Kirchhoff-Consigli Construction Management, LLC

Filing 59

MEMORANDUM (Order to follow as separate docket entry) re: 45 MOTION to Amend/Correct 22 Answer to Complaint, Counterclaim, and File Amended Counterclaim. Signed by Honorable Matthew W. Brann on 8/22/2017. (jn)

IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF PENNSYLVANIA
KIRCHHOFF-CONSIGLI
CONSTRUCTION MANAGEMENT,
LLC,
Plaintiff,
v.
DELUXE BUILDING SYSTEMS,
INC.,
Defendant.

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No.: 4:15-CV-01462

(Judge Brann)

MEMORANDUM OPINION
AUGUST 22, 2017
I.

BACKGROUND
Plaintiff, Kirchhoff-Consigli Construction Management, LLC, (hereinafter

“KCCM”) filed this action against Defendant, Deluxe Building Systems, Inc., a
subcontractor, (hereinafter “Deluxe”); KCCM is the general contractor for Pace
University’s expansion of its Pleasantville, New York campus. KCCM
subcontracted with Deluxe to build modular dormitories at its Berwick,
Pennsylvania facility and deliver those units to the Pace campus.
KCCM filed a five count complaint against Deluxe.1 Count I alleges breach
of contract, Count II is for replevin, Counts III and IV are for injunctive relief,2 and

1

July 28, 2015, ECF No. 1.

Count V is for conversion. Deluxe, in turn, filed two counterclaims against
KCCM, alleging breach of contract in Count I and unjust enrichment in Count II.3
Exactly one year after the complaint was filed, on August 26, 2016, Deluxe
filed a Motion to Amend its counterclaim.4 The Court delayed ruling on the
motion because the parties requested referral to mediation.5 The case trial track in
effect at that time was set aside, and after some delays, the matter proceeded to an
unsuccessful mediation.
I now take up the motion, which was fully briefed last year and is overripe
for disposition. For the following reasons I will grant the motion in part and deny
it in part.
II.

DISCUSSION
As part of the subcontract between the parties (hereinafter “the contract” or

“the subcontract”), Deluxe was required to secure an Irrevocable Standby Letter of
Credit6 in the amount of one-million dollars, naming KCCM as beneficiary. On

2

A hearing on KCCM’s motion for preliminary injunction was held on August 24, 2015. I
granted the motion from the bench, which was subsequently memorialized by Order on
August 28, 2015.

3

August 21, 2015, ECF No. 22.

4

August 26, 2016, ECF No. 45.

5

ECF No. 40.

6

The parties at times refer to it as a letter of credit. While letters of credit and irrevocable
standby letters of credit are treated the same under the Uniform Commercial Code, it is
important to recognize that they are distinct documents utilized differently (as explained later

- 2 - 

July 28, 2016, KCCM sent the bank a drawing certificate requesting a withdrawal
of the entire one-million dollars. The bank duly authorized the withdrawal of onemillion dollars to KCCM (hereinafter “the draw”).
Deluxe now moves to amend Counts I and II of its counterclaims to include
the draw in its breach of contract and unjust enrichment claims, respectively.
Deluxe also seeks to add a third counterclaim to allege breach of warranty under
the Uniform Commercial Code.
A.

Amending a Pleading

Amendment prior to trial is governed by Federal Rule of Civil Procedure
15(a). More than 21 days after filing a pleading, “a party may amend its pleading
only with the opposing party’s written consent or the court's leave.”7 The rule
continues, “the court should freely give leave when justice so requires.”8
Sixty years ago, the United States Supreme Court admonished the bench and
bar that “the federal rules reject the approach that pleading is a game of skill in
which one misstep by counsel may be decisive to the outcome and accept the
principle that the purpose of pleading is to facilitate a proper decision on the

in the body of this Memorandum Opinion). I’ve cited to the parties use of terms, but with the
understanding that the document at issue here is an irrevocable standby letter of credit.
7

Fed. R. Civ. P. 15(a)(2).

8

Id.

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merits.”9 Expounding further on Rule 15 the Supreme Court later explained that “if
the underlying facts or circumstances relied upon by a plaintiff may be a proper
subject of relief, he ought to be afforded an opportunity to test his claim on the
merits.”10 “In the absence of any apparent or declared reason—such as undue
delay, bad faith or dilatory motive on the part of the movant, repeated failure to
cure deficiencies by amendments previously allowed, undue prejudice to the
opposing party by virtue of allowance of the amendment, futility of amendment,
etc.—the leave sought should, as the rules require, be ‘freely given.’”11
A District Court has the discretion to grant or deny the opportunity to
amend.12 However, that discretion is tempered by guidance from the United States
Court of Appeals for the Third Circuit which has stated that “in evaluating
challenges to the denial of opportunity to amend we have held consistently that
leave to amend should be granted freely.”13
Wright & Miller’s Federal Practice and Procedure explains that “perhaps the
most important factor listed by the Court for denying leave to amend is that the

9

Conley v. Gibson, 355 U.S. 41, 48, 78 S.Ct. 99, 103, 2 L.Ed.2d 80 (1957).

10

Foman v. Davis, 371 U.S. 178, 182 (1962).

11

Id.

12

See id.

