Article

Factual Summary: To secure Buyer's exercising of its options to purchase real estate, Buyer obtained a standby in favor of the Beneficiary/Seller in the amount of US$1,000,000 according to the Complaint. The Option Contract provided that the standby was available if Buyer defaulted. The standby required a "'statement certifying that [Buyer] has defaulted under that option contract for purchase and sale of property.'"

When Buyer failed to exercise the purchase option and close the purchase, Beneficiary/Seller drew on the standby, presenting the required default statement. Buyer/Applicant sued the Seller/ Beneficiary and Issuer, moving to enjoin honor and claiming LC fraud. The trial court denied Applicant's motion. On appeal, affirmed.


Legal Analysis:

1. Fraud; Revised UCC §5-109; Breach of Contract: Applicant claimed that it was not in default under the Option Contract because it was excused from performance due to a clause relating to governmental restrictions. Because the U.S. government had determined that the land had been a panther habitat under environmental and wildlife protection rules, Applicant/Buyer was required to acquire approximately "1,100 panther migration units" in order to develop the property, which Applicant/ Buyer was unable to do prior to the contractually mandated closing. In interpreting the Option Contract, however, the appellate court concluded that there was no affirmative duty on the part of the Seller/ Beneficiary to obtain the permits. Therefore, the court concluded that the Seller/Beneficiary had a colorable claim to draw, quoting from cases cited in Official Comment 1 of Revised UCC §5-109.

2. Injunction; Discretion: Noting that a trial court is accorded considerable discretion in awarding an injunction, the appellate court determined that there was no clear abuse of discretion in refusing injunctive relief.

3. Injunction; Irreparable Injury; Adequate Remedy; Revised UCC §5-109(b)(3): Noting that the Applicant would have a claim for money damages in the event that the Beneficiary wrongfully drew on the LC, the appellate court concluded that Applicant had not demonstrated irreparable injury or an inadequate remedy at law.

4. Injunction; Irreparable Injury; Harm to Reputation; Revised UCC §5-109(b)(3): Applicant claimed that honor of the LC would connote that it had defaulted on the Option Contract and was experiencing financial instability, causing irreparable harm. The appellate court rejected the claim, characterizing it as "speculative" and not amounting to irreparable injury.

5. Injunction; Balance of Harm; Independence Principle; Revised UCC §5- 103(4); Revised UCC §5-109(b)(4): In assessing the consequences of an injunction, the appellate court concluded that any theoretical injury to the Applicant in denying the injunction did not outweigh the possible harm to the Beneficiary from granting it. The appellate court noted the significance of the Independence Principle, stating that "[i]ssuing an injunction could threaten the vitality of letters of credit in general. Further, [Beneficiary] bargained for this letter of credit and granting an injunction in this case would eliminate the benefit of financial security it creates."

6. Injunction; Public Interest; Revised UCC §5-109(b)(3): Noting that "[i]t is in the public's interest to preserve the purpose of the letter of credit to permit its continued use in facilitating trade and commerce," the appellate court concluded that the public interest would not be served by the award of injunctive relief.

Comments:

1. Breach of Contract Issue: The problem here is simply one of breach of contract and not letter of credit fraud. Accordingly, the court properly refused injunctive relief.

2. Non-Bank Issuer; Revised UCC §5- 103(a)(10): Although not noted by the court, it is apparent from the opinion that the Issuer was a non bank issuer. What is more surprising, however, is the result of a search on www.manta.com (a website profiling small and medium-sized companies) which stated that the Applicant's parent company, Lennar Corp., is also the parent of Fidelity Guaranty and Acceptance Corp., the Issuer. If true, this information raises the question of whether the undertaking is a "letter of credit." Under Revised UCC §5-102(a)(10) a letter of credit can only be issued for the issuer's own account if the issuer is a financial institution. Arguably, Fidelity Guaranty and Acceptance Corp. is a financial institution but the question remains whether one looks beyond recitals in determining whether a credit is issued for the account of the issuer and whether that entity is a financial institution.

[JEB/plc]

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