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TOKYO KOGYO BOEKI SHOKAI, aJapanese corporation,No. 96-35175Plaintiff-Appellant,D.C. No.v.CV-94-01167-DCAUNITED STATES NATIONAL BANK OFOPINIONOREGON,Defendant-Appellee.

Appeal from the United States District Courtfor the District of OregonJames A. Redden, District Judge, PresidingArgued and SubmittedMay 7, 1997--Portland, OregonSubmission deferred May 9, 1997Resubmitted: September 16, 1997Filed September 19, 1997Before: Robert Boochever, Melvin Brunetti andAlex Kozinski, Circuit Judges.Opinion by Judge Kozinski; Dissent by Judge Boochever

_____________________________COUNSEL Dennis H. Markusson, Montgomery, Green, Jarvis, Kolodny& Markusson, Denver, Colorado, and James L. Hiller, LanePowell Spears Lubersky, Portland, Oregon, for the plaintiff-appellant.John F. Neupert and Bruce L. Campbell, Miller, Nash, Wie-ner, Hager & Carlsen, Portland, Oregon, for the defendant-appellee.OPINIONKOZINSKI, Circuit Judge:In this case we answer the question that must be on every-one's mind: May a letter of credit applicant subrogate to theposition of the issuing bank and sue the confirming bank forfraud, negligence and violation of the Uniform CommercialCode?Tokyo Kogyo Boeki Shokai (Kogyo), a Japanese importer,contracted with West Road America to import constructionpanels from Washington state to Japan. To finance the deal,Kogyo had Mitsubishi Bank issue a letter of credit, initiallyfor $1,600,000. West Road's banker, United States NationalBank of Oregon (National), agreed to be the confirming bank.1Unusually, the Mitsubishi letter of credit contained a "redclause."2 Ordinarily, to draw on a letter West Road wouldhave had to provide National with documents--a draft,invoices and the like--showing it had shipped the panels.However, the red clause allowed West Road to receiveadvances even before shipping the panels upon presentingcertain documents, including a written undertaking that itwould later present the normal papers. Like many interna-tional letters of credit, this one contained a clause adoptingthe terms of the Uniform Customs and Practice for Documen-tary Credits (oddly abbreviated by lawyers as UCP).According to the amended complaint, West Road received$1,436,000 in advances under the first letter of credit withoutever shipping any panels. Nice work if you can get it. Afterthat letter expired, Mitsubishi issued a second one on thesame terms for $1,780,000. This time West Road shippedsome panels, about half the number ordered, but at twice theagreed-upon price. Like clockwork, National paid West Road,Mitsubishi paid National, and Kogyo paid Mitsubishi. Withan ordinary letter of credit, both Mitsubishi and Kogyo couldhave refused to pay if the documents presented were non-conforming. It is unclear whether either could have refusedunder a letter with the red clause. In any event, neither did.Kogyo sued National, claiming fraud, negligence and UCCand UCP violations.3 Following the magistrate judge's recom-mendation, the district court dismissed. Kogyo filed anamended complaint, which was again dismissed. Kogyoappeals. It argues that subrogation allows it to step into Mitsu-bishi's shoes and sue National, even though Kogyo andNational weren't immediately linked in the chain.Until recent passage of UCC section 5-117, Or. Rev. Stat.S 75.1170, Oregon law did not speak clearly to subrogation ofrights created by a letter of credit. Oregon cases do hold thatwhere a secondarily-liable party pays another's debt the for-mer may subrogate to the latter's rights. See Maine Bonding& Cas. Co. v. Centennial Ins. Co., 693 P.2d 1296, 1301 (Or.1985). However, no Oregon case applies this principle to let-ters of credit. The standard example of secondary liability isa guarantee--the guarantor must pay only if the principaldefaults. By contrast, National argues, in a letter of crediteach party is primarily liable to the next party in the chain andmust pay whether or not the applicant (Kogyo) defaults. Incases from other jurisdictions this primary/secondary liabilitydistinction has sown much confusion. The majority of casesdo not allow subrogation under pre-section 5-117 versions ofthe UCC, agreeing with National's position that letters ofcredit create primary liability. See Tudor Dev. Group, Inc. v.United States Fidelity & Guar. Co., 968 F.2d 357, 361-62(3rd Cir. 1992) (collecting cases).[1] The new UCC section allows subrogation. However,that law applies only to letters of credit issued on or after Jan-uary 1, 1998. See S 246, SS 27, 29, 69th Or. Leg., Reg. Sess.(1997). If the legislature thought the new law merely clarifiedexisting rules, it would not have limited its effect to letters ofcredit issued after its effective date. Thus, the current Oregonlegislature seems to believe that prior law did not allow subro-gation. While by no means dispositive, this supports Nation-al's argument that subrogation was not allowed under priorlaw.