13

Dole v. Arco Chem. Co., 921 F.2d 484, 486 (3d Cir. 1990)

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opposing party will be prejudiced if the movant is permitted to alter a pleading.”14
“Conversely, if the court is persuaded that no prejudice will accrue, the amendment
should be allowed.”15 “Thus, the facts of each case must be examined to determine
if the threat of prejudice is sufficient to justify denying leave to amend.”16
Our Court of Appeals agrees. “The trial court’s discretion under Rule 15,
however, must be tempered by considerations of prejudice to the non-moving
party, for undue prejudice is the touchstone for the denial of leave to amend.”17
“But the non-moving party must do more than merely claim prejudice; it must
show that it was unfairly disadvantaged or deprived of the opportunity to present
facts or evidence which it would have offered had the ... amendments been
timely.”18
“[I]f the amendment substantially changes the theory on which the case has
been proceeding and is proposed late enough so that the opponent would be
required to engage in significant new preparation, the court may deem it
prejudicial.”19 “Likewise, if the proposed change clearly is frivolous or advances a

14

§ 1487Amendments With Leave of Court—When Leave to Amend May Be Denied, 6 Fed.
Prac. & Proc. Civ. § 1487 (3d ed.).

15

Id.

16

Id.

17

Heyl & Patterson Int'l, Inc. v. F. D. Rich Hous. of Virgin Islands, Inc., 663 F.2d 419, 425 (3d
Cir. 1981) (internal citation omitted).

18

Bechtel v. Robinson, 886 F.2d 644, 652 (3d Cir. 1989) (internal citation omitted).

19

Ross v. Jolly, 151 F.R.D. 562, 565 (E.D. Pa. 1993).

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claim or defense that is legally insufficient on its face, the court may deny leave to
amend.”20
Here, KCCM argues that amendment is futile.
B.

Motion to Dismiss Standard of Review

“Where a defendant raises futility of amendment as a defense, the Court
must apply the standard of a motion to dismiss, pursuant to Fed.R.Civ.P.
12(b)(6).”21 “To survive a motion to dismiss, a complaint must contain sufficient
factual matter, accepted as true, to ‘state a claim to relief that is plausible on its
face.’”22 “A claim has facial plausibility when the plaintiff pleads factual content
that allows the court to draw the reasonable inference that the defendant is liable
for the misconduct alleged.”23 “Although the plausibility standard does not impose
a probability requirement, it does require a pleading to show more than a sheer
possibility that a defendant has acted unlawfully.”24 Moreover, “[a]sking for

20

Id.

21

Provenzano v. Integrated Genetics, 22 F. Supp. 2d 406, 411 (D.N.J. 1998), and see Powell v.
Wetzel, No. 1:12-CV-2455, 2016 WL 8731445, at *3 (M.D. Pa. Sept. 13, 2016) (Schwab,
M.J.), report and recommendation adopted, No. 1:12-CV-02455, 2016 WL 8710470 (M.D.
Pa. Sept. 30, 2016) (“Thus, in determining whether an amendment would be futile, we apply
the same standard as we apply in determining whether a complaint fails to state a claim upon
which relief can be granted under Fed. R. Civ. P. 12(b)(6).” “In other words, ‘[t]he District
Court determines futility by taking all pleaded allegations as true and viewing them in a light
most favorable to the plaintiff.’”

22

Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. 544, 570 (2007).

23

Iqbal, 556 U.S. at 678.

24

Connelly v. Lane Const. Corp., No. 14-3792, 2016 WL 106159, at *3 (3d Cir. Jan. 11, 2016)
(Jordan, J.) (internal quotations and citations omitted).

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plausible grounds . . . calls for enough facts to raise a reasonable expectation that
discovery will reveal evidence of [wrongdoing].”25 The plausibility determination
is “a context-specific task that requires the reviewing court to draw on its judicial
experience and common sense.”26 No matter the context, however, “[w]here a
complaint pleads facts that are ‘merely consistent with’ a defendant’s liability, it
‘stops short of the line between possibility and plausibility of entitlement to
relief.’”27
When disposing of a motion to dismiss, a court must “accept as true all
factual allegations in the complaint and draw all inferences from the facts alleged
in the light most favorable to [the plaintiff].”28 However, “the tenet that a court
must accept as true all of the allegations contained in the complaint is inapplicable
to legal conclusions.”29
In this matter, KCCM argues that amendment is futile because Deluxe
materially breached the subcontract. Thus, Deluxe is estopped from claiming
KCCM defaulted as Deluxe is the party responsible for the initial breach.

25

Twombly, 550 U.S. at 556.

26

Iqbal, 556 U.S. at 679.

27

Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 557 (internal quotations omitted)).

28

Phillips v. Cnty. of Allegheny, 515 F.3d 224, 228 (3d Cir. 2008) (Nygaard, J.).

29

Iqbal, 556 U.S. at 678 (internal citations omitted).

