Documentary Credit World

Topics: Breach of Lease; Constructive Eviction; Injunction; Letter of Credit; Temporary Restraining Order

Note: In lieu of a cash security deposit for a commercial lease,₁ Experior Global Warehousing, LLC (Lessee/Applicant) applied for and caused Huntington Bank (Issuer) to issue a letter of credit in favor of BTC III Hamilton DC LLC (Landlord/Beneficiary). The LC was secured by Lessee/ Applicant’s business equipment, although the value and whether practice rules applied was not mentioned in the case’s text. As provided in the lease, Landlord/Beneficiary could demand sums under the LC to “satisfy any arrears of Rent, or to pay any sums owed to Landlord as described in the Lease, or to satisfy any damage, injury, expense or liability caused to Landlord by such default.”

During an initial walk-through of the building, Lessee/Applicant discovered concerning water issues, allegedly from a broken sprinkler pipe. There were other ongoing concerns of “water seepage” and “wet ceiling tiles”. The issues, following inspection by an expert, allegedly stemmed from a construction defect (i.e. lack of vapor retarder under the concrete floor). Ultimately, despite claimed promises to the contrary, Landlord/Beneficiary allegedly failed to remedy the water concerns. Lessee/Applicant sued Landlord/Beneficiary alleging various claims, principally breach of lease.₂ Additionally, Lessee/Applicant sought a temporary restraining order (TRO) to “prevent [Landlord/Beneficiary] from taking any adverse action against [Lessee/Applicant] under the provisions of the Lease … including any action related to the letter of credit”. The New York Supreme Court, Kirsch, J., denied the requested TRO.

To obtain a TRO, a party must demonstrate: (1) that the underlying claim is likely to succeed on the merits; (2) irreparable harm absent a TRO; (3) granting the TRO will not cause irreparable harm to the opposing party; and (4) the balance of equities favor the requesting party. The Judge began and ended the analysis on the issue of irreparable harm. For a breach of contract action, there are generally two means of demonstrating irreparable harm: “(1) where the subject matter of the contract is of such a special nature [or] peculiar value that damages would be inadequate; or (2) where because of some special and practical features of contract, it is impossible to ascertain the legal measure of loss so that money damages are impracticable.” (citations omitted).

Lessee/Applicant merely alleged “economic loss and loss of [customer] goodwill” absent a TRO. The requested relief, however, was directed at preventing Landlord/Beneficiary from essentially demanding sums under the LC. As the Judge noted, “[t]his potential harm is not irreparable. Any amount that [Landlord/Beneficiary] may draw from the LOC is readily quantifiable.” Because a money judgment entered in favor of Lessee/Applicant could render it whole, irreparable harm could not be demonstrated. Lessee/Applicant also failed to show any “peculiar” or “special nature” of the lease; furthermore, there was evidence that Landlord/Beneficiary had made no demands on the LC or even “insinuated” an intent to do so. As such, the Judge considered the claim “entirely speculative.”

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