Centennial Industries, Inc. v. Union Trust Co.

JAMES S. GETTY, Judge, Specially Assigned. This is an appeal by Centennial Industries, Inc., from a denial of its motion to vacate a confessed judgment, in the ²⁰⁴ amount of $50,000.00, obtained by Union Trust Company of Maryland. Intertwined in this question are issues of good faith dealing between parties, meritorious defenses and the commercial vitality and function of letters of credit. We begin with a factual recitation of the transactions between the parties.

In 1984 Centennial was engaged as a contractor by the United States Department of Agriculture (U.S.D.A.) for the purpose of supplying the government with soybean oil. Initially, Centennial acted as a broker, purchasing the oil from various suppliers who processed and shipped it as directed. In June, 1986, Centennial leased a packaging facility located in Georgia which enabled it to process and package soybean oil thereby maximizing its profit. In order to finance the purchases of soybean oil from suppliers, Centennial entered into a “Commercial Letter of Credit Agreement and Security Agreement” with Union Trust.

With each contract awarded Centennial by the U.S. D.A., the proceeds were assigned to Union Trust and the latter would issue a letter of credit for the benefit of the particular suppliers. Once the contract had been fulfilled, Union Trust would pay the supplier, deduct any loans and fees due and remit the balance to Centennial. The loan amount, $50,000 in this case, was start-up money enabling Centennial to begin processing the purchases received from the suppliers of soybean oil. One of the documentary requirements set forth in the letters of credit issued by Union Trust was the inclusion of a Federal Grain Inspection Certificate required by the U.S. D.A. before Union Trust’s payment was forthcoming.

When Centennial was acting as a broker, the inspection certificate was obtained by the supplier since no other party dealt with the finished product. After Centennial began its own packaging, the suppliers delivered the oil to Centennial’s packaging plant in Georgia for processing. Under this arrangement, Centennial became the final handler of the packaged oil and, as such, it was required to obtain the ²⁰⁵ inspection certificate since the U.S.D.A. required that the last processor obtain the certificate. Despite the fact that Centennial was no longer acting solely as a broker, the letters of credit it requested and those issued by Union Trust included a requirement that the suppliers submit the inspection certificate “to be obtained by Centennial.” This the suppliers refused to do, contending, with some justification, that they were no longer processing oil, but selling oil in bulk to Centennial and they were entitled to be paid on delivery, not at some later date when Centennial completed the operation.

Thereafter, Centennial requested that Union Trust amend the letters of credit to satisfy the objections raised by the suppliers. The request was refused. The $50,000 promissory note involved in this case arose from a $1,022,000 contract awarded Centennial by the U.S. D.A. on August 26,1986. Union Trust advanced $50,000 as working capital needed by Centennial to fulfill the contract.

Prior to the entry of the confessed judgment, Centennial obtained two additional contracts for delivery of 8,335,419 pounds of soybean oil between October 1, 1986 and December 5, 1986. Union Trust, as a result thereof, increased Centennial’s line of credit to $1.7 million per month. The value of the outstanding contracts was $2,000,000. One of these contracts generated a letter of credit issued to Archer Daniels Midland Company dated September 25,1986, requiring the supplier, Archer Daniels, to submit a “Federal Grain Inspection Service Certificate (to be supplied by Centennial Industries) in duplicate.” Contending that it had no ability to control the obtention of the certificate once the material left its plant, Archer Daniels refused to provide the oil.

According to Centennial all other suppliers contacted refused to provide oil to Centennial subject to the same terms contained in the letter of credit issued by Union Trust to Archer Daniels. On November 16,1986, Union Trust filed a Notice of Entry of Judgment by Confession for the $50,000 previously advanced. Centennial countered with a Motion ²⁰⁶ to Vacate Judgment supported by an affidavit from its President, Robert Fenner, alleging that it had a meritorious defense to Union Trust’s claim. The motion was denied by the Circuit Court for Howard County (Nissel, J.) and this appeal followed.

Centennial raises two issues, namely: 1. In a confessed judgment suit filed by a bank, where a defendant alleges that the bank breached its duty of good faith, did the court properly consider the allegations of the defendant in determining if they raised a meritorious defense or counterclaim, applying the lesson of Robert Anthony Jacques v. First National Bank of Maryland, 307 Md. 527 [ 515 A.2d 756 ] (1986)? 2. Does the obligation of good faith, imposed on a bank in its relationship with a loan customer, apply to the benefit of a borrower, under a line of credit and a letter of credit arrangement? Union Trust views the issue as whether Centennial alleged facts sufficient to establish a cause of action against Union Trust for breach of contract entitling it to vacate the judgment by confession.

