Article

Note: The Equal Justice Foundation filed a class action complaint in the Ohio state courts against Level Propane Gases, Inc., based on various consumer claims. Settlement was proposed including the payment of US$2,200,000 in damages. Fearing that Level Propane would become insolvent, the Foundation refused to settle the case without a bond or LC to ensure payment. Deutsche Bank Trust Co. America (Issuer), which was Level Propane's largest secured creditor to the extent of US$60,000,000, agreed to provide two LCs totaling US$2,200,000 and naming the Foundation as Beneficiary to pay the damages portion of the settlement agreement. It was understood that the LCs could only be drawn on if the court finally approved the settlement and entered a final judgment in favor of the Foundation.

The Foundation (Beneficiary) signed the stipulation and settlement agreement which was conditional upon issuance of the irrevocable LCs, and the court gave its preliminary approval to the settlement. Shortly afterwards, Issuer issued the two LCs.

However, before the execution of the settlement agreement and issuance of the LCs and unknown to Beneficiary, Issuer had entered into a forbearance agreement with Level Propane (Applicant) requiring that Applicant execute the settlement agreement with Beneficiary by a certain date. Shortly after that date, Issuer filed papers that placed Applicant into involuntary bankruptcy dissolution.

In the bankruptcy hearing, Beneficiary moved to have the automatic stay lifted so that it could pursue the class action to final judgment, enabling it to draw on the LCs. Issuer opposed lifting the stay. Applicant/Debtor then filed motions to reject the proposed settlement as an executory contract under 11 U.S.C. Section 362 of the Bankruptcy Code. The United States Bankruptcy Court for the Northern District of Ohio Eastern Division, Baxter, J., granted the motion to reject, finding that the settlement agreement was an executory contract.

Claiming that Issuer rushed to complete the settlement agreement prior to the bankruptcy filing in order to increase the value of the bankruptcy estate, Beneficiary then brought this action against Issuer seeking a declaratory judgment stopping Issuer from asserting the expiration date on the LCs and declaring that the complaint in the lawsuit served as a presentment and draw on the LCs on a theory of promissory estoppel. It also alleged common law claims of fraud and intentional misrepresentation and alleged that Issuer had violated the Ohio UCC Article 5. Beneficiary alleged that neither Issuer nor Applicant had ever intended for the LCs to serve as security for the settlement, instead Beneficiary claimed that they had engaged in self-dealing and had a vested interest in assuring that the action was quickly settled with the goal of increasing the value of the bankruptcy estate.

Issuer moved to dismiss for failure to state a claim or failure to plead fraud with requisite particularity.

The United States District Court for the Southern District of Ohio, Eastern Division, Sargus, J., denied Issuer's motions and granted Beneficiary leave to amend its complaint.

The court ruled that "a declaratory judgment cannot itself trigger the reimbursement obligations, which, instead, are imposed only when the bank honors a presentment under the [LC]."

Regarding Beneficiary's fraud and intentional misrepresentation claims, Issuer argued that any assurances that the LCs would serve as security for Applicant's obligations were opinions about the law and could not form the basis for fraud and misrepresentation claims. However, the court found that Beneficiary alleged that Issuer had fraudulently failed to disclose material facts that would have caused Beneficiary to refuse to execute the settlement. Thus, the allegations could not be dismissed on this basis.

Although Beneficiary had not alleged facts to show that it reasonably relied on Issuer's alleged misrepresentation, the court declined to dismiss this claim. Because Beneficiary claimed that it signed the settlement agreement in reliance on Issuer's assertions, Beneficiary was required to prove this as part of its prima facie case. Additionally, although Beneficiary did not plead its factual allegations of fraud with sufficient particularity, the court granted Beneficiary leave to amend its complaint.

As to the LCs, the court noted that they were not to about to expire. The Issuer had pointed out that the LCs by their terms were automatically renewed. Although Beneficiary argued that Issuer had repudiated the LCs by resisting Beneficiary's attempts to lift the automatic stay, the court observed that Beneficiary did not show that Issuer's efforts in Bankruptcy Court against Beneficiary's attempts to lift the stay constituted repudiation. The court stated that Beneficiary "has failed to articulate how [Issuer] otherwise repudiated the [LCs], given that[Beneficiary] never formally presented the drawing certificates... .[Beneficiary] has not demonstrated how [Issuer] repudiated the [LCs] in light of the Bankruptcy Court's Orders that forestalled [Beneficiary's] ability to satisfy all of the conditions required to draw on them."

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