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Note: General Electric Capital Corporation(Lender) contracted to establish a line of credit with Sorbee International, Ltd. by which Lender would provide letters of credit to enable Sorbee (Borrower) to purchase inventory from foreign vendors. In connection with the line of credit, Elliot Stone, Borrower's President and Chief Executive Officer, signed an absolute and unconditional guarantee in favor of Lender which also contained a confession of judgment clause subject to Pennsylvania law empowering Lender to confess judgment on default.

It was alleged that Lender originally reserved50% of the amount of a letter of credit when it was opened and 100% once a bill of lading was presented, reducing Borrower's credit by the entire amount of the letter of credit. Apparently, Lender altered this procedure at some point and lowered its reserve to35% on issuance and credited this amount on presentation. Relying on this increase in its available credit, Borrower purchased substantially increased inventory, increasing its credit line in excess of US$3,000,000.

It was also alleged that a year later and without notice, Lender changed its reserve policy, reserving 100% of the credit amount on the presentation of documents under the credit. This change resulted in a sudden reduction of credit by US$700,000 which made it impossible for Borrower to continue to operate. Accordingly, it filed for bankruptcy protection, which occasioned a default on the guarantee in addition to other claimed defaults. Lender then demanded payment from Borrower's President on his guarantee and subsequently entered a confession of judgment against him in the U.S. District Court for the Eastern District of Pennsylvania for US$3,045,574.69.

Borrower's President then filed a motion to open the judgment and obtained a stay of its execution, claiming that he has a meritorious defense in that Borrower has meritorious defenses against Lender for breach of contract, of its duty of good faith and fair dealing, and negligent misrepresentation, among others. The court, Padova, J., denied the motion and lifted the stay of execution.

Lender argued that the motion should be denied because the guarantee was unconditional and absolute. The court agreed, noting that under the applicable law of New York, a waiver of defenses would be enforced unless it was a mere recital that was not specific and fraud in the inducement was alleged. It noted that the waiver in the guarantee in this case was specific and detailed and that there was no allegation of fraudulent inducement.

[JEB/asc]

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