Article

Note: In connection with the export of soy beans, AWB (USA) Ltd. (Exporter) obtained financing from Standard Chartered Bank (Lender). The financing was conditioned on Exporter obtaining and maintaining a 65% payment guarantee assuring Lender of repayment of the importer's obligations from a U.S. government agency, the Commodity Credit Corporation (Guarantor). In order to maintain Guarantor's payment guarantee, Exporter had to provide an unencumbered interest in the goods being exported. Lender also required Exporter to provide a standby letter of credit to assure repayment to it of its 35% remaining obligation. Exporter did so, obtaining an LC in favor of Lender issued by ANZ Bank (Issuer). However, through its Geneva affiliate, Exporter gave a security interest in the collateral to Issuer, thereby impairing Guarantor's payment guarantee.

When Importer defaulted on the notes given in payment for the sale, Beneficiary drew on the letter of credit and was paid. It also claimed on the Guarantor. Although Guarantor made initial payments, it reduced them when it discovered the existence of the encumbrance on the goods due to the letter of credit. Under its regulations, Guarantor was only liable for a limited portion of the loss, an amount into which the letter of credit proceeds had to be calculated. As a result, Beneficiary suffered a loss of US$23,859,775.70 including interest. Since Beneficiary was not fully reimbursed by the letter of credit proceeds and the export insurance, it sued Exporter on its obligation to reimburse and on its indemnity.

The trial court gave judgment in favor of Lender in Standard Chartered Bank v. AWB (USA) Ltd., 2008 WL 144698 (S.D.N.Y. Jan. 30, 2007), noted in 2009 Annual Survey at 504. On appeal, the intermediate appellate court issued a mandate requiring the trial court to provide additional information in order to assist it in deciding the appeal because the district court's opinion "lacked necessary explanatory information and findings". Accordingly, the United States District Court for the Southern District of New York, Hellerstein, J., provided detailed responses to the appellate court's questions.

The Judge responded that Applicant breached its contractual obligations when it had its sister affiliate, AWB (Geneva) (Applicant) collateralize their exported agricultural goods to secure the LC. In doing so, AWB (USA) exposed Beneficiary to sharing recovery with the Commodity Credit Corporation ("CCC") upon default by the importer, pursuant to Supplier Credit Guarantee Program (SCGP), set out at 7 C.F.R. Section 1493.400. This action also undermined the independence of the LC. In negotiations, Exporter had informed Beneficiary that AWB (Geneva) would be the Applicant on the Standby LC, but Beneficiary did not know that this would expose Beneficiary to recovery sharing. The Judge, quoting the testimony of the parties involved in the negotiations, concluded that Exporter was aware that Beneