Article

Factual Summary: To assure payments of its bankrupt subsidiary's obligations on contracts to design, engineer, and construct two electric generating facilities, Applicant caused four standbys to be issued in favor of owners of facility sites.

While Applicant was working to complete construction of the generating facilities, Beneficiaries made public announcements that they planned to transfer their interest in the facilities to lenders to satisfy their US$1.1 billion debt. Because Applicant was expending US$ 350,000 daily in reliance on future payment, Applicant sought assurances that Beneficiaries would be able to honor their payment obligations, including US$ 38 million in prepaid contingent liquidated damages, to Applicant upon completion of the contract. When it did not receive the requested reassurances, Applicant sought a preliminary injunction to restrain Beneficiaries from drawing on the LCs until Applicant's action seeking a permanent injunction and termination of its contractual obligation was decided. The trial court granted the preliminary injunction.


Legal Analysis:

Preliminary Injunction: The court applied general New York law relating to injunctions, which allows issuance of a preliminary injunction before trial when 1) the moving party is likely to succeed in a trial on the merits, 2) the moving party will suffer irreparable injury if the injunction is not granted, or 3) granting the injunction will not impose a larger burden on the enjoined party than refusing the injunction will impose on the moving party. The court ruled that Applicant had successfully proved its likelihood of success in a trial on the merits by demonstrating that Beneficiaries had assigned their property interests to satisfy an outstanding debt and had failed to assure repayment of its debt to Applicant. The court further noted that issuing a preliminary injunction would significantly damage "[n]either issues of balancing the harms nor whether there truly is irreparable injury that cannot be satisfied by monetary damages, nor the special significance of a letter of credit in the commercial business world."

Comments:

1. It is unclear whether or not US Revised UCC Article 5 applies to this LC.

2. Whether or not it does, the court failed to apply the proper test which is not simply whether or not there are grounds for concluding that the applicant will prevail in its contract action, but whether or not there is material fraud.

3. The court fails to grasp the fundamental nature of the independent character of an LC. In concluding that there is no undue impact on the "special significance of a letter of credit in the commercial business world," the court is wrong. Absent material fraud, standbys should not be interrupted. To do so does negatively impact the special significance of standbys in the commercial world.

[JEB/llh]

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