Article

Factual Summary: To provide collateral for a corporate loan, Lender required an accessory guarantee from Guarantor and an LC from Guarantor's brother (Applicant/Surety), who then obtained an LC from Issuer in favor of Lender's Agent (Beneficiary). The LC required presentation of a statement from Beneficiary certifying a default in the loan agreement and stating that "all reasonable recovery efforts against [Borrowers], the collateral securing obligations under [the Loan Agreement] and all guarantors guaranteeing the obligations under [the Loan Agreement]" had been exhausted.

When Applicant was notified that Borrowers were in default, Beneficiary foreclosed on other collateral which was sold at auction. Concerned about a drawing on the LC, Applicant sued Beneficiary to obtain a declaratory judgment that the LC should be cancelled and to enjoin drawing. After a hearing, the trial court granted a preliminary injunction for 45 days to allow resolution. At the close of the time period, Applicant moved to extend the preliminary injunction and Beneficiary moved for summary judgment. The trial court denied the motion to extend time and entered summary judgment in favor of Beneficiary.

Legal Analysis:

1. Preliminary Injunction; Material Fraud; Revised UCC § 5-109; Forgery: Applicant argued that any documents presented to Issuer to draw on the LC would be false because Beneficiary did not reasonably exhaust all available remedies or conduct a commercially reasonable sale of the associated collateral. Applicant argued that Beneficiary could have taken additional steps to make the auction more commercially reasonable such as selling the assets individually instead of in bulk, locating the auction in Houston, Texas instead of Chicago, Illinois, providing potential buyers more time to review the assets, and removing the imposed requirement for buyers to deposit 25% of their initial bid. Applicant also stated that Beneficiary was the only bidder and purchased the assets for less than the value of the assets at the time of the initial loan.

Citing Texas cases and Revised UCC § 5-109(b), the court stated that Applicant must demonstrate material fraud in order to obtain injunctive relief. It noted that Applicant had not alleged material fraud, and dismissed its motion to extend preliminary injunction. Applicant had argued that a drawing that contained the required statement that the conditions necessary to draw had been fulfilled "would necessarily be false because [Beneficiary] has not reasonably exhausted all of its remedies or conducted a commercially reasonable sale of the collateral." The court, however, observed that Applicant had failed to meet its burden even of proving that the sale was conducted on unreasonable terms.

The court then granted Beneficiary's motion for summary judgment in part because Beneficiary "[did] not contend that it [had] exhausted its remedies in satisfaction of the letter of credit and [had] not yet attempted to draw on the letter of credit." Since Beneficiary did not contest this factual assertion, the court concluded that "this claim does not present a ripe controversy" and that Applicant's claim that Beneficiary failed to exhaust reasonable recover efforts "should be dismissed without prejudice."

[JEB/dep]

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