Article

Note: The Cheyenne River Sioux Tribe (Indian Tribe) planned to operate a commercial buffalo farm and to finance it by the sale of US$4,650,000 in corporate bonds. To do so, Indian Tribe formed Corporation and entered into a trust agreement with bondholders who appointed J.P. Morgan Trust Company, N.A. (Trustee/Beneficiary) to act on their behalf. Pursuant to the agreement, Corporation granted Beneficiary a security interest in the buffalo herd, slaughter-house equipment, and land. In the event that the collateral was insufficient to cover default, a standby LC was required in favor of Beneficiary.

At the request of Jennifer Easton (Applicant), a third party surety, U.S. Bank, N.A. (Issuer) issued a standby LC for US$2,200,000 in favor of Trustee, and Applicant signed a reimbursement agreement. The standby provided for automatic renewals but also contained a final expiration date. The LC "stated that [Beneficiary] could draw upon it by submitting a sight draft accompanied by documentary evidence indicating either that [Corporation] defaulted on its bond payments and that [Beneficiary] foreclosed on the herd and equipment, or that [Issuer] had declined to permit the [LC] to automatically renew."

Although Corporation defaulted, Beneficiary did not foreclose on any of the security interests. Instead, the day prior to the final LC expiration date, Beneficiary "submitted a sight draft for the full amount of the [LC] and certified that the Bank had declined to permit the [LC] to automatically renew." Claiming that it had not refused to renew the standby LC or sent a notice to that effect, Issuer refused payment. Beneficiary "asserted that the [LC] itself constituted a non-renewal because it included an expiry clause stating that 'in any event, this [LC] shall not be automatically extended beyond May 15, 2003, the final expiration date.'"

Subsequently, Beneficiary sued Issuer for wrongful dishonor, and Issuer brought a third-party complaint against Applicant who counter-claimed against Issuer for willful misconduct and against Beneficiary for breach of the trust agreement. On cross motions for summary judgment, the trial court granted summary judgment in favor of Issuer and against Applicant, and granted summary judgment in favor of Applicant against Beneficiary. J.P. Morgan Trust Co., N.A. v. U.S. Bank, N.A., 381 F. Supp. 2d 865 (D. Wis. 2005) [U.S.A.], abstracted at 2006 Annual Survey 366.

On Beneficiary's Motion for Reconsideration of the order entering summary judgment against it, the United States District Court for the Eastern District of Wisconsin, Adelman, J., granted the motion in part and denied it in part. The court denied Beneficiary's motion regarding dismissal of the claim for willful misconduct.

Beneficiary also petitioned the court to revise its conclusion that Beneficiary had committed fraud since Applicant had not alleged fraud and the issue had not been briefed. Since there was no opposition to the motion, the court withdrew that portion of the opinion.

However the court reiterated its "conclusion that [Issuer] properly dishonored [Beneficiary's] draw." The court noted that "[Beneficiary] erroneously certified that [Issuer] declined to permit the [LC] to automatically renew when in fact [Issuer] did not do so." The court noted that there was no violation of the independence principle "in determining that it had not refused to permit the letter to renew, [Issuer] did not have to consider the underlying transaction but had only to look at its own records."

On appeal, Applicant moved for an award of attorney's fees, contending that the law of Minnesota applied. Under Minnesota's version of Revised UCC §5-111(e), attorney's fees are to be awarded to the prevailing party.. In citing applicable law, the court applied the choice of law rules of the forum where the litigation was taking place, Wisconsin. It noted that the LC was issued in Wisconsin and that the drawing took place there. Stating the rule that "courts generally resolve issues relating to [LCs] under the law of the state in which the issuing or confirming bank is located or where performance under the letter occurs," the court concluded that the LC was subject to the law of Wisconsin. Since Wisconsin had not adopted Revised UCC Article 5 at the time the LC was issued, the court concluded that attorney's fees were inappropriate.

Beneficiary also sought revision of the court's conclusion that there had been a breach of the beneficiary's warranty to the applicant under Prior UCC §5-111, namely that "the necessary conditions of the [LC] have been complied with." Beneficiary contended that there could only be a breach of an LC warranty if the bank honored the presentation, relying on Revised UCC Section 5-110(a) Official Comment 1 which states that "the warranties in subsection (a) are not given unless a letter of credit has been honored, no breach of warranty under this subsection can be a defense to dishonor by the issuer." The court, however, noted that the revision was not in effect and stated that the prior version "plainly provides that a beneficiary warrants that its assertions in support of its attempt to obtain payment under [an LC] are true."

Comments by James E. BYRNE:

1. Non-Documentary Conditions: The opinion affords an interesting glimpse at the non-documentary condition rule of UCP500 (1998) Article 13(a) (Standard for Examination of Documents). When Issuer refused to honor the draft because Beneficiary's statement that the LC had failed to renew was not true, Issuer only had to look to its own records, as the court observed. Doing so does not violate the independence principle.

2. Automatic Renewal; Final Expiration Date: This LC also affords an example of the type of planning necessary before drafting an automatic renewal clause. If Beneficiary had refused security beyond the final expiration date, it should have insisted on the option of drawing in the event of the failure to replace the LC in the face of the pending final expiration date. James E. BYRNE, Drafting "Evergreen" Clauses, Institute of International Banking Law & Practice, 2006).

[JEB/al]

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.