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C. Terms of the Subcontract Relevant to the Irrevocable Standby
Letter of Credit
Attachment E to the subcontract between KCCM and Deluxe required that
Deluxe obtain the irrevocable standby letter of credit. I set it forth in its entirety
below:
Attachment E
To the Subcontract between Kirchhoff-Consigli Construction
Management (KCCM) and DeLuxe Building Systems (DBS), for
KCCM Project # 421, Pace University Master Plan Phase 1A
1. As security for its faithful performance of all of its obligations under
the Subcontract, DBS shall furnish an irrevocable standby letter of
credit in the amount of One Million Dollars ($1,000,000), in the form
attached hereto, within ten (10) days of the execution by both parties
of this Subcontract. The failure to furnish this letter of credit shall be
deemed a material breach of this Subcontract, and grounds for
immediate termination after ten (10) days’ notice to DBS and the
failure of DBS to so furnish the letter of credit within that ten (10) day
period. Upon such termination, KCCM shall be entitled to all
remedies provided for in the Subcontract, as well as any other
remedies available at law or in equity.
2. DBS’s principal Donald E. Meske shall execute a Personal Guaranty
of the form attached hereto, simultaneously with DBS’s execution of
this Subcontract.
3. DBS shall execute the FIRST AMENDMENT TO SUBCONTRACT
attached hereto simultaneously with its execution of this Subcontract.
4. Should DBS fail to meet any of the scheduled milestones identified in
Exhibit E, Project Schedule Requirements, of this Subcontract,
provided KCCM is current in its payments to DBS pursuant to the
terms of the Subcontract, KCCM may assess liquidated damages
against DBS as follows:
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a. Five Thousand Dollars ($5,000) per day for each of the first
thirty (30) days past the schedule milestone that DBS has failed
to complete the task associated with the scheduled milestone.
b. Ten Thousand ($10,000) per day starting on the thirty-first
(31st) day and for every day thereafter that DBS has failed to
complete the task associated with the scheduled milestone.
KCCM shall be entitled to withhold such liquidated damages from
amounts otherwise due to DBS under the Subcontract. In the event
that DBS shall recover the Subcontract schedule and ultimately meet
the completion date, the amount of liquidated damages withheld shall
be restored to the Subcontract price, less the sum of any and all costs
incurred by KCCM in connection with maintaining and/or recovering
the Subcontract schedule by reason of the failure of DBS to meet
milestones, and paid to Subcontractor with its payment for its next
regularly scheduled requisition; it is expressly agreed and
acknowledged that in its sole discretion KCCM may expend any and
all amounts reasonably necessary to mitigate the impacts of any DBS
delay to the Project.
The amounts set forth above are fixed and agreed on by and between
the KCCM and DBS because of the impracticability and difficulty
fixing and ascertaining the true value of the damages KCCM will
sustain by failure of the DBS to complete its Work in accordance with
the scheduled milestones, such as loss of revenue, interest charges,
liquidated damages assessed by the project Owner against KCCM,
delays caused to other contractors, and other damages. Said amounts
are agreed to be a reasonable estimate of the amount of damages
which KCCM will sustain and said amount shall be deducted or
withheld from any monies due or that may become due to DBS, and if
said monies are insufficient to cover said damages, then DBS shall
pay the amount of the difference.
The right of KCCM to assess liquidated damages as provided for
herein is independent of KCCM’s right to backcharge DBS for
liquidated damages assessed against KCCM by the Owner that result
from delay or other actions or inactions on the part of DBS.

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5. In addition to the rights and remedies afforded it under applicable law
and under other provisions of this Subcontract, should DBS fail to
meet any of the scheduled milestones identified in Exhibit E
associated with its modular manufacturing, or should DBS otherwise
breach a material condition of this Subcontract while it is engaged in
the modular manufacturing for this Project, then KCCM or its
designee shall be entitled to enter into DBS’s facilities to inspect he
work and the manufacturing process, and shall be afforded direct
access to any/all DBS executive leadership, management, and
production supervisory personnel for the purpose of communicating
about the status and completion of the work. During the course of
such communication, DBS personnel shall truthfully and accurately
answer all questions by KCCM or its designee about the status of and
plans for completion of its work, DBS’s financials for the project, and
other topics relevant to DBS’s successful completion of its work, and
shall receive any suggestions or guidance that KCCM or its designee
may offer. 30
D.

Terms of the Irrevocable Standby Letter of Credit

The text of the revised irrevocable standby letter of credit at issue, dated
October 2, 2014 is also set forth, in full.
Ladies & Gentlemen:
We, First Keystone Community Bank (the “Bank”), hereby establish
and issue in favor of Beneficiary, Kirchhoff-Consigli Construction
Management, LLC (“Beneficiary”) this Amended Irrevocable Standby
Letter of Credit No. 224 (the “Letter of Credit”) in the aggregate
amount not exceeding One Million Dollars and No Cents
($1,000,000.00) in support of the liabilities and obligations of the
Account Party, DeLuxe Building Systems, Inc. and Donald E. Meske
to the Beneficiary, which will be available upon presentment of the
Beneficiary’s draft effective immediately and expiring on the
Expiration Date (as hereinafter defined), providing Kirchhoff-Consigli
has no default toward DeLuxe Building Systems or Donald E. Meske.

30

ECF No. 5-5 at 60-61.