[2] Kogyo argues that Articles 10, 15, 17 and 20 of theUCP imply it can subrogate to Mitsubishi's position. How-ever, this does not clearly follow from the Articles' language.Article 10 merely defines what a confirming bank hasundertaken to do. If anything, it defines duties to the benefi-ciary, not the applicant. Article 15 says banks must examinedocuments with reasonable care. It does not say who may suefor violation of that duty. Article 17 says banks assume no lia-bility for the acts of others. But this does not waive liabilityfor their own acts. Article 20(a) says "Banks utilising the ser-vices of another bank or other banks for the purpose of givingeffect to the instructions of the applicant for the credit do sofor the account and at the risk of such applicant. " This insu-lates Mitsubishi from liability for National's misbehavior. Itdoesn't give Kogyo a right to sue National. Moreover, theUCP formalizes customary practice. See James J. White &Robert S. Summers, 3 Uniform Commercial Code S 26-3 (4thed. 1995). If subrogation is customary, we would expect tosee more of it in the caselaw.[3] Kogyo also argues that under National's interpretationof the UCP it will be unable to sue, even if National engagedin fraud. Heaven forfend that a potential plaintiff be strandedwith no one to sue, though West Road does present itself asa possible defendant. Moreover, the UCP doesn't preventKogyo from suing Mitsubishi if Mitsubishi should not havehonored the documents National presented. Under Article 17Mitsubishi is not liable for National's acts, but it remains lia-ble for its own. Perhaps the red clause stopped Mitsubishi andKogyo from refusing payment. If so, Kogyo should have readthe red clause more carefully. Or perhaps it did, and made abargain which reflects the risk Kogyo took on. Either way, wesee no reason to contort the UCP out of shape to protectKogyo from the unfortunate consequences of a bad bargain.[4] Kogyo also makes several tort claims. As to negligence,National has no duty to Kogyo. Applying negligence princi-ples would undermine the UCC. See Confeccoes Texteis deVouzela, LDA v. Riggs Nat'l Bank, 994 F.2d 851, 854 (D.C.Cir. 1993); Instituto Nacional de Comercializacion Agricola(Indeca) v. Continental Illinois Nat'l Bank, 858 F.2d 1264,1269 (7th Cir. 1988); Auto Servicio San Ignacio, S.R.L. v.Compania Anonima Venezolana de Navegacion, 765 F.2d1306, 1308 (5th Cir. 1985). As to fraud, Kogyo argues forfraud as a common law "gap-filler": If the UCC and UCP pro-vide Kogyo no remedy, then the common law must. But,under the letter's terms, either Kogyo was bound to pay Mit-subishi even if National's payment was improper, or else itwasn't. If Kogyo was bound to pay, then it did not rely uponNational's alleged misrepresentations, since Kogyo had to payMitsubishi in any event. Without reliance on the misrepresen-tations, there is no fraud. See Rice v. McAlister, 519 P.2d1263, 1265 (Or. 1974). If Kogyo was not bound to pay, thenit should have a claim against Mitsubishi, and we need notcreate a fraud claim as a gap-filler.4 AFFIRMED.

_____________________________BOOCHEVER, Circuit Judge, dissenting.I respectfully dissent.Our jurisdiction in this case is based on diversity of citizen-ship, and we apply the law of Oregon. Thus, we are asked todetermine whether the Supreme Court of Oregon would allowKogyo to be subrogated to Mitsubishi's right to recover fromNational.On an appeal from a dismissal for failure to state a claim,we take the facts as they are stated in the complaint. We mustassume, then, that National violated the terms of the letter ofcredit and its "red clause" when it advanced West Road ini-tially $1,435,000 and later $1,780,000 on a second letter ofcredit. Mitsubishi then paid National for the amounts paid outto West Road. Under those circumstances, Mitsubishi, theissuer of the letter of credit, would certainly be entitled torecover the amount paid by National that did not comply withthe agreed upon terms. See, e.g., Confeccoes Texteis de Vou-zela v. Riggs Nat'l Bank, 994 F.2d 851, 853 (D.C. Cir. 1993)(confirming bank owes duty to issuing bank). The only ques-tion is whether Kogyo, having reimbursed Mitsubishi, may besubrogated to Mitsubishi's right to recovery from National.The Uniform Commercial Code (UCC) has been adopted bythe state of Oregon. At the time that the transactions in ques-tion occurred, the UCC provisions concerning the rights of anapplicant, such as Kogyo, that reimburses an issuer, such asMitsubishi, to be subrogated to the rights of the issuer asagainst the confirming bank were somewhat ambiguous. Fewappellate courts have addressed this question, and in doing sothey applied state law. Bankruptcy courts are split on whethersubrogation was permissible under the pre-revision version ofthe UCC. See Tudor Dev. Group, Inc. v. United States Fidel-ity & Guar. Co., 968 F.2d 357, 361-62 (3rd Cir. 1992) (major-ity view does not allow subrogation, but minority does permitit).Our task is to determine as best we can whether theSupreme Court of Oregon would allow subrogation. Underthese facts, I believe that it would.First, Oregon recognizes broad subrogation rights wherethe equities so demand. The Supreme Court of Oregon hasstated,       [s]ubrogation is a remedy which is highly favored.       