Article

Note: To assure payment of monies due under a Rate Lock Agreement between Natixis Real Estate Capital (Lender) and Setzer Properties Commerce City, LLC (Borrower), Borrower obtained standby LCs issued by Fifth Third Bank (Issuer) in favor of Lender for approximately US$1,800,000.00.

Lender/Beneficiary drew on the standbys when the Rate Lock Agreement was terminated. Alleging fraud based on the calculation of the interest rate as determined by the loan commitment, Borrower/ Applicant obtained a temporary restraining order enjoining issuer from paying. On Beneficiary's motion, the United States District Court for the Eastern District of Kentucky, Hood, J., dismissed the suit because it was filed in an improper forum.

In his opinion, the Judge noted that Lender/ Beneficiary was located in New York City, New York. Borrower/Applicant had its principal location in Lexington, Kentucky, and Issuer had its principal location in Cincinnati, Ohio. The Judge also noted that the loan commitment provided that:

Each part hereto hereby submits to the exclusive jurisdiction of the courts of the state of New York for any legal action or proceeding resulting from the transaction contemplated herein.

Borrower/Applicant argued that the Rate Lock Agreement did not contain a forum selection clause. The Judge rejected this argument, stating that, "the alleged fraud pertains to the calculation of the interest rate as set forth in the commitment." Borrower/ Applicant further argued that the clause only contemplated the closing of the loan and since the closing did not occur, the clause was not applicable to the dispute. The Judge rejected this claim because the calculation of the interest rate was an integral part of the transaction as defined by the language of the selection clause.

Comment:

Whatever the merits of the application for the injunction, the decision of the court regarding the forum is seriously problematic. The issue is whether or not the issuer should be enjoined from honoring a complying presentation due to material fraud. This issue falls within US Revised UCC Section 5-109 Fraud and Forgery, and relates to the letter of credit and letter of credit law, but not the underlying contractual agreement. That the material fraud would involve a determination of facts related to and in light of the underlying contract does not and should not make its forum selection clause determinative of the jurisdiction where an injunction may be sought. Only a forum selection clause in the LC would be determinative and it appears that there was no such clause. On the other hand, even without looking at the clause in the underlying contract, the forum may be improper since it was the location of the applicant rather than of the issuer or the place for presentation. In any event, the applicable law would be the law of Ohio, the place where it is issued under Revised UCC Section 5-116(b) (Choice of Law and Forum).

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