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This Amended Irrevocable Letter of Credit replaces and supersedes
the original version dated September 29, 2014.
Each draft drawn by the Beneficiary must be marked “Drawn under
First Keystone Community Bank Irrevocable Standby letter of Credit
No. 224” and be accompanied by the original of this letter, or if the
original has been returned to the Bank, a certified copy thereof, and a
statements signed by an authorized representative of the Beneficiary
that the amount of the draft does not exceed the amount due and
owing to the Beneficiary from the Account Party, and there has been a
default by Account Party under the terms of a Subcontract between
Deluxe Building Systems, Inc. (“Subcontractor” and the Beneficiary
dated June 10, 2014, together with any amendments thereto or
personal guarantees thereof (“Subcontract”) beyond any applicable
cure period or failure by Subcontractor to perform or pay for any of
the obligations required by the Subcontract or to pay to the
Beneficiary any damages or other amounts which the Subcontractor or
Account Party is required to pay to the Beneficiary under the terms of
the Subcontract provided therewith. This Letter of Credit shall be
released and the original returned to the Bank by the Beneficiary
within 10 days of the date that het final payment of retainage under
the Subcontract becomes due to the Subcontractor.
Beneficiary under the terms of the Subcontract provided therewith.
This Letter of Credit shall be released and the original returned to the
Bank by the Beneficiary within 10 days of the date that the final
payment of retainage under the Subcontract becomes due to the
Subcontractor.
The Bank is not to be called upon to resolve issues of law or fact
between the Beneficiary and Account Party. Any draft(s) drawn
hereunder and in compliance with the terms of this Letter of Credit
will be duly honored if drawn and presented to our office at the above
address prior to the expiration of this Letter of Credit. Partial
drawings are permitted. The Beneficiary hereby agrees to endorse of
the reverse side of the original Letter of Credit the amount(s) of any
such partial draft(s) which Beneficiary is paid, and to surrender the

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original Letter of Credit to the Bank together with any draft which
exhaust the amount available under this Letter of Credit.31
E.

Text of the Drawing Certificate and Accompanying Certification

Anthony M. Consigli, the Chief Executive Officer of KCCM signed and
issued a drawing certificate to the bank. That drawing certificate is also set forth in
pertinent part:
The undersigned, Kirchhoff-Consigli Construction Management,
LLC, now known as Consigli Construction NY, LLC (the
“Beneficiary”), hereby certifies to First Keystone Community Bank as
follows:
The Beneficiary is entitled to draw upon the Letter of Credit in the
amount of $1,000,000.00, pursuant to that certain Subcontract
between DeLuxe Building Systems, Inc. (the “Account Party”) and
the Beneficiary dated June 10, 2014, together with any amendments
thereto or personal guarantees thereof (the “Subcontract”).
Pursuant to the Letter of Credit, this Drawing Certificate is
accompanied by the following documents:
1. An original of the Letter of Credit; and
2. A statement signed by an authorized representative of the
Beneficiary.32
The attached certification signed by Mr. Consigli is additionally noted as
follows:
The undersigned Anthony M. Consigli, Chief Executive Officer of
Kirchhoff-Consigli Construction Management, LLC, now known as

31

ECF No. 45-1 at 4-5.

32

ECF No. 45-2 at 4.

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Consigli Construction NY, LLC, does hereby certify to First Keystone
Community Bank, as follows:
1. I am the duly elected Chief Executive Officer of KirchhoffConsigli Construction Management, LLC, now known as Consigli
Construction NY, LLC, the beneficiary (“Beneficiary”) under that
certain Irrevocable Standby Letter of Credit Number 224, as
amended by Amendment to Irrevocable Standby Letter of Credit
Number 224 (the “Letter of Credit”), and I am authorized to submit
this certification on behalf of the Beneficiary.
2. The Beneficiary is now known as Consigli Construction NY, LLC,
as evidenced by the certificate issued by the Secretary of State of
the State of New York on July 26, 2016, a copy of which is
attached as Exhibit A.
3. I am making this certification pursuant to the terms of the Letter of
Credit and that certain Drawing Certificate dated July 28, 2016
(the “Drawing Certificate”), pursuant to which the Beneficiary is
drawing on the Letter of Credit in the amount of One Million
Dollars ($1,000,000.00) (the “Draw”).
4. DeLuxe Building Systems, Inc. (the “Account Party”) is in default
beyond any applicable cure period of its obligations to the
Beneficiary under that certain Subcontract between the Account
Party and the Beneficiary dated June 10, 2014, together with any
amendments thereto or personal guarantees thereof (the
“Subcontract”). The Account Party has failed to perform its
obligations and pay amounts due to the Beneficiary under the
Subcontract.
5. As of the date of this certification, the Account Party owes at least
$1,180,566 to the Beneficiary for failure to perform its obligations
under the Subcontract, and such amount owed by the Account
Party continues to increase because the Account Party’s scope of
work is not completed and the Account Party ceased performing all
services under the Subcontract.

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6. The amount of the Draw does not exceed the amount due and
owing to the Beneficiary from the Account Party.33
This certification was dated July 28, 2016 and signed by Mr. Consigli.
F.

Amendment to Count I, Breach of Contract

As written presently, Count I of Deluxe’s counterclaims against KCCM is a
claim entitled “Breach of Contract - Failure to Pay.”34 Deluxe originally asserted
in this claim that “KCCM was required to…make prompt payments to
Deluxe…[and that] KCCM breached the Subcontract by…failing and refusing to
make payment for work performed by Deluxe.”35 The demand in Count I is for
damages “in excess of $1,500,000.”36
The proposed amendment to Count I changes the title to succinctly “Breach
of Contract.”37 The amended counterclaim contains the language quoted above but
adds the following: “Further the Letter of Credit could only be drawn upon if
KCCM was not in default of its obligations under the Subcontract and if sums were
owed to KCCM.”38 Deluxe also proposes to add language that “KCCM breached
the Subcontract and the Letter of Credit by drawing on the Letter of Credit at a

33

ECF No. 45-2 at 5-6.

