Forgot your password?
Please enter your email & we will send your password to you:
My Account:
Topics: Advising Bank; Breach of Fiduciary Duty; Negligent Misrepresentation; Partial Summary Judgment; Standby Letters of Credit; Wrongful Dishonor
Note: To secure an advance tendered to its partner for an underlying real estate deal, ERA Capital L.P. (Creditor) approached its bank, Regions Bank (Advising Bank), for advice on letters of credit as Creditor expressed that it did “not have any experience” with LCs. Advising Bank acknowledged having expertise with LCs transactions and proceeded to assist Creditor with LC terms and standard practice.1
Prior History:
ERA Capital L.P. v. Soleil Chartered Bank, No. 651984/2019, 2021 WL 2003177 (N.Y. Sup. Ct. May 19, 2021) (denying motions to dismiss complaints against Issuer and Advising Bank), summarized in Oct. 2021 DCW at 15.
As the LC drafting progressed, an Advising Bank representative expressed concern with Soleil Chartered Bank as the issuer as it was previously assumed Standard Chartered Bank would issue the credit. Advising Bank informed Creditor that it would request its compliance division to “do a background check” on Soleil Chartered Bank. Subsequently, the Advising Bank representative informed Creditor that “this bank [Soleil] is good but I would have preferred Standard Chartered Bank.” Ultimately, Soleil Chartered Bank (Issuer) issued a USD 900,000 standby LC subject to UCP600 in favor of Creditor/Beneficiary. Advising Bank advised the LC terms to Creditor/ Beneficiary by letter which included a disclaimer: “THIS LETTER IS SOLELY AN ADVICE OF THE ENCLOSED IRREVOCABLE STANDBY LETTER OF CREDIT AND CONVEYS NO ENGAGEMENT OR RESPONSIBILITY ON OUR PART.”
Not mentioned in the May 2021 judgment, however, was that Issuer issued a second standby LC for USD 1.8 million in favor of Creditor/Beneficiary. Advising Bank again tendered its advice to Creditor/Beneficiary including the same disclaimer. Later, when Advising Bank sent SWIFT messages to Issuer demanding payment on the second standby, Issuer allegedly dishonored on the basis of Creditor/Beneficiary’s “failure to deposit [USD]1.8 million with [Issuer] as a condition to a drawing.” Issuer also stated it had “cancelled” the standby. As the opinion notes, Issuer honored the USD 900,000 credit, but not the USD 1.8 million standby.
Creditor/Beneficiary sued Issuer alleging breach of contract; Creditor/Beneficiary also sued Advising Bank for negligence and breach of fiduciary duty. Issuer and its Parent company as well as Advising Bank filed motions to dismiss the action. The trial court denied each motion. After further evidence was collected and testimony given, Advising Bank moved for summary judgment. The New York Supreme Court, Crane, J., denied the motion in part.
Following discovery, the Judge offered a detailed review of how each LC transaction arose. This review included email, phone and text message exchanges. A key message included a proposed draft LC sent by Creditor/Beneficiary’s partner and a document containing the issuing bank’s SWIFT information. Interestingly, the draft LC stated “S CHARTERED BANK, NEW YORK” as issuer, while the second document listed Standard Chartered Bank as issuer. The first draft LC Creditor/ Beneficiary shared with Advising Bank showed “S CHARTERED BANK, NEW YORK” as the proposed issuer. Advising Bank, after briefly reviewing the terms, replied that the draft “[was] fine”. Later, after talks with its partner, Creditor/Beneficiary forwarded an updated draft which showed Soleil Chartered Bank as the issuer for the first time. Advising Bank responded via email:
[Creditor/Beneficiary’s partners] totally threw me with the name of the issuing bank. I have asked my compliance officer to quickly do a background check on Soleil Chartered Bank and get back to me. In the past communications they list themselves as S. Chartered Bank, which I interpreted to be Standard Chartered Bank. Hold tight and I will get back to you shortly.
Not long after, Advising Bank sent an email stating “this bank is good but I would have preferred Standard Chartered Bank.” Advising Bank performed an OFAC check to determine whether Issuer was subject to U.S. sanctions; that check was negative. Furthermore, at a pretrial hearing, an Advising Bank representative expressed comfort with advising the standby because “it was issued through SWIFT, meaning [Issuer] was vetted, verified, and had passed a rigorous screening test designed to eliminate fraudulent parties in similar transactions.” Advising Bank did, however, inform Creditor/Beneficiary that it would have to get an amendment to the draw conditions of the standby; the proposed terms required an authenticated SWIFT message from Creditor/Beneficiary, capabilities that it lacked. Advising Bank suggested the following draw term: “Written certification signed by an authorized officer of [Creditor/Beneficiary]”.
A few days before the first standby was issued, employees of Advising Bank exchanged internal messages regarding a Documentary Credit World “article” detailing New York litigation against Issuer.2 The employee handling the Creditor/Beneficiary transaction, however, was not concerned with Issuer “because the disputes and cases the article referenced were between an account party and an issuer, and stemmed from the payment of LC issuance fees, not an issuer ’s potential dishonor of a demand”.3 As mentioned previously, no issues ultimately arose concerning the first standby.
