Article

Note: To settle a dispute arising from the sale of their business, the Yaucks agreed to pay the Shnappups US$540,000 in monthly installments over ten years. The settlement further required provision of an LC assuring payment.

The agreement stated:

The payments to be made by Yauck pursuant to Subparagraph C of this Paragraph 1 (that is, the 120 monthly payments of $ 4,500.00 each starting on July 15, 2002) shall be secured by and guaranteed by an Irrevocable Letter of Credit to be obtained by Yauck no later than 5:00 p.m. on Wednesday, May 29, 2002. The bank that Yauck selects to issue the Irrevocable Letter of Credit is subject to the Schnappups' approval. Such approval cannot be unreasonably withheld by the Schnappups. The terms of the Irrevocable Letter of Credit are also subject to the Schnappups' approval. The terms of the Irrevocable Letter of Credit must be unconditional and unequivocal as to the obligation of Yauck to make the payments secured by and guaranteed by the Irrevocable Letter of Credit. The terms of the Irrevocable Letter of Credit must be clear that Yauck is not permitted to withhold or delay payments to the Schnappups for any reason whatsoever. By the terms of this Agreement, Yauck agrees that Yauck's obligation to make the payments described in Subparagraph C of this Paragraph 1 is unconditional and unequivocal and that Yauck is not permitted to withhold or delay payments for any reason whatsoever. The Schnappups will be entitled to draw on the Irrevocable Letter of Credit for the full amount of any payment due under Subparagraph C of this Paragraph 1 in the event any monthly payment of $ 4,500.00 (as described in Subparagraph C) is not made by the 20th day of the month in which the payment is due ... The payments secured by and guaranteed by the Irrevocable Letter of Credit may, at the request of the Schnappups or their counsel, be made payable to the Schnappups' heirs and/or assigns. Yauck shall be responsible for paying all costs and expenses associated with obtaining and maintaining the Irrevocable Letter of Credit. If the Irrevocable Letter of Credit - issued by a bank approved by the Schnappups and with terms approved by the Schnappups and consistent with this Agreement - is not in place by 5:00 p.m. on May 29, 2002, the Schnappups will be entitled to have the Court in the Lawsuit immediately enter judgment against Scott J. Yauck and Custom Metal Products, jointly and severally, in the amount of $ 637,000.00, less any payments made by Yauck at the time judgment is entered.

The Schnappups and Yauck acknowledge that an acceptable Irrevocable Letter of Credit is in place as of 5:00 p.m. on May 29, 2002. The Irrevocable Letter of Credit is dated May 28, 2002, and entitled 'Revised Standby Irrevocable Letter of Credit No. I 1020.'

The Yaucks (Applicants) obtained an LC from Investor's Bank in favor of the Schnappups (Beneficiaries) in the amount of US$362,000 that expired in one year. The LC provided that

[f]ewer than thirty (30) business days remain prior to the current expiry date of Irrevocable Letter of Credit No. I1020; Dietrich & Roswitha Schnappup have not received either a replacement of that Irrevocable Letter of Credit having a term of at least 360 days, in a stated amount at least equal to the present value of all remaining payments under a settlement agreement between Beneficiary and Account Party (discounted using an annual rate of 8.50%), and otherwise having the same terms as such Irrevocable Letter of Credit, or an extension of the expiry date of such Irrevocable Letter of Credit, in a stated amount at least equal to the present value of all remaining payments under a settlement agreement between Beneficiary and Account Party (discounted using an annual rate of 8.50%), on the same terms for a period of at least 360 days following such current expiry date. The Beneficiary is entitled to payment in the amount of $ __________, representing the present value of the remaining payments due under a settlement agreement between Beneficiary and Account Party (discounted using an annual rate of 8.5%).

Applicants did not provide Beneficiaries with a replacement LC, and Beneficiaries/Sellers failed to draw on their one year LC before it expired. Although Applicants were current on all payments, Beneficiaries demanded that an LC be maintained. Beneficiaries/Sellers then sued Applicants/Buyers for specific performance of the obligation to maintain an LC or for damages in the full amount due.

Both parties moved for summary judgment. The Circuit Court for Waukesha County, Wisconsin, Snyder, J.,granted summary judgment in favor of Applicants/Buyers. On appeal, the Court of Appeals of Wisconsin, District Two, Anderson P.J., reversed and remanded.

The appellate court rejected Applicants'/Buyers' claim that "by the terms of the accepted letter of credit, the parties contemplated [Beneficiaries'/ Sellers'] option not to renew the letter of credit and, in the event renewal did not occur thirty business days prior to the letter of credit's expiry date, the [Beneficiaries/Sellers] were entitled to draw the full amount on the letter of credit but chose not to do so."

The court concluded that

[o]nly by reference to the letter of credit can [Applicants/Buyers] assert that there is full compliance with the settlement agreement. However, the provision in the letter of credit giving [Beneficiaries/Sellers] a thirty-day window of opportunity to demand the present value of remaining payments cannot alter the terms and conditions of the settlement agreement. The letter of credit itself is not a contract between [Beneficiaries/Sellers] and [Applicants/Buyers]. Indeed, [Beneficiaries/Sellers] do not even become signatories to the letter of credit until such time that a demand is made under its terms. It is disingenuous of [Applicants/Buyers] to contend that the settlement agreement gave [Applicants/Buyers] the right not to renew the letter of credit and that the parties wrote into their agreement that if [Applicants/Buyers] did not renew the letter of credit, [Beneficiaries/ Sellers] could choose the remedy set forth in the letter of credit. Mere acknowledgement in the settlement agreement that the approved letter of credit was in place did not serve to amend the terms of the settlement agreement.[Footnote omitted.]

[JEB/az]

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