34

ECF No. 22. at 14.

35

ECF No. 22 at 14, ¶¶ 9-10.

36

ECF No. 22 at 14.

37

ECF No. 45-3 at 22 and ECF No. 45-5 at 22.

38

ECF No. 45-3 at 22, ¶ 14 and ECF No. 45-4 at 22, ¶ 14.

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time when it was in default of its obligations under the Subcontract and at a time
when sums were not owed to KCCM.”39 Finally, Deluxe proposes to change the
damages demand to read “As a result of the breaches of the Subcontract and Letter
of Credit, Deluxe has incurred, and continues to incur, damages in excess of
$1,000,000.”40
G. Amendment to Count II, Unjust Enrichment
Count II, Unjust Enrichment, presently reads in part, “KCCM has been
enriched, at Deluxe’s expense, by the services and products provided by Deluxe,
which have not been paid for by KCCM.”41 Deluxe seeks to amend this sentence to
add the following concluding language: “and by the funds received by the
wrongful Draw under the Letter of Credit.”42
H. Adding Count III, Breach of Warranty Under the Uniform
Commercial Code
Finally, Deluxe seeks to add a third counterclaim, Count III, Breach of
Warranty under the Uniform Commercial Code to allege, in relevant part:
“Pursuant to section 5-110 of the Uniform Commercial Code, as codified in
Pennsylvania at 13 Pa.C.S.A. § 5110, if a letter of credit is presented and honored,
the beneficiary (KCCM), among other things, warrants to the applicant (Deluxe)

39

ECF No. 45-3 at 22, ¶ 15 and ECF No. 45-4 at 23, ¶ 15.

40

ECF No. 45-3 at 23, ¶ 16 and ECF No. 45-4 at 23, ¶ 16.

41

ECF No. 22 at 14, ¶ 13.

42

ECF No. 45-3 at 23, ¶ 18 and ECF No. 45-4 at 24, ¶ 18.

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that the drawing on the letter of credit does not violate any agreement between the
applicant and beneficiary or any other agreement intended by them to be
augmented by the letter of credit (the “UCC Letter of Credit Warranty”).43
“KCCM’s draw on the Letter of Credit is in breach of the UCC Letter of Credit
Warranty because KCCM has defaulted under the Subcontract, sums were not
owed by Deluxe to KCCM and KCCM violated the provisions of the Letter of
Credit.” 44
I.

Amendment will be permitted as to Counts I and II

KCCM initially argues that amendment should not be permitted because
Deluxe’s principal, Dan Meske, conceded in his testimony at the August 24, 2015
preliminary injunction hearing45 that Deluxe had defaulted on the subcontract.
KCCM argues that Deluxe is estopped from claiming KCCM’s default when
Deluxe is the party responsible for the initial breach.

43

ECF No. 45-3 at 23, ¶ 21 and ECF No. 45-4 at 25, ¶ 21.

44

ECF No. 45-3 at 24, ¶ 22 and ECF No. 45-4 at 25, ¶ 22.

45

The testimony that KCCM characterizes as Dan Meske’s acknowledgment of default is as
follows.
Q: Are you also aware that they have reserved the right, under article eight, that if they pay
your vendors and suppliers and your payroll that they can offset those payments against
what you’re due?
A: Yes
Q: And there is no dispute here that those things happened. Correct?
A: That’s correct.

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The flaw in KCCM’s argument is that it is asking the Court to make a
factual finding as to the ultimate issue in dispute in this action: who defaulted on
the subcontract at issue, Plaintiff or Defendant? I simply cannot make this factual
finding at this stage of the proceedings. Moreover, KCCM is asking the Court to
make a factual finding based on a proceeding that dealt with the “likelihood of
success on the merits” but was not intended as a resolution of the ultimate issue on
the merits.46 It is well-settled that “a preliminary injunction is customarily granted
on the basis of procedures that are less formal and evidence that is less complete
than in a trial on the merits,”47
The current procedural posture of this matter is such that I must accept the
facts as alleged by Deluxe as true, and for the purposes of today’s motion accept its
contention that KCCM defaulted. As such, the above cited amendments to Counts
I and II would survive a motion to dismiss and amendment would not be futile.
Viewing the facts in that light, therefore, amendment will be permitted as
there is no undue prejudice to KCCM in allowing amendment. “Prejudice becomes

46

I granted its motion for preliminary injunction, thus finding a likelihood of success on the
merits that Deluxe, and not KCCM, defaulted. But for me to hold as such on the merits now
would be an overreach of my authority.

47

Kos Pharm., Inc. v. Andrx Corp., 369 F.3d 700, 718 (3d Cir. 2004), citing University of
Texas v. Camenisch, 451 U.S. 390, 395, 101 S.Ct. 1830, 68 L.Ed.2d 175 (1981).