In late March 2018, Creditor/Beneficiary requested that Advising Bank advise a second standby that it expected from Issuer. As a Creditor/Beneficiary representative later testified, “he proceeded with the later [USD]1.8M LC because [Advising Bank employee] previously stated that [Issuer] ‘[was] good’ in connection with the first ... LC, and that he assumed [Issuer] was an appropriate issuer for this second ... LC as a result.” Advising Bank so advised the second standby, including its disclaimer, although, Issuer ultimately dishonored that credit.
Turning to the summary judgment motion, the Judge addressed whether the third count of Creditor/Beneficiary’s complaint, breach of fiduciary duty, should be dismissed. In light of all of the reviewed communications between the parties, the Judge concluded that “the relationship the record reflects does not amount to anything more than an arm’s length bank-customer relationship.” Citing the disclaimer Advising Bank included in its letters, the Judge noted that Creditor/Beneficiary “could not reasonably have expected [Advising Bank] to be acting under a fiduciary duty.” Ultimately, Creditor/Beneficiary was unable to demonstrate a fiduciary duty as a matter of fact despite the fully developed record and its subjective claims of having relied on Advising Bank’s expertise; moreover, case law Creditor/Beneficiary cited were “inapposite because they involve[d] motions to dismiss.”
As for the second count of the complaint, negligent misrepresentation, the Judge noted the requisite elements: “(1) the existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff; (2) that the information was incorrect; and (3) reasonable reliance on the information.” Based on the full record, Advising Bank failed to eliminate all triable issues of fact regarding the claim. Essentially,
Subsequent History:
Advising Bank filed an appeal. The New York Supreme Court, Appellate Division, Kern, Friedman, Kennedy, Scarpulla and Pitt-Burke, JJ., unanimously affirmed without costs. As for the first branch of Advising Bank’s summary judgment motion, the court ruled that the breach of fiduciary claim was properly dismissed:
[Advising Bank] which ultimately acted as adviser for two letters of credit issued by Soleil Chartered Bank (see UCC § 5-107[c]), did not negotiate on [Beneficiary]’s behalf, have authority to bind [Beneficiary] to any agreement with the issuer or [Beneficiary]’s borrower, or counsel [Beneficiary] as to the substance of the deals at issue.
As for the negligent misrepresentation claim, summary judgment was appropriately denied. There were enough facts to support a special or “privity-like relationship” requiring Advising Bank to relay correct information to Beneficiary. “[T]here are triable issues of fact as to whether [Advising Bank’s] statement that the issuing bank was good to proceed ‘was incorrect,’ and whether [Beneficiary] reasonably relied on the statement when accepting the letter of credit on which payment was ultimately denied.” The appellate court noted all remaining arguments were unavailing.
[Advising Bank’s] submissions raise issues of fact as to whether it ignored potential red flags concerning [Issuer] and its suitability as an issuer, and was negligent because it never conveyed this information to [Creditor/Beneficiary], continued to assist with the underlying LC transactions and informed [Creditor/Beneficiary] that [Issuer] was ‘good’ for the LC transaction.
The statement that Issuer was “good” to handle the transaction was the alleged misrepresentation that Advising Bank made and, but for that statement, Creditor/Beneficiary claimed that it would not have proceeded with Issuer for the second standby.
The Judge also noted that testimony by Advising Bank representatives failed “to eliminate the triable issues of fact concerning the discrepancy in the dates the OFAC Check was performed and date the results were printed.” Initial testimony suggested the check occurred earlier in the day before the first LC was issued. Following a recess at trial, however, the Advising Bank representative “changed his position” and instead testified that the check occurred the day before. The discrepancy in the dates and Advising Bank’s failure to “clear up these issues” precluded summary judgment on count two of the complaint.
Before concluding the opinion, the Judge addressed a final matter regarding whether Advising Bank properly relied on its OFAC check and results in advising Creditor/ Beneficiary that Issuer was a suitable bank. In light of the internal comments about Issuer, “there is a question about whether it was negligent for [Advising Bank] nevertheless to tell [Creditor/ Beneficiary] that the bank was good because it was on the SWIFT network, and because the OFAC Check’s results confirmed that [Issuer] was not on the regulatory list.” Thus, the Judge denied summary judgment regarding negligent misrepresentation and ordered the parties to appear remotely for a pretrial conference.
1For example, Advising Bank recommended that a U.S. based bank issue the standby, that the credit be subject either to UCP600 or ISP98, be expressly irrevocable, state a definite expiry date, and “be payable against a simple statement that ‘Applicant has defaulted under that certain agreement between [Creditor/Beneficiary] and XXX, dated xx/xx/xxxx’.”
2That litigation being Rich Int’l Grp. v. Soleil Capitale Corp., 147 A.D.3d 493 (N.Y. App. Div. 2017) [USA], noted in Feb. 2018 DCW at 19.
3Before sharing the DCW article, Advising Bank representatives exchanged an email on an unrelated LC transaction that involved Issuer; one representative made an “off-the-cuff” remark that “[Issuer] is kind of shady — one of those companies that will just issue [LCs] because they are on SWIFT.”