Article

Factual Summary: To secure the manufacture and delivery of railcars and trailers by Third-party/ Manufacturer, Applicant/Surety obtained a standby LC from Issuer in favor of Beneficiary/Purchaser. The standby required a document stating that Applicant was in default on underlying contract. Applicant undertook to answer the debt of Manufacturer, Beneficiary's counter-party. Applicant had been incorporated for the purpose of obtaining the letter of credit, although its officers were also officers at Manufacturer, but there was no contract between Applicant and Beneficiary. To allow Beneficiary to make the statement required by the standby, (instead of amending the standby) Manufacturer, Applicant/Surety, and Beneficiary entered into an agreement making defaults by the Manufacturer constitute defaults by the Applicant for purposes of the LC.

Subsequently, Manufacturer and Beneficiary entered into a Project Monitoring Agreement (the "PMA") without Applicant being a party or having been advised. Under the PMA, Beneficiary would make "special contract payments" to or on behalf of Manufacturer. Beneficiary was authorized to draw on the LC if not repaid by Manufacturer. In addition, Applicant claimed that Beneficiary fraudulently obtained Applicant's consent to the extension of expiry date.

When Beneficiary drew on the LC to reimburse itself for special contract payments to Manufacturer under the PMA and was paid, Applicant sued Beneficiary for the proceeds drawn under the LC. The trial court ruled that Beneficiary was not entitled as a matter of law to retain the proceeds.

Legal Analysis

1. Suretyship: The Judge ruled that Applicant was a surety for Manufacturer that suretyship is to be determined by examining the substance of the transaction. The Judge noted that Beneficiary had recourse against Applicant for up to $3 million. Because there was a suretyship, the Judge concluded that "suretyship defense" was available for Applicant.

2. Independence Principle; Suretyship Defense of Discharge; Availability in LC Transactions: In ruling that suretyship defense was available against Beneficiary, the Judge cited Rev. UCC§5-103 Comment 2, stating that "[courts] ha[ve] expressly rejected the argument that UCC provisions governing a beneficiary's right to draw on a letter of credit may be employed to prevent an action by an applicant against a beneficiary for return of drawn proceeds based on their underlying contractual relationship ... Under the independence principle, a beneficiary's right to draw on a letter of credit is analyzed without regard to contractual or legal obligations outside the four corners of the letter, and the underlying relations of the parties are not impacted by the rules governing the enforceability of the letter of credit." Then, the Judge ruled that Applicant's obligations as surety of Manufacturer were discharged when Manufacturer and Beneficiary entered into the PMA without the consent or notice of Applicant, and thus Beneficiary was not entitled as a matter of law to retain the proceeds drawn under the LC. The court also cited Oregon's version of UCC 4-103, and UCC 5-103.

3. Breach of warranty premised on material fraud by Beneficiary: The Judge cited Oregon's version of Rev. UCC 5-110, stating that "[Beneficiary], by successfully presenting [Issuer] with its request to draw on the Letter of Credit, warranted to both [Issuer] and [Applicant] that its draw request would not facilitate material fraud on either [Issuer] or [Applicant]." Beneficiary argued that the statutory warranty claim failed as a matter of law because the allegations of fraud did not satisfy the materiality standard as is used in Oregon's version of Rev. UCC 5-109. In refusing to recognize a material fraud on the part of Beneficiary fraudulently obtaining Applicant's consent to the extension of expiry date, the court cited with approval the standard in Ground Air Transfer v. Westate's Airlines, 899 F.2d 1269 (1st Cir. 1990) and UCC Section 5-109 Comment 1, reasoning that the conduct had no impact on the question whether Beneficiary could properly draw on the letter during its effective period, and thus "could not have so vitiated the transaction that the legitimate purposes for which the irrevocable letter of credit first issued would not be served by honoring [Beneficiary]'s draw."

4. Breach of warranty premised on violation of underlying agreements: The Judge cited Oregon's version of Rev. UCC 5-110], stating that by successfully making presentation, Beneficiary "additionally warranted to Applicant that its draw request did not violate any agreement intended to be "augmented" by the Letter of Credit". The Judge then ruled that since Applicant was previously discharged from its suretyship obligation under the LC by virtue of the actions of Beneficiary, Beneficiary's drawing on the letter of credit necessarily put it in breach of the warranty that there is no violation of agreement between the parties. In arguing that it is entitled as a matter of law to summary judgment, Beneficiary asserted that damages are an essential element of a claim for breach of statutory warranty, which Applicant is unable to satisfy. In granting summary judgment in favor of Applicant, the Judge ruled that actual damage is not an element of a claim for breach of the statutory warranty.

5. Declaratory Judgment; mootness: Applicant requested declaratory judgment that the LC is unenforceable and expired, and that any draw in the past and future are without effect. The Judge dismissed Applicant's claim for declaratory judgment, reasoning that "claims for declaratory relief are moot in light of [Beneficiary]'s successful draw".

6. Right of reimbursement; unjust enrichment: Issuer moved for summary judgment against Beneficiary on the ground of unjust enrichment, claiming that the drawing was invalid. The Judge dismissed the motion, reasoning that "[Issuer] has an available contractual and statutory remedy against [Applicant] for reimbursement of its payment to [Beneficiary]."

[JEB/yn]

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