- 17 - 

‘undue’ when the opponent shows it would be unfairly disadvantaged or deprived
of the opportunity to present facts or evidence which it would have offered.”48
If KCCM drew on the one-million dollar irrevocable standby letter of credit
in support of monies it claims Deluxe owed to it, presumably that one-million
dollar draw would be part of the evidence KCCM would present in its case in chief
as to any net damages due.49 Moreover, as to Counts I and II, KCCM has prepared
a defense to the breach of contract and unjust enrichment claims as far back as
August 21, 2015 when the answer and counterclaims were filed. The proposed
amendment as to those two counts merely expands the scope of the factual
allegations from the subcontract exclusively to also include the irrevocable standby
letter of credit. Additionally, discovery is still ongoing, and dispositive motions
are not due until December 31, 2017. I conclude that there is little prejudice to
KCCM in permitting amendment.
J.

Deluxe will not be permitted to add counterclaim Count III.

KCCM next argues that “Deluxe’s motion to amend is also procedurally
deficient to the extent that the amended complaint fails to state a claim against

48

Harrison Beverage Co. v. Dribeck Importers, Inc., 133 F.R.D. 463, 468 (D.N.J. 1990)

49

In fact, irrevocable standby letters of credit have been described aptly in the following
manner: “If Customer defaults, Beneficiary can receive what are in effect liquidated damages
without incurring any litigation costs.” Michael Stern, The Independence Rule in Standby
Letters of Credit, 52 U. Chi. L. Rev. 218, 234 (1985)

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KCCM for Breach of Warranty under the Uniform Commercial Code.”50
Pennsylvania’s codification of the commercial code states:
(a) Warranties generally.--If its presentation is honored, the
beneficiary warrants:
(1) to the issuer, any other person to whom presentation is made
and the applicant that there is no fraud or forgery of the kind
described in section 5109(a) (relating to fraud and forgery
generally); and
(2) to the applicant that the drawing does not violate any
agreement between the applicant and beneficiary or any other
agreement intended by them to be augmented by the letter of
credit.51
The Uniform Commercial Code defines a letter of credit as “a definite
undertaking that satisfies the requirements of the Section 5-104 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.”52
The Westlaw annotations to the statue state “this warranty has primary
application in standby letters of credit or other circumstances where the applicant
is not a party to an underlying contract with the beneficiary.”53 “It is not a warranty
that the statements made on the presentation of the documents presented are
truthful nor is it a warranty that the documents strictly comply under Section 5                                                            
50

ECF No. 47 at 3.

51

13 Pa.C.S.A. § 5110.

52

U.C.C. § 5-102.

53

13 Pa.C.S.A. § 5110 note 2.

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108(a).”54 “It is a warranty that the beneficiary has performed all the acts expressly
and implicitly necessary under any underlying agreement to entitle the beneficiary
to honor.”55 “If, for example, an underlying sales contract authorized the
beneficiary to draw only upon ‘due performance’ and the beneficiary drew even
though it had breached the underlying contract by delivering defective goods,
honor of its draw would break the warranty.”56 “By the same token, if the
underlying contract authorized the beneficiary to draw only upon actual default or
upon its or a third party’s determination of default by the applicant and if the
beneficiary drew in violation of its authorization, then upon honor of its draw the
warranty would be breached.”57 “In many cases, therefore, the documents
presented to the issuer will contain inaccurate statements (concerning the goods
delivered or concerning default or other matters), but the breach of warranty arises
not because the statements are untrue but because the beneficiary's drawing
violated its express or implied obligations in the underlying transaction.”58

54

Id.

55

Id.

56

Id.

57

Id.

58

Id.

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“An ‘irrevocable standby letter of credit,’ is different from a standard
commercial letter of credit.”59 “The latter is a simple payment mechanism.”60
“Rather than a buyer promising to pay seller, a buyer/account party has issuer
promise to pay a seller/beneficiary; payment is expected to occur through the
issuer.”61 “In contrast, the standby letter of credit is merely a backup.”62 “The
beneficiary makes proper demand upon the issuer only if the account party fails to
pay or perform.”63 “The Uniform Commercial Code makes no distinction between
these different uses of a letter of credit.”64 “The standby letter of credit differs from
the traditional letter of credit in that the beneficiary may draw on the standby letter
of credit only after the customer defaults on the underlying contract.”65 “[U]nder
the standby letter of credit, the beneficiary usually generates all of the necessary
documents himself (usually a simple statement that the customer is in default).”66
“The standby letter of credit allows the beneficiary to recover damages simply by
asserting that the customer has defaulted on the contract; except where the fraud in

59

Arbest Construction Co. v. First Nat'l Bank & Trust Co. of Oklahoma City, 777 F.2d 581,
585 (10th Cir. 1985).

60

Id.

61

Id.

62

Id.

63

Id.

64

18 Summ. Pa. Jur. 2d Commercial Law § 15:2 (2d ed.).

65

Michael Stern, The Independence Rule in Standby Letters of Credit, 52 U. Chi. L. Rev. 218,
219–20 (1985).

66

Id.

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the transaction exception applies, the issuer is not permitted to refuse payment
based either on its belief that the beneficiary’s assertion is false or on the existence
of any defenses that the customer may have on the underlying contract.”67
“Letters of credit serve international commerce by providing assurance of
prompt payment at minimal cost.”68 “In the ordinary letter of credit transaction,
there are at least three distinct agreements: ‘the underlying contract between the
customer and the beneficiary which gave rise to their resort to the letter of credit
mechanism to arrange payment; the contract between the bank and its customer
regarding the issuance of the letter and reimbursement of the bank upon its
honoring a demand for payment; and the letter of credit itself, obligating the bank
to pay the beneficiary.’”69 “Customer also bears the risk that Beneficiary will
demand payment without justification—that is, that Beneficiary will assert that
Customer has defaulted when it knows that Customer has complied with the terms
of the contract.”70

67

Id.

