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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
2003 LC CASE SUMMARIES No. 4183/2003 (Mass. Sup. Ct. 2003) [U.S.A.]
Topic:Injunction; Irreparable Injury; Material Fraud; Preliminary Injunction
Type of Lawsuit: Applicant sought preliminary injunction to restrain beneficiaries from drawing on the LC.
Parties:
Plaintiff/Applicant- Raytheon Company
Defendant/Beneficiary- Exelon Mystic Development, LLC.
Defendant/Beneficiary- Exelon Fore River Development, LLC.
Issuer- JPMorgan Chase Bank
Issuer- Westdeutsche Landsbank Gironzentrale
Underlying Transaction: The construction of two electric generating facilities.
LC: Four standby LCs for US$1,863,000.00, US$49,890,017.00, US$11,583,648.30, US$9,818,279.30. Silent as to governing rules.
Decision: Applying New York Law, the Superior Court of Massachusetts, van Gestel, J., granted Applicant's motion for preliminary injunction, restraining beneficiaries from assigning, transferring, alienating or liquidating their interests in the LCs or from drawing on the LCs.
Rationale: Under New York law, a preliminary injunction will be granted where the moving party will suffer irreparable injury in a matter in which it is likely to succeed on the merits, and where there is no undue burden placed on other persons.
Subsequent History: Beneficiary sought dismissal of Applicant's claim for permanent injunction in favor of an earlier filed action in New York. In an action, Superior Court of Massachusetts, van Gestel, J., granted the motion to dismiss, but stayed the dismissal for one month to allow Applicant to seek the injunction in New York, because "it seems much more appropriate for the proceedings to be conducted by a New York judge who can interpret his own state's laws and whose rulings New York's appellate courts can review." [Raytheon Company v. Exelon Mystic Development, LLC, 17 Mass. L. Rep. 86 (Mass. 2003).]
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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