Article

Topics: Wrongful Dishonor; Assignment of Claim to Wrongful Dishonor; Assignment of Proceeds; Notice of Refusal; LC Fraud; Independence Principle; Unjust Enrichment: Limitations Period; US Rev. UCC § 5-115

Note: To finance its performance of a contract with the Jordanian Education Ministry to sell computer equipment and services, UPS Capital Business Credit (Financier) extended a line of credit to Ashford International (Seller). This arrangement was subsequently modified so that Financier issued two performance standbys (Financier's Standbys) subject to ISP98 in the amount of USD 330,104.80 each in favor of the Education Ministry for the account of Seller. Financier also obtained a guarantee from Export-Import Bank of the United States (Guarantor), an export credit agency of the U.S. Government. As part of this arrangement, Seller obtained two standby LCs (United Standbys) issued by United California Discount Corporation (Issuer) in favor of Financier (which became the Beneficiary of the United Standbys) to assure repayment of Financier's standbys.

The Financier's Standbys, as amended, required a draft, Financier's statement of default, and presentation of the original operative instrument. The Education Ministry apparently drew on both of Financier's Standbys, triggering Financier/Beneficiary's drawing on the two United Standbys in its favor. Finding discrepancies, Issuer sent a notice of dishonor which Financier/Beneficiary cured, re-presenting. Issuer also found the re-presentation to be discrepant.

Financier/Beneficiary then made a claim with Guarantor and, on payment, assigned its claim against Issuer to Guarantor. Guarantor/Assignee then sued Issuer for wrongful dishonor, breach of contract, and unjust enrichment. Both parties moved for summary judgment. The U.S. District Court for the Central District of California, Snyder, J., granted Guarantor/Assignee's motion on the grounds of wrongful dishonor and breach of contract, but granted summary judgment to Issuer on the claim of unjust enrichment. On appeal the United States Court of Appeals for the Ninth Circuit, Wardlaw, Paez, and Rawlinson, JJ., in a per curiam opinion, affirmed.

The appellate court ruled that the claim was subject to federal common law since it was made by a federal insurance program which had assigned its letter of credit claim within the one year statutory limitations period. The appellate opinion stated that Guarantor's "claims against [Issuer] are not time-barred because [Guarantor] filed its complaint before the applicable federal six-year statute of limitations pursuant to 28 U.S.C. § 2415(a), and [Financier] assigned the claims to [Guarantor] before the applicable one-year state statute of limitations."

Issuer argued that its obligation to honor was conditioned on proof that Seller failed to perform on the underlying agreement. The appellate court ruled that proof of failure to perform on the underlying agreement was not a condition precedent to payment of the LCs because of the independence principle. Referring to the independence principle, the appellate court noted that under an LC payment must be made upon a proper presentation regardless of any dispute between the parties. The opinion stated that this application of the independence principle was "especially true in light of the amendment that was made to the [United Standbys], changing the beneficiary certification language from certifying that 'the amount of our draft represents funds due as a result of the failure of [Seller] to perform as to the terms of the [Jordanian Contract],' which explicitly addresses failure to perform, to certifying that 'the amount of our draft represents funds due as a result of drawing of our letter of credit [the United Standbys] by order of [Seller] under the terms of the [Jordanian Contract],' which does not explicitly address failure to perform."

Issuer also alleged that Financier/Beneficiary had engaged in fraud. The appellate court noted that the trial court found no evidence of fraud presented. The appellate opinion stated that "[t]he fact that [Financier/Beneficiary] presented the [United Standbys] while there was ongoing litigation regarding [Seller]'s performance under the underlying contract did not constitute fraud."

[JEB/rs]

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