68

Sound of Mkt. St., Inc. v. Cont'l Bank Int'l, 819 F.2d 384, 388 (3d Cir. 1987).

69

Id. citing Insurance Co. of North America v. Heritage Bank, N.A., 595 F.2d 171, 173 (3d
Cir.1979); accord Voest-Alpine International Corp. v. Chase Manhattan Bank, N.A., 707
F.2d 680, 682 (2d Cir.1983); First Commercial Bank, 486 N.Y.S.2d 718, 475 N.E.2d at
1258.

70

Michael Stern, The Independence Rule in Standby Letters of Credit, 52 U. Chi. L. Rev. 218,
234 (1985).

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KCCM argues that to state a claim under the UCC, Deluxe must have
alleged that the draw is violative of the subcontract, as opposed to violative of the
letter of credit itself. I agree.
The subcontract between KCCM and Deluxe states very little regarding the
irrevocable standby letter of credit. The only reference to the irrevocable standby
letter of credit merely states that Deluxe must obtain one. The subcontract places
no limits on KCCM’s ability to draw. The sole reference in the subcontract to the
irrevocable standby letter of credit states, in pertinent part:
As security for its faithful performance of all of its obligations under
the Subcontract, DBS shall furnish an irrevocable standby letter of
credit in the amount of One Million Dollars ($1,000,000), in the form
attached hereto, within ten (10) days of the execution by both parties
of this Subcontract. The failure to furnish this letter of credit shall be
deemed a material breach of this Subcontract, and grounds for
immediate termination after ten (10) days’ notice to DBS and the
failure of DBS to so furnish the letter of credit within that ten (10) day
period. Upon such termination, KCCM shall be entitled to all
remedies provided for in the Subcontract, as well as any other
remedies available at law or in equity.
The UCC itself notes, as relevant to the parties here, “if its presentation is
honored, the beneficiary [here, KCCM,] warrants to the applicant [here, Deluxe]
that the drawing does not violate any agreement between the applicant [Deluxe]
and beneficiary [KCCM] or any other agreement intended by them to be
augmented by the letter of credit.”71

71

13 Pa. C.S.A. § 5110(a)(2).

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KCCM argues that “in order to state a claim under the statute, a claimant
must demonstrate that a draw is violative of some extraneous agreement, as
opposed to the letter of credit itself.”72 The footnote to the Al Makaaseb Gen.
Trading Co. case KCCM cited to this position states:
In its motion for reconsideration, plaintiff argues that the revised 2001
version of the Article V is incompatible with the holding in the PNC
case.73 This Court disagrees with plaintiff's assertions and finds that
the PNC case remains good law and that the revised Section 5110
does not create a “warranty of veracity.” Revised Section 5110 states
that a document required for presentation neither be forged or
materially fraudulent, nor should it violate any agreement between the
applicant and the beneficiary or any other agreement intended by them
to be augmented by the letter of credit. As explained below, the Court
finds that there is no evidence that the document was forged or
materially fraudulent, nor was there evidence that the letter of credit
violated any other agreement between USSI and plaintiff or the
contracting parties, USSI and VG.74

72

ECF No. 47 at 9.

73

PNC Bank, Nat'l Ass'n v. Liberty Mut. Ins. Co., 912 F. Supp. 169 (W.D. Pa.), aff'd sub nom.
PNC Bank Nat. Ass'n v. Liberty Mut. Ins. Co., 101 F.3d 691 (3d Cir. 1996) (Bank that had
paid $3 million to beneficiary upon presentment of sight draft drawn against irrevocable,
standby letter of credit brought action against beneficiary for breach of warranty and
fraudulent misrepresentation. On cross-motions for summary judgment and bank's motion to
strike affidavit submitted by beneficiary's attorney, the District Court, Cindrich, J., held that:
(1) beneficiary did not breach beneficiary warranty by presenting demand for payment
containing false recitation of fact; (2) presentment clause in letter of credit did not constitute
representation as to facts and thus, could not form basis of claim for fraudulent
misrepresentation under Pennsylvania law; (3) attorney's affidavit submitted as expert
opinion would not be considered.)

74

Al Makaaseb Gen. Trading Co. v. U.S. Steel Int'l, Inc., 412 F. Supp. 2d 485, 495 n. 6 (W.D.
Pa. 2006).

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Here, KCCM is correct that “Deluxe has not identified any contract
provision that prohibited the draw.”75 Without allegations of how KCCM’s draw
on the letter of credit violates the subcontract between the parties, proposed
amended counterclaim III fails to state a claim.
By obtaining the irrevocable standby letter of credit, Deluxe undertook
precisely the risk the document contemplated -- that KCCM would draw on it.76 It

75

ECF No. 47 at 9.

