## Facts

- Lessors leased property to Circular Ramp Garages, Inc. (CRG), which agreed to construct a parking garage on the site.
- The lease contemplated $250,000 payable upon CRG’s default as liquidated damages.
- To secure CRG’s lease performance, Pacific National Bank of San Francisco issued an instrument titled “Letter of Credit No. 17084” for up to $250,000 in favor of the lessors.
- The instrument conditioned payment on documentation tied to lease default, including an affidavit of default, notice describing failures, and expiration of a 30-day cure period.
- The Wichita Eagle and Beacon Publishing Co., Inc. became the assignee of the lessors’ rights under the instrument.
- CRG failed to obtain financing, did not complete the project, and defaulted under the lease.
- Wichita Eagle presented a $250,000 draft to the bank; the bank refused to honor it, and Wichita Eagle sued.

## Issues

1. Whether the instrument labeled a “letter of credit” should be governed as a letter of credit or treated as a guaranty tied to the underlying lease.
2. Whether the instrument’s payment conditions departed from the commercial function of letters of credit by requiring the issuer to assess underlying performance and default.
3. If the instrument was a guaranty, what amount the bank owed in light of the lease’s $250,000 default provision.

## Decision

- The Ninth Circuit held the instrument was not a letter of credit despite its label.
- The court characterized the instrument as an ordinary guaranty obligating the bank to pay what CRG owed under the lease, capped at $250,000.
- The court concluded the lease contemplated a $250,000 payment upon default and treated that provision as a valid liquidated damages clause.
- The court modified the judgment to award Wichita Eagle $250,000 plus interest.

## Legal Principles

- Contract classification turns on operative terms and commercial function, not the label placed on the instrument by the parties.
- A true letter of credit is designed to assure payment through document-based compliance without requiring the issuer to police the underlying contract.
- Where payment conditions effectively require the issuer to evaluate underlying performance, default, notice, and cure, the instrument functions as a guaranty rather than a letter of credit.
- Under a guaranty tied to an underlying contract, the guarantor’s liability tracks the principal obligor’s obligation (subject to the guaranty’s cap), and a valid liquidated damages clause can set the measure of recovery.

## Conclusion

The Ninth Circuit treated the bank’s “letter of credit” as a guaranty because its conditions required assessment of lease performance and cure, and it awarded the assignee $250,000 plus interest based on the lease’s enforceable liquidated-damages provision.


Wichita Eagle & Beacon Publ’g Co. v. Pac. Nat’l Bank of S.F., 493 F.2d 1285 (9th Cir. 1974)