Article

Factual Summary: As security for payment obligations under an energy supply contract, Applicant, a subsidiary of Enron Corporation, obtained two standby LCs in favor of Beneficiary, a power company, totaling US$57,500,000. As issued, Beneficiary was required to present a certificate stating that Applicant was in default and liable to furnish alternate security as requested by Beneficiary. At the request of Applicant's parent company, Issuer amended the LCs to extend the expiration of the credits and alter the documents required for a proper drawing. The amended LCs required Beneficiary to present certificates indicating that an early termination of the underlying contract had occurred and continued and that Applicant had failed to pay Beneficiary in accordance with the terms of that contract.

Beneficiary subsequently drew on both LCs, enclosing certificates signed by Beneficiary's senior officers quoting the exact language required by the LCs. Issuer refused to honor the drawings, stating in its notice of dishonor that the certificates "are allegations of, but not proof of, the required essential extrinsic facts and are refused." Beneficiary then sued Issuer for wrongful dishonor. Beneficiary's Motion for Summary Judgment was granted.

Legal Analysis:

1. Discrepant Documents; Wrongful Dishonor; Independence: Issuer argued that it was justified in dishonoring Beneficiary's draw because the LC's documentary requirements were not satisfied. The court found this argument "to be bereft of merit." It noted that the certificates that accompanied the drawing complied "word-for-word" with the required language of the amended LCs. The documents were wholly consistent with the LC requirements and there was no indication of other discrepancies.

Furthermore, contrary to Issuer's argument, there was no indication in the LCs that Beneficiary was required to "prove" any of the assertions called for in the accompanying certificates. The court noted that such a requirement would be "totally inconsistent with the purpose of a letter of credit". The court cited the principle of independence, noting that "the obligation of the issuing bank to honor a [beneficiary's] draw which complies with the conditions of credit is independent of the underlying contract ... for which the credit was issued."

2. Amendment; Fraudulent Inducement: Issuer argued that Beneficiary fraudulently induced it to amend the LCs by failing to advise Issuer that the payment obligations that the LCs secured were already in default when the amendments were sought. According to the court, this argument was "without basis" because "[t]he amendment resulted from [Applicant's] request to [Issuer], not from something [Beneficiary] did or was required to do."

[JEB/jwb]

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