## Facts

- Tri-County Metropolitan Transportation District of Oregon (TriMet) contracted with Colorado Railcar Manufacturing, LLC to build and deliver light railcars; the contract required an irrevocable $3 million standby letter of credit (LOC) in TriMet’s favor.
- Colorado Railcar arranged for CRM Collateral II, Inc. (CRM), a special-purpose entity, to be the LOC applicant; KeyBank issued the LOC naming TriMet as beneficiary.
- The LOC allowed TriMet to draw by presenting specified documents, including a certification that “the applicant is in default under the underlying contract.”
- Because CRM (not Colorado Railcar) was the applicant, the parties modified the underlying contract to add CRM so that a default by Colorado Railcar would constitute a default by CRM for purposes of drawing on the LOC.
- Colorado Railcar later faced financial distress; TriMet and Colorado Railcar (without CRM) entered a “special-payment” arrangement under which TriMet would advance additional funds beyond the contract price to keep performance going.
- The special-payment arrangement permitted TriMet to reimburse itself for those advances by drawing on the LOC if Colorado Railcar did not repay the advances.
- TriMet made more than $5.5 million in special payments and then sought to draw the full $3 million LOC amount, certifying the applicant’s default.
- CRM sued to stop payment, asserting it functioned as a surety and was discharged because TriMet and Colorado Railcar materially changed the secured obligation and increased CRM’s risk without CRM’s consent.
- The district court granted summary judgment for CRM and enjoined TriMet’s draw; TriMet appealed.

## Issues

1. Whether CRM, as the LOC applicant supporting Colorado Railcar’s obligations, was a surety under Oregon law and could invoke suretyship defenses.
2. Whether TriMet and Colorado Railcar’s special-payment agreement materially increased CRM’s risk without CRM’s consent, discharging CRM from its surety obligation.
3. Whether the independence principle for letters of credit prevents application of suretyship defenses as between the applicant and the beneficiary.

## Decision

- The Ninth Circuit affirmed summary judgment for CRM.
- The court held CRM was properly treated as a surety under Oregon law based on the substance of its undertaking to answer for Colorado Railcar’s obligations.
- The court held the special-payment agreement materially increased CRM’s risk without its consent, discharging CRM’s surety obligation and barring TriMet’s draw as against CRM.
- The court rejected the argument that LOC independence foreclosed suretyship defenses between applicant and beneficiary, distinguishing the issuer’s duty to honor a conforming demand from applicant–beneficiary rights and remedies.

## Legal Principles

- Under Oregon law, suretyship status turns on substance: a party that undertakes to be answerable for another’s obligation may be treated as a surety even if the transaction uses letter-of-credit form.
- A surety is discharged when the creditor and principal debtor, without the surety’s consent, materially modify the underlying obligation in a way that materially increases the surety’s risk.
- In standby LOC transactions, the independence principle governs the issuer’s obligation on a facially compliant presentation but does not bar courts from applying suretyship doctrines to disputes between the applicant and the beneficiary regarding entitlement to draw.

## Conclusion

The Ninth Circuit held that CRM functioned as a surety for Colorado Railcar and was discharged when TriMet and Colorado Railcar, without CRM’s consent, adopted a special-payment arrangement that materially expanded the secured risk; TriMet therefore could not draw on the standby letter of credit against CRM based on that modification.


CRM Collateral II, Inc. v. Tri-County Metro. Transp. Dist. of Or., 669 F.3d 963 (9th Cir. 2012)