Article

Note: Bradlees Stores, Inc., a 105-store discount apparel chain, entered into negotiations to purchase clothing from several companies including Easy & Joytex Corporation, Leading Manufacturer Pte. Ltd, Lekim Textile Industries Pte. Ltd. and Maxim Garments Sdn. Bhd. through an intermediary, Li & Fung Limited. Typically, orders would be placed through a Placement Memoranda that the intermediary would convey to the various Sellers. The Buyer required that samples be approved of by it. At an appropriate stage, Buyer would post an LC for the benefit of the intermediary which would then be transferred to the appropriate Seller/Beneficiary. The Approval Sample Certificate issued by Buyer was a required document under the credit.

Having become insolvent, Buyer filed for voluntary reorganization under Chapter 11 of the U.S. Bankruptcy Code, and cancelled the orders. The intermediary sent cancellation notices to Beneficiaries stating that cancellation of orders was due to the liquidation of Buyer. The Sellers filed claims in the bankruptcy proceedings which were challenged by the Buyer on the grounds that, since it had not approved the samples, Sellers had failed to perform a condition precedent to being paid.

Buyer moved for summary judgment on its motions to strike and have the claims expunged. The Bankruptcy Court for the Southern District of New York granted Buyer's motion for summary judgment. On appeal, the United States District Court for the Southern District of New York, Sweet, J., vacated the decision and remanded it for a determination of the time when submission or approval of samples was required under the contract.

The appellate court noted that the analysis necessary for determining whether the seller had performed differed where anticipatory repudiation is alleged. The question is not whether the seller had completed every requirement to be paid under the contract as fully performed but whether it had performed as required up to the time of repudiation. Accordingly, it remanded for a determination as to what performance was required by when with respect to approval of the samples.

The appellate court noted Sellers' objections to the conclusion of the bankruptcy court that the requirement of the LCs that an approval sample certificate be presented also applied to the contract for sale between Buyer and Sellers and that such certificates constituted a precondition precedent to recovery by the Sellers.

The appellate court stated:

"[t]he fact that the certificates may have been conditions precedent to [Buyer's] obligation to pay the Appellants does not mean that the submission of the certificates was a condition precedent when the contracts were cancelled. Apart from the issue of how the requirements in the Letter of Credit were interpreted, however, it was not improper for the Bankruptcy Court to have considered the Letters of Credit as setting out the requirements in order for the Appellants to be paid. Although, as [Sellers] argue, the Letter of Credit may be a separate contract from the Placement Memorandum, they may be read together as a single agreement 'where two or more contracts are part of a single transaction and appear in combination ... to constitute the entire understanding of the parties ..." Kittredge Equip. Co., Inc. v. Ted's Victorian Pub & Restaurant, LLC, 2001 Mass. App. Div. 192, No.01WAD002, 2001 WL 1012205, at *2 (Mass. App. Div. Aug. 28, 2001).

The appellate court rejected Sellers' argument that the UCP and UCC Article 5 doctrine of independence requires that the letter of credit provisions be ignored in determining the terms of the contract. It stated that "the UCC and UCP provisions cited by the [Sellers] merely stand for the proposition that, as a general rule, the issuer must honor a letter of credit when presented with the proper drawing documents regardless of any disputes that may exist with respect to the underlying agreement". It went on to note that the "invocation of the doctrine of independence is inapposite here as the dispute in this litigation relates not to distribution of the proceeds of any of the Letters of Credit but to the underlying requirements which [Beneficiaries] must fulfill for [Applicant] to be obligated to pay."

[JEB/tas] 324

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