Article

Factual Summary: In order to secure against default under the terms of a commercial lease, Tenant obtained a standby LC in favor of Landlord. When Tenant defaulted on the lease, Landlord/Beneficiary evicted Tenant and drew the full amount of the LC, presenting also a letter outlining its damages to the Issuing Bank. The damages included future nonpayment of rents without offset for any rents that might have been gained from a new tenant.

Issuer refused payment on the LC because it believed that the damages claimed by Beneficiary due to Tenant's default were inconsistent with the amount requested since the property had been re-let. Issuing Bank and Beneficiary subsequently negotiated an agreement under which Issuing Bank paid US$258,653.54 and that additional drawings on the balance of the LC would be accompanied by a letter detailing additional damages for which it sought compensation.

When Beneficiary subsequently drew on the LC for additional damages for lost rent, Issuing Bank refused. Beneficiary sued Issuing Bank for wrongful dishonor. The Supreme Court, New York County, DeGrasse, J., entered judgment for the Beneficiary, awarding it of US$39,546.46. On appeal, the Supreme Court of New York, Appellate Division, affirmed.

Legal Analysis:

1. Independence: Issuing Bank argued that Beneficiary was required to establish actual damages under the lease. It claimed that Beneficiary had relet the premises and was not entitled to claim further damages. The appellate court noted that "there is no language in the actual agreement requiring [Beneficiary] to establish its actual damages under the lease." Additionally, the court stated that "a letter of credit is separate and apart from the underlying contract, and a bank that wrongfully dishonors a letter of credit is precluded from introducing evidence as to the beneficiary's actual damages...."

2. LC Fraud: Issuing Bank suggested that Beneficiary had fraudulently attempted to obtain a windfall by its additional drawing because it re-let the premises. The court rejected this suggestion, stating that "the mere fact that [Beneficiary] was able to re-let the premises does not establish fraud. [Beneficiary] gave the new tenant a six-month rentconcession as an inducement to enter into the lease.Because [Beneficiary] would not receive any rent from the new tenant between December 2003 and June 2004, it did not receive a windfall for unpaid rent for the period January through March 2004."

Comments:

1. Independence is the right issue for this case. The bank evidently failed to understand the documentary character of its undertaking. It had no business questioning the first drawing. Its agreement with the beneficiary, which appears to have had the effect of an amendment to the LC, called for a statement of the claims being made, it did not empower the bank to judge them.

[JEB/hah]

1. The per curiam (unsigned) opinion of the appellate court is stark and contains few facts by which to understand the result. Since there is no published trial court decision, the Editors have had recourse to the parties' appellate briefs. Brief for Defendant-Appellant, 5 E. 59th Street Holding Co. v. Farmers & Merchants Bank of Eatonton, Ga., 2004 NY App. Div. Briefs 601691 (No. 0601601/04) (July 12, 2005); Brief for Plaintiff-Respondent, 5 E. 59th Street Holding Co. v. Farmers & Merchants Bank of Eatonton, Ga., 2004 NY App. Div. Briefs 601691 (No. 0601601/04) (April 18, 2006); Reply Brief for Defendant-Appellant, 5 E. 59th Street Holding Co. v. Farmers & Merchants Bank of Eatonton, Ga., 2004 NY App. Div. Briefs 601691 (No. 0601601/04) (April 28, 2006). The facts stated here represent a composite on which the briefs were argued. In addition, the text of this abstract was sent to counsel listed in the opinion for comment.

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