Article

Factual Summary:

In connection with the stock buy-out of a medical company, the stockholders sold their shares in exchange for promissory notes. Each note provided for annual payments of interest and principal for a period of five years. The notes were secured by standby letters of credit. The standbys provided for payment within ten days after presentation of a draft accompanied by a notarized statement that the draw represents an unpaid instalment or that the outstanding balance of the corresponding promissory note is due and payable.

The first two installments were paid directly by the obligor. However, after being advised that the third installment would not be paid, the payees accelerated the notes and drew the maximum amounts to which each was entitled under the respective letters of credit. Subsequent to honoring the draft, the issuer concluded that the amounts paid exceeded the amounts due, and sought reimbursement. The beneficiaries then sought a declaration that the draws under the letters of credit were correct, and that there was no obligation to repay any amounts to the issuer.

The issuer brought six counterclaims against the beneficiaries, including fraud, money had and received, payment by mistake, unjust enrichment, breach of contract and negligent misrepresentation. The parties moved for summary judgment. The kial court dismissed the issuer's counterclaim for fraud, but granted summary judgment on its other counterclaims on the ground that the amounts paid under the letters of credit exceeded the amounts due under the promissory notes. The beneficiaries appealed. The appellate court reversed the decision of the trial court, granted summary judgment in favor of the beneficiaries, and dismissed the issuer's counterclaims.


Legal Analysis:

1. Independence Principle: The appellate court noted that the amounts due under the promissory notes were irrelevant to the issuer's liability under the letters of credit because, under the independence principle, an issuer is obligated solely under the terms of the credit. On that ground, the court found that the beneficiaries are not required to reimburse the issuer for the amounts drawn under the credits that exceed the amounts due under the promissory notes. The court noted that the only claim against the beneficiary was that of the applicant but that that the applicant had reached a final settlement with the issuer. As a result, the issuer had no recourse against the beneficiary.

2. Warranty by Beneficiary: The issuer contended that it should recover the amounts overpaid because the beneficiaries breached the warranties provided under Prior UCC - 5111(1). The court did not agree. Under New York law, pursuant to Prior NY UCC - 5102(4), New York's non-conforming amendment, a credit that is subject to the UCP is not subject to the Uniform Commercial Code. Hence, the appellate court ruled that the beneficiaries were not liable to the issuer for the any amounts that were overpaid.

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.