Forgot your password?
Please enter your email & we will send your password to you:
My Account:
Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
2007 LC CASE SUMMARIES No. 07-0430-KD-B; 2007 WL 2683675 (S.D. Ala. 2007) [USA]
Topics: Injunction; Arbitration; Irreparable Harm; Jurisdiction; US Revised UCC § 5-109; Material Fraud
Type of Lawsuit: Applicant sued Beneficiary for declaration that condominium purchase contract be rescinded and that LC supporting it be cancelled.
Parties: Plaintiff/Applicant- Arthur Drago and Kathy Drago (Counsel: Peter F. Burns, Cunningham & Mackey, Mobile, AL; Melissa Mutert Thomas, Burns, Cunningham & Mackey, PC, Mobile, AL)
Defendant/Beneficiary- Holiday Isle, LLC and The Mitchell Company, Inc., its manager and sole member (Counsel: Charles William Daniels, Jr., Bowron, Latta & Wasden, PC, Mobile, AL; Thomas Marriott Wood, Bowron, Latta & Wasden, Mobile, AL)
Issuer- Regions Bank
Underlying Transaction: Purchase agreement for condominium.
LC: Standby LC for US$94,000. Silent as to governing rules.
Decision: The United States District Court of the Southern District of Alabama, Southern Division, DuBose, J., applying Alabama law, denied Applicant's motion to enjoin Beneficiary from receiving proceeds.
Rationale: A court has jurisdiction to grant emergency injunctive relief to avoid irreparable harm and maintain the status quo notwithstanding pending arbitration but such irreparable harm must be actual and imminent and cannot be harm that is likely to be corrected through the arbitration process.
Article
Factual Summary: On behalf of purchasers of a condominium unit (Applicants), Bank issued LC in amount of US$94,000 as a deposit to Developer (Beneficiary). Applicants subsequently rescinded the purchase under a US federal statue [Interstate Land Sales Full Disclosure Act, 15 U.S.C. § 1708 (1968)] and Applicant brought an action against Beneficiary for a declaration that the contract was rescinded and for cancellation of the LC. Beneficiary moved to compel arbitration pursuant to contract terms which was ordered by the court which also stayed the lawsuit pending arbitration. Beneficiary however, drew on the LC, and Issuer informed Applicants who then moved in the court proceeding to enjoin disbursement of the proceeds until the arbitration was concluded and to add Issuer as a party to the action.
Legal Analysis:
1. Jurisdiction: Beneficiary argued that injunctive relief was inappropriate because arbitration was pending and, that the court did not have jurisdiction, citing Manion v. Nagin, 255 F.3d 535 at 538-39 (8th Cir. 2001), for the proposition that the "courts should not grant injunctive relief unless there is qualifying contractual language which permits it." Noting that Manion represented a minority view, the court ruled that parties could seek judicial "emergency injunctive relief" regardless of a binding arbitration clause.
2. Irreparable Harm: Applicants alleged that they would sustain irreparable harm if proceeds from the LC were disbursed because of the damage to their reputation and credit score and also alleged without further explanation that they may be unable to collect on a judgment at a later date. In rejecting this argument, the court noted that irreparable harm must be actual and imminent and cannot be merely speculative. It also stated that irreparable harm is not typically present where corrective relief is available at a later date and when monetary relief would provide adequate relief.
Comments:
1. US Housing Market: This action reflects additional fall out from the collapse of the overheated US housing market and the wide spread use of LCs, often by speculators, to assure payment of the purchase price for buildings, particularly along the Gulf of Mexico, on which construction was in the early phases.
2. Material Fraud; Revised UCC § 5-109: While the court properly noted that irreparable harm is a necessary element of an award of injunctive relief, it failed to refer to the requirement of material fraud in US Revised UCC § 5-109. Had the court done so, it would not have had to consider whether or not there was irreparable harm since there was no allegation of material fraud or LC Fraud and without it, an injunction will not lie. To the extent that the decision implies that the presence of irreparable harm would have justified the award of an injunction, it is unfortunate.
[JEB/jlb]
COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE
The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.