 20
614 CRM COLLATERAL II v. TRICOUNTY METROPOLITAN TRANS.
 Collateral II cannot be characterized as a surety, and
therefore is not entitled to the defense of discharge. TriMet’s
draw on the Letter of Credit was proper and did not violate
the statutory warranty of § 75.1100(1)(b). We reverse the
grant of summary judgment for Collateral II on that claim and
remand for entry of summary judgment in favor of TriMet.
We also reverse and remand the district court’s dismissal of
all remaining claims and cross-claims, with instructions to
dispose of them in accordance with this opinion.
REVERSED and REMANDED.
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