## Facts

- Fibrex borrowed $3.9 million from a bank to finance a timber purchase, conditioned on personal guarantees by Akira and Saeko Saheki and a standby letter of credit securing repayment.
- Fibrex and Ochoco contracted for Ochoco to purchase up to 6.5 million board feet of logs; as part of the arrangement, Ochoco caused an irrevocable $3.9 million standby letter of credit to be issued for the bank’s benefit.
- Fibrex later failed to perform under the log-sale arrangement; the parties renegotiated and amended related agreements.
- Fibrex’s bank loan matured and Fibrex did not pay; the bank drew more than $2 million on the standby letter of credit.
- Ochoco reimbursed the issuing bank for the draw amounts and then sought to enforce the beneficiary bank’s rights against Fibrex and the Sahekis through equitable subrogation.
- The trial court dismissed Ochoco’s subrogation claims on the ground that neither an applicant nor an issuer on a standby letter of credit can be subrogated to the beneficiary’s claims, and denied leave to replead.

## Issues

1. Whether a standby letter-of-credit applicant that reimburses the issuer after a beneficiary’s draw may be equitably subrogated to the beneficiary bank’s rights against the borrower and guarantors.
2. Whether letter-of-credit doctrines (including the independence principle) categorically preclude equitable subrogation to the beneficiary’s underlying claims.

## Decision

- The appellate court reversed the dismissal and remanded.
- The court rejected an absolute rule barring subrogation for letter-of-credit applicants (or issuers).
- The court held that equitable subrogation may be available in the standby letter-of-credit context, subject to traditional equitable requirements, and that Ochoco’s allegations were sufficient to avoid dismissal as a matter of law.

## Legal Principles

- Equitable subrogation is an equitable device to compel ultimate discharge of a debt by the party who, in fairness, should bear it; it is not limited to formal surety relationships.
- A party that pays another’s debt to protect its own interests, and is not a mere volunteer, may seek to stand in the creditor’s shoes if equity supports shifting the loss.
- The independence principle governs the issuer–beneficiary payment obligation, but does not, by itself, eliminate post-payment equitable claims allocating the ultimate economic burden among applicant, debtor, and guarantors.
- Subrogation in this setting is not automatic; it depends on customary equitable considerations, including whether the claimant discharged another’s obligation and whether subrogation would unfairly prejudice intervening rights or permit unjust enrichment.

## Conclusion

The court held that standby letter-of-credit law does not impose a categorical bar on equitable subrogation, and that an applicant who reimburses the issuer after a draw may pursue subrogation to the beneficiary bank’s rights against the borrower and guarantors if the traditional equitable factors support that remedy.


Ochoco Lumber Co. v. Fibrex & Shipping Co., Inc., 164 Or. App. 769, 994 P.2d 793 (Or. Ct. App. 2000)