The courts are inclined to expand rather than to       restrict the principle. Although formerly the right       was limited to transactions between principals and       sureties, it is now broad and expansive, and has a       very liberal application . . . the principle being modi-       fied to meet the circumstances of the individual case.Oregon v. Smither, 626 P.2d 356, 359 (Or. 1981) (citationomitted). See also Maine Bonding & Casualty v. CentennialInsurance Co., 693 P.2d 1296, 1301 (Or. 1985) (subrogation"is a doctrine which will be applied or not according to thedictates of equity and good conscience, and consideration ofpublic policy, and will be allowed in all cases where the equi-ties of the case demand it").Taking the facts from the face of the complaint, the equitiesof this case are clear. National advanced West Road close tothree million dollars despite West Road's failure to complywith the terms laid out by the letter of credit defining theparameters of such advances. Mitsubishi performed as the let-ter of credit required and reimbursed National for thoseadvances. Kogyo, in its turn, did the same for Mitsubishi. Inthe end, National's failure to abide by the terms of the letterof credit cost Kogyo millions of dollars. As the party at fault,National "in equity and good conscience ought to pay" toKogyo the sum that Kogyo was compelled by contract to payto Mitsubishi. See Maine Bonding & Casualty Co., 693 P.2dat 1301.Moreover, in light of its expansive reading of subrogationrights, I believe that the Supreme Court of Oregon wouldinterpret the UCC, as adopted by the Oregon legislature, asallowing subrogation in this context. Revised Article 5 S 5-117(b) of the UCC provides:        An applicant that reimburses an issuer is subro-       gated to the rights of the issuer against any benefi-       ciary, presenter, or nominated person to the same       extent as if the applicant were the secondary obligor       of the obligations to the issuer . . . .This revised section, which was adopted by the Oregon leg-islature after the events at issue took place, has not yet beeninterpreted by Oregon courts. In fact, Oregon courts havenever specifically addressed what subrogation rights exist inthe letter of credit context. The drafters of the UCC, however,stated that the new provision merely "clarifies the subrogationrights of an Issuer who has honored a letter of credit. Theserights of subrogation also extend to an applicant who reim-burses . . . ." UCC Rev. Art. 5, Prefatory Note, p.6.1 Thus, theUCC drafters believed that the UCC as originally drafted, andadopted by the Oregon legislature, permitted subrogation.In light of Oregon's broad subrogation doctrine, I believethat the Supreme Court of Oregon would fall in line with theUCC drafters. I would hold that the Oregon legislature origi-nally adopted the UCC with the intention of allowing"[a]napplicant that reimburses an issuer [to be] subrogated to therights of the issuer against" the confirming bank, Rev. UCCS 5-117(b), and would thus allow Kogyo to proceed againstNational. the end

___________________________FOOTNOTES 1 A guide for the perplexed on letter of credit terminology: Kogyo, theapplicant, paid for goods using the letter; Mitsubishi, the issuing bank,contracted to pay for the applicant (on the agreement, of course, that theapplicant would later pay it back); National, the confirming bank, acted asan intermediary by passing money to West Road and documents to Mitsu-bishi; and West Road, the beneficiary or customer, got paid using the let-ter.2 A "red clause" is so called because it is often printed in red so as tocall attention to it. It may also be the color of the face of whomever atKogyo agreed to this provision.3 Apparently Kogyo could find no violations of the UPA, URE, USC orUCLA.4 Kogyo points to Pubali v. City Nat'l Bank, 676 F.2d 1326 (9th Cir.1982), as a case allowing fraud suits between non-adjacent parties to a let-ter of credit. But, in Pubali an issuing bank sued an advising bank whichwas also the assignee of the letter's proceeds and which collected on theletter twice. Pubali has no clear discussion of who owes a duty to whom,and the defendant was self-dealing in an unusual, egregious way, notmerely performing the role of advising bank. Allowing a fraud claim here,where National played a typical confirming bank role, would undermineour results under the UCC, UCP and negligence. Cf. Cenlin Taiwan Ltd.v. Centon, Ltd., 5 F.3d 354, 356 (9th Cir. 1993) (Pubali rationale shouldnot be pushed too far to include all situations where a bank is serving itsself-interest in some way).1 The majority points out that Oregon's adoption of the above provisionapplies only to letters of credit issued on or after January 1, 1998. MajorityOpinion at 12300. This is true. But, as the majority also points out, it isnot dispositive. See Kaiser Cement v. Tax Com., 443 P.2d 233, 235 (Or.1968) (applying clarifying amendment to tax code in case filed prior to1965 notwithstanding provision in amending statute that changes were"retroactive only to January 1, 1965").