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 change 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 amended 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. The trial court granted Beneficiary's Motion for Summary Judgment. On appeal, affirmed.


Legal Analysis:

1. Compliance: Issuer argued that the certificates presented are allegations, but not proof, of "the required essential extrinsic facts". The trial court had found this argument to be "bereft of merit" since the certificates complied "word-for-word" with the terms of the amended credits. The appellate court stated that "the documents presented by plaintiff to obtain payment pursuant to the subject amended letters of credit issued for its benefit facially complied with the requirements set forth in the letters of credit."

2. Fraud: Issuer argued that Beneficiary fraudulently induced it to amend the LCs by failing to inform it that the payment obligations secured by the LCs were already in default at the time that the amendments were sought. The trial court characterized this argument as "without basis" since "[t]he amendment resulted from [Applicant's] request to [Issuer], not something [Beneficiary] did or was required to do." The appellate court noted that "no issue was raised as to whether the underlying transactions in connection with which the letters of credit had been issued were permeated by fraud". As a result, it termed Issuer's obligation as "absolute". The appellate court continued with the observation that "[i]ndeed, far from being inadequate, the documentation presented by [Beneficiary] in seeking to draw upon the amended letters of credit, i.e., signed certificates, was significantly more reliable and exacting than the minimally adequate text for such presentment documents under the subject agreements."

[JEB/rdhf]

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