76

The risk inherent in obtaining an irrevocable standby letter of credit has been described
thusly:
Consider the following hypothetical standby letter of credit transaction. Beneficiary, a
corporation, and Customer, a building contractor, enter into a contract under which Customer
is to construct an office building in Japan for a contract price of five million dollars.
Beneficiary, wishing to be protected in the event that Customer fails to perform, requires
Customer to obtain a standby letter of credit in Beneficiary's favor in the amount of
$500,000. Under the terms of the standby letter of credit, Beneficiary is entitled to payment
when it presents to the issuing bank a written statement that Customer has defaulted upon the
contract. Assuming either that no fraud in the transaction exception to the rule of
independence existed or that the parties were unaware of such an exception, would the
parties be willing to enter into such an arrangement?
This arrangement has obvious advantages for Beneficiary. If Customer defaults, Beneficiary
can receive what are in effect liquidated damages without incurring any litigation costs.
Moreover, Beneficiary does not bear the judgment and execution risks that would ordinarily
be borne by a party who has the burden of going forward with litigation: Beneficiary avoids
the risks that it will lose on procedural grounds or because of the erroneous application of
substantive law by a trial court, it avoids evidentiary problems that may weigh heavily
against the party having the burden of proof, and it avoids potential difficulties in obtaining
satisfaction of any judgment it might obtain. The standby letter of credit shifts all these risks
to Customer. Customer also bears the risk that Beneficiary will demand payment without
justification—that is, that Beneficiary will assert that Customer has defaulted when it knows
that Customer has complied with the terms of the contract.
At first glance, it might appear that neither party would want to contract for this arrangement.
If Beneficiary is acting in good faith, it has no intention of making an unjustified demand and
therefore would not be expected to bargain for the power to make one. Because Customer
and the issuing bank will demand compensation for assuming the risk of such a demand
being made, the contract price would be increased without any apparent corresponding

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would seem that Deluxe’s proposed addition of counterclaim III is merely an
attempt to replead Count I — KCCM should not have taken what is in effect, onemillion dollars in liquidated damages because it asserts that KCCM was in default

benefit to Beneficiary. It also appears unlikely that Customer would be willing to assume the
risk of an unjustified demand. Customer would certainly require that he be given additional
compensation for assuming this risk; but because the risk includes the possibility of
Beneficiary's deliberately making a false demand, it would seem impossible to calculate an
adequate amount of compensation.
This analysis is incorrect, however, because it fails to take into account the positions of the
parties before they agree to the use of a standby letter of credit. In fact, Beneficiary benefits
from an absolute rule of independence for three reasons. First, the issuing bank may charge a
smaller fee for the standby letter of credit because it knows that it will not become embroiled
in litigation with the beneficiary if it is requested to pay under a conforming demand. The
reduction in the cost of the standby letter of credit may in turn be passed on to Beneficiary
through a reduction in the price of the underlying contract. Second, Beneficiary is assured
that Customer will not be able to hold up payment on the standby letter of credit by alleging
that a good-faith demand was in fact made in bad faith. Third, Beneficiary also protects itself
against the possibility that a court will mistakenly enjoin payment by finding that its honest
demand was made in bad faith.
Customer also benefits from the use of a standby letter of credit under an absolute rule of
independence. It is simplistic to conclude either that Customer would agree to the use of the
standby letter of credit only out of ignorance of the consequences or that the transaction must
be the result of superior bargaining power on the part of Beneficiary. Customer will only
agree to the use of a standby letter of credit if Beneficiary compensates him for the risk of an
unjustified demand. If Customer believes that Beneficiary would be likely to demand
payment without justification, the compensation it would require would be so high that
Beneficiary would be unwilling to enter into the transaction. Thus, the parties will use the
standby letter of credit only when Customer has a high degree of confidence that Beneficiary
will not make an unjustified demand for payment. When this is true, Beneficiary's
trustworthiness, combined with the certainty of operation and reduced cost of the standby
letter of credit, may make the overall expected cost of this arrangement lower than what the
expected cost of the transaction would be in the absence of the standby letter of credit.
Customer will still have to be compensated for the risk of an unjustified demand, but this
compensation may now be small enough that Beneficiary prefers to use the standby letter of
credit rather than some other risk-shifting device.
Michael Stern, The Independence Rule in Standby Letters of Credit, 52 U. Chi. L. Rev. 218,
233–36 (1985).

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of the subcontract. But a breach of warranty claim would only apply if KCCM had
warranted in the subcontract that it would only draw if certain conditions applied.
The text of the subcontract noted above cites no conditions on the draw; in fact, it
gives KCCM unfettered discretion to draw. “It is not a warranty that the
statements made on the presentation of the documents presented are truthful nor is
it a warranty that the documents strictly comply under Section 5-108(a).”77 “It is a
warranty that the beneficiary has performed all the acts expressly and implicitly
necessary under any underlying agreement to entitle the beneficiary to honor.”78
Because the subcontract does not specify any acts that either entitle or disallow the
beneficiary (here KCCM) to make a draw, Deluxe cannot state a claim under the
UCC for breach of warranty.
III.

CONCLUSION
For the foregoing reasons, Deluxe’s motion is granted in part and denied in

part. Deluxe will be permitted to file an amended answer with counterclaims
amending Counts I and II. It may not add its proposed Count III.

77

13 Pa. C.S. § 5110 note 2.

78

Id.

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An appropriate Order follows.
BY THE COURT:

s/ Matthew W. Brann
Matthew W. Brann
United States District Judge

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