Article

Factual Summary: To assure payment of rent under a lease, Bank issued its LC on behalf of tenant in favor of Landlord (Beneficiary). The LC required presentation of sight drafts drawn on Issuer accompanied by a signed statement of an Authorized Representative of Beneficiary stating in part:

Funds hereunder are available to Beneficiary against presentation to the Bank at the Bank's office ... of Beneficiary's sight draft(s) drawn on us and accompanied by the signed statement of (i) any person who is or purports to be a duly Authorized Representative (hereafter defined) of the Beneficiary, stating that (x) an Event of Default has occurred and remains uncured under that certain Lease dated April 23, 1999 between Beneficiary and Applicant or (y) less than twenty-five (25) days remain prior to April 29, 2001, and Applicant has failed to renew or replace the same with a letter of credit in form, substance and amount required by the terms of the Lease.

Subsequently, Beneficiary sold its interest in the leased property and assigned the lease to 2100 McKinney Office L.P. (Lease Assignee). The lease was evidenced by a Bill of Sale, Assignment and Assumption and Special Warranty Deed (collectively, the Transfer Documents). Two months after the Sale Documents were executed, Beneficiary filed a certificate of cancellation with the Secretary of the State of Delaware. Although Beneficiary and Assignee shared the same limited partner, there was no evidence indicating that Assignee was a partner in Beneficiary.

Although the LC provided for limited transfer of the LC, the transfer procedures were not followed.

When the Issuer sent a notice of non-renewal, the LC was not replaced. The Lease Assignee drew on the LC in its own name as a "successor in interest" of the Beneficiary. The statements were on Lease Assignee's stationary and documents were presented detailing the sale. When the draw was refused "because the statement regarding the expiration date of the letter of credit did not follow the exact language of the letter of credit", the Lease Assignee made a re-presentation (again in its own name) revising the language to mirror that of the LC. When notified of the drawing, Applicant objected on the grounds that it was "an improper attempt to transfer the letter of credit". Although Issuer advised Lessee/Transferee of the objection, it did not refuse the second draw. Despite this, Lease Assignee made a third draw in the name of the original Beneficiary (even though the original Beneficiary had dissolved and wound up as a corporation).

Following the third draw, Issuer honored the LC and claimed reimbursement which Applicant refused. Applicant sued Issuer for wrongful honor and Issuer counterclaimed for reimbursement and to enjoin foreclosure on the collateral. On cross motions for summary judgment, the trial court granted Issuer's whether the third drawing was timely, the summary judgment was based on the second drawing. On appeal, the intermediate appellate court reversed and remanded for further proceedings.

Legal Analysis:

1. Name of Beneficiary; Successor by Operations of Law; Transfer; Strict Compliance: Issuer argued that Assignee was a "successor beneficiary" who acquired the LC by "operation of law". It cited Temple-Eastex, Inc. v. Addison Bank, 672 S.W.2d 796, 27 Tex.Sup.Ct.J. 409 (Texas 1984) applying state corporate law, for the proposition that even though the LC was silent as to transfer, the beneficiary's parent company was permitted to draw on an LC in its own name because, under applicable corporate law, it acquired the LC as a "vertical distributee" upon dissolution of its wholly owned subsidiary. Issuer contended that the sale Documents provided sufficient evidence as a matter of law that Lease Assignee was a vertical distributee of the original Beneficiary and therefore Lease Assignee acquired the LC by operation of law and honoring the LC was lawful.

The appellate court disagreed, noting that "...under Temple-Eastex, a 'vertical distributee' is an entity that receives the assets of a beneficiary on dissolution and thus becomes a successor beneficiary by operation of law." (pg 12) it noted that in a partnership such as the Beneficiary that entity would be a partner, general or limited. This court examined the documents presented and concluded that the claim to be a successor in intent of the Beneficiary "would have put Bank on inquiry as to the status and rights of [Lease Transferee] to the letter of credit."

It noted that the documents presented "indicated that [Beneficiary] had voluntarily transferred or assigned assets to [Lease Transferee], apparently a third party." Here, "...the documents submitted to Bank...indicated that [Beneficiary/Lease Assignee] had voluntarily transferred or assigned assets to [Lease Assignee]..."; the relationship was horizontal, not vertical, and there was no evidence presented which indicated that [Beneficiary/Lease Assignee] would "...succeed to the rights of [Beneficiary] upon its dissolution."

2. "Authorized Representative": Issuer also argued that the LC permitted presentations by an "authorized representative" of the beneficiary. The appellate court noted, however, that:

[t]he language of the letter of credit, however, states that funds are available to the Beneficiary against presentation of the Beneficiary's sight draft and a signed statement of anyone who is or purports to be a duly authorized representative of the Beneficiary, stating one of two things. Thus, the authorized representative is permitted to make either of the two statements required by the letter of credit; it is not entitled to make a presentation in its own name under its own sight draft.

Comment:

Apparently, this LC was issued prior to the enactment of Revised UCC §5-113 (Transfer by Operation of Law). Revised UCC §5-102(a)(15) defines "Successor of a beneficiary" as "a person who succeeds to substantially all of the rights of a beneficiary by operation of law, including a corporation with or into which the beneficiary has been merged or consolidated, an administrator, executor, personal representative, trustee in bankruptcy, debtor in possession, liquidator, and receiver." Subsection 5-113(c) provides "An issuer is not obliged to determine whether a purported successor is a successor of a beneficiary or whether the signature of a purported successor is genuine or authorized." and Subsection (d) provides "Honor of a purported successor's apparently complying presentation under subsection (a) or (b) has the consequences specified in Section 5-108(i) even if the purported successor is not the successor of a beneficiary. Documents signed in the name of the beneficiary or of a disclosed successor by a person who is neither the beneficiary nor the successor of the beneficiary are forged documents for the purposes of Section 5-109." While the Lease Transferee is not a successor, it is a purported successor for purposes of the latter two subsections. The questions, however, would be whether the statement that the issuer is not obligated to determine successor status would apply to a situation when it appears that the basis for the claim is not justified by documents presented. While these documents are likely to be extraneous documents under UCP500 Article 13(a), they are not under ISP98 Rule 6.12 (Additional Document in Event of Drawing in Successor's Name). Under this rule, it would appear that the documents presented, indicating a sale rather than transfer by operation of law, would be inadequate.

[JEB/aee]

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