We shall address the issues as stated by Centennial. In his affidavit alleging a meritorious defense, Mr. Fenner describes the history of the business relationship between Union Trust and Centennial. The first two contracts amounted to approximately 275,000 pounds of soybean oil for a total price of approximately $70,000. Centennial acted as a broker and, according to the affidavit, Union Trust forwarded an amended letter of credit in order to correct several “documentary discrepancies.” Fenner also alleges that contract executions were underway with three or four other named vegetable oil producers and that (unspecified) modifications were made in letters of credit by either meetings or telephone conversations with Union Trust personnel, specifically Ms. Mitzie Holmes-Dempsey, Vice President in ²⁰⁷ charge of business development. 1 By the end of September, according to the affidavit, all of the letters of credit had been issued for the $2,000,000 purchase of soybean oil, modifications were made in the letters of credit relating to the purchase of boxes and cans, but the suppliers of oil would not accept the requirement that they supply the certificate of inspection.

Fenner alleges a pattern and practice between Centennial and the bank of correcting documentation discrepancies after the issuance of the letters of credit. He concludes his affidavit by setting forth the alternatives he suggested to resolve the dilemma; they include: 1. An offer to provide an inspector at Centennial’s expense to certify the quality of the oil prior to receipt. 2. A guarantee of quality as to government standards. 3.

Recognition by Union Trust that a U.S.D.A. inspector was on the premises of the packaging plant in Georgia. 4. Recognition by Union Trust that it had 45 days after shipment to render payment and any defect would be apparent within that time frame. Fenner then states his intention to sue Union Trust for $14,000,000. At the hearing on the Motion to Vacate Confessed Judgment no testimony was offered other than Fenner’s affidavit.

The trial judge held that Centennial did not establish facts sufficient to create a prima facie claim and was not, therefore, entitled to vacate the judgment by confession. The Law Maryland Rule of Civil Procedure 2-611(d) establishes the standard governing the vacating of a confessed judgment. It states: ²⁰⁸ [I] f the court finds that there is a substantial and sufficient basis for an actual controversy as to the merits, the court shall order the judgment by confession opened____ In Murray v. Steinmann, 29 Md.App. 551 , 349 A.2d 447 (1975), we said: [T]he burden of proof to vacate a confessed judgment is not fulfilled by the mere assertion of a defense. There must be sufficient evidence to persuade the fair and reasoned judgment of an ordinary man ... that there are substantial and sufficient grounds for an actual controversy as to the merits of the case.

If, however, the evidence is such that persons of ordinary judgment and prudence could fairly draw different inferences from it, the controversy should not be decided as a matter of law, but instead should be submitted to a trier of fact. Stankovich v. Lehman, 230 Md. 426 , 187 A.2d 309 (1963). Centennial argues that an obligation of good faith is imposed upon any financial institution that enters into a lending arrangement with a borrower, citing Jacques, supra. It also contends that the principles concerning letters of credit do not apply, because this is simply a lending relationship and a lender’s breach of a duty to lend money.

Despite its efforts to distance itself from the letters of credit, Centennial argues that the bank was obliged to amend the letters to satisfy the suppliers and its refusal was a breach of its good faith obligation. In Jacques, supra, the purchasers of a home applied for a mortgage loan through First National Bank. The bank advised the purchasers that they qualified for a loan of $74,000 rather than the $112,000 requested and the loan figure was later reduced to $41,400. The bank was later sued for the economic loss sustained by the purchasers in obtaining alternate financing and the Court of Appeals held that a tort duty of reasonable care in processing the application for the loan existed where contractual privity existed between the bank and the applicants. ²⁰⁹ We have no quarrel with the results reached in Jacques or in Chew v. Meyer, 72 Md.App. 132 , 527 A.2d 828 (1987), another case recognizing that a contractual obligation arising from the “intimate nexus” of the relationship may give rise to a tort duty to act reasonably in fulfilling whatever obligation has been undertaken. 2 We disagree, however, with Centennial’s argument that these cases are dispositive of the issues presented in the present case.

The contract between Centennial and Union Trust was not created in a vacuum. The letters of credit were the