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Note: In connection with the settlement of class action litigation against it, Level Propane Gases, Inc. (Defendant/Applicant) obtained letters of credit for US$2,200,000 issued by Deutsche Bank Trust Co. Americas through its affiliate, BT Commercial Corporation (Issuer), in favor of Equal Justice Foundation (Plaintiff/Beneficiary). The LCs were payable when the final settlement was judicially approved. Subsequently, however, Defendant/ Applicant was forced into involuntary bankruptcy by Issuer, the main creditor, and other creditors and the class action was automatically stayed. Plaintiff/ Beneficiary moved to lift the automatic stay in order to proceed with the litigation so as to be able to draw on the LC but its motion was denied by the bankruptcy court.

During the negotiations for the LC, Issuer's attorneys had allegedly failed to disclose an agreement that gave Issuer considerable control over Defendant/ Applicant due to the threat of withdrawing financing. After the denial of Plaintiff/Beneficiary's motion to lift the stay, Issuer wrote Beneficiary, "calling for the return of the letters of credit in light of [Applicant]'s intention to reject and terminate the ... settlement agreement of the bankruptcy proceeding. [Issuer] demanded the immediate return of the original letters of credit, indicating that they were 'null and void, and of no further forth and effect.'"

Plaintiff/Beneficiary then filed this action against Issuer, alleging fraud, intentional misrepresentation, fraudulent concealment, fraudulent inducement and promissory fraud and anticipatory repudiation. Issuer moved to dismiss, arguing that the fraud claims were not pled with sufficient particularity and failed to state a claim for which relief could be granted as to anticipatory repudiation. The United States District Court, S.D. Ohio, Sargus, J. denied the motion.

Plaintiff/Beneficiary alleged that Issuer effectively operated Defendant/Applicant during the time that the settlement was reached and had engaged in self-dealing so as to appear to increase Debtor's value. Plaintiff/Beneficiary claimed that that Issuer had never intended for the LC to serve as security for the settlement and had engaged in a fraudulent scheme whereby Defendant/Applicant would be able to reject the settlement and ensure that Issuer would never have to perform under the accompanying letters of credit.

The court noted that to withstand a motion to dismiss, a party must "allege the time, place, and content of the alleged misrepresentation on which he or she relied; the fraudulent scheme; the fraudulent intent of [the other party]; and the injury resulting from fraud." It concluded that Plaintiff/Beneficiary had done so.

Plaintiff/Beneficiary also claimed that Issuer was liable for having anticipatorily repudiated its LC obligation in its letter to Beneficiary. Issuer responded that its letter "does not, as a matter of law, constitute a repudiation because [Issuer] did not communicate that it refused to perform its obligations under the letters or credit. [Issuer] maintains that the letter merely advised [Plaintiff/Beneficiary] that [Defendant/Applicant] had terminated the stipulation of settlement and simply 'requested' that [Plaintiff/ Beneficiary] comply with the termination provisions in the agreement by returning the letters of credit."

The court noted that there was a remedy for anticipatory repudiation in Revised UCC §5-111. It stated that "anticipatory repudiation occurs when a party indicates to the other contracting party, prior to the time performance is due, that it will not perform its obligations under a contract at issue." The court observed that the issue of whether the Issuer repudiated the letters of credit "turns on the factsensitive question of whether the October 9, 2003 letter reasonably indicated a rejection of [Issuer's] obligation." Reading the allegations of the complaint most favorably to the Beneficiary, the court concluded that "a reasonable person could interpret a demand for immediate return of the letters as an indication [Issuer] did not intend to perform its obligations."

[JEB/mm]

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