CRM Collateral II, Inc. v. Tri-County Metropolitan Transportation District

Tri-County Metropolitan Transportation District (TriMet) (defendant) contracted with Colorado Railcar Manufacturing, LLC for the manufacture and delivery of light railcars and a trailer. The contract required Colorado Railcar to secure an irrevocable $3 million standby letter of credit. Pursuant to a separate investment agreement with Colorado Railcar, CRM Collateral II, Inc. (Collateral II) (plaintiff) purchased a $3 million letter of credit from KeyBank for TriMet’s benefit. The letter of credit stated that TriMet could draw on the letter by presenting, among other things, certification that the applicant for the letter of credit was in default. Because Collateral II was the applicant and not Colorado Railcar, the parties added Collateral II as a party to the underlying contract so that a default under that contract by Colorado Railcar would constitute a default by Collateral II for purposes of drawing on the letter of credit. TriMet and Colorado Railcar subsequently agreed that TriMet would make special additional payments to Colorado Railcar to support Colorado Railcar financially while Colorado Railcar finished making the railcars. The special-payment agreement allowed TriMet to draw on the letter of credit to reimburse itself for the special payments if Colorado Railcar failed to repay. Colorado Railcar and TriMet did not obtain Collateral II’s consent to this arrangement. TriMet eventually made over $5.5 million in special payments and tried to draw on the letter of credit for reimbursement. Collateral II alleged that TriMet’s draw was fraudulent and sought to enjoin KeyBank from paying. The district court found that Collateral II was a surety and could assert the suretyship defense of discharge because the special-payment agreement between TriMet and Colorado Railcar had materially increased Collateral II’s risk as surety without Collateral II’s consent. The court granted summary judgment for Collateral II, and TriMet appealed to the United States Court of Appeals for the Ninth Circuit.