Article

Prior History: 546 F.3d 365 (6th Cir. 2008), abstracted in 2009 Annual Review at 470.

Note: In June 2007, Robert Langley (Mortgagor/Applicant) applied for two adjustable-rate mortgage loans for approximately US$73,000,000 and US$14,000,000 from Prudential Mortgage Capital Company, LLC (Mortgagee/Beneficiary) to finance two separate commercial real estate projects. The parties negotiated two "Rate Lock Agreements" which required Mortgagor/Applicant to pay "unwind costs if the loans failed to close for any reason." The contracts also contained a forum selection clause which stated that "any litigation arising out of this Agreement shall be brought only in a state or federal court sitting in New York County in the State of New York." When the subprime mortgage crisis occurred and the rate on 10-Year Treasury Notes fell, Mortgagee/Beneficiary classified the event as a "material adverse change" and demanded an increase in the rate lock deposits from Mortgagor/Applicant, but the parties disagreed as to the rate-fixing mechanism. Mortgagor/Applicant then applied for two LCs from National City Bank (Issuer) to prevent Mortgagee/Beneficiary from declaring an "unwind event" and because he hoped that the LCs would facilitate resolution of the Rate Lock Agreement dispute. The LCs did not contain a forum selection clause. Mortgagee/Beneficiary claimed that the failure to finalize the loans constituted an unwind event and drew on the LCs. Mortgagor/Applicant then sued Mortgagee/Beneficiary and Issuer to enjoin Issuer from honoring the LCs.

The United States District Court for the Eastern District of Kentucky, Hood, J., applying Kentucky law, issued a preliminary injunction. The Judge agreed with Mortgagor/Applicant that "as there was no meeting of the minds regarding the Rate Lock Agreements, the choice of law and forum selection clauses [in the agreement choosing New York as the forum and New York law]...d[id] not control this litigation."

On appeal, the United States Court of Appeals for the Sixth Circuit, Moore and Rogers, JJ, in a brief per curiam opinion, vacated and remanded, stating that the trial court erred in deciding that the forum selection clause in the rate lock agreement was invalid, and "the preliminary injunctive relief based on that analysis was therefore reversed." In a concurring opinion, Moore J. further explained that the trial court "abused its discretion in determining that the four preliminary-injunction factors weighed in favor of granting preliminary injunctive relief", had it been a proper venue.

The Concurring Opinion stated that "[a] plaintiff seeking a preliminary injunction must establish that he [wa]s likely to succeed on the merits, that he [wa]s likely to suffer irreparable harm in the absence of preliminary relief, that the balance of equities tip[ped] in his favor, and that an injunction [wa]s in the public interest." In noting that courts may order an injunction when there is material fraud only if the courts found that "the applicant [wa]s more likely than not to succeed under its claim of ... material fraud", the Concurring Opinion observed that the Kentucky courts had not addressed the meaning of "material fraud". The opinion noted that the Official Comments to Revised UCC Section 5-109 "endorse[d] the fraud standard previously articulated" in cases applying the "fraud in the transaction" rubric of Prior UCC Section 5-114. It also noted that Kentucky courts in applying this provision interpreted it to permit injunctions "only in very limited circumstances".

The Concurring Opinion stated that "[t]he drafters of the revised U.C.C. provision intended the terms "material" and "materially" to raise the burden of proof on the party seeking an injunction as compared to the former version's focus on 'fraud in the transaction.'"In applying these principles to the facts of the case, the Concurring Opinion noted that 'nothing in the record indicate[d] that [Mortgagee/Beneficiary]'s conduct r[o]se to the level of 'fraud.'" The Concurring Opinion also addressed the requirement of "irreparable harm", noting that trial court's finding that a loss of goodwill and business reputation would cause irreparable harm was incorrect. The opinion stated that "the general rule [wa]s that "a plaintiff's harm [wa]s not irreparable if it [wa]s fully compensable by money damages ... but this court ha[d] recognized that a loss of business goodwill may constitute irreparable harm because of the difficulty in calculating damages." The opinion nevertheless held that given the independence feature of LC, payment on the LC in no way suggested breach under the contract. "It therefore strains credulity to think Applicant's reputation or good will would be tarnished upon payment of the letters." The Concurring Opinion also observed that "the remaining equities weighed against an injunction" which should only be granted in "exceptional cases".

Comment:

The result is correct since there was no proof of fraud. While it is laudable that the concurring opinion sought to clarify why there was an abuse of discretion, the clarification added further confusion. Whether or not other equities weighed in favor of granting injunctive relief, it is not available under Revised UCC Section 5-109(b)(4) if there is no finding that the applicant is more likely than not to succeed in meeting its burden of proving the existence of material fraud or forgery. Once it is determined that there is no such likelihood, other equitable considerations are irrelevant. Unfortunately, it is unclear from the Concurring Opinion whether the Judge understood this point.

In addition, a forum selection clause in a separate agreement should have no bearing whatever on the appropriate forum for an injunction under an LC which is independent from the underlying agreement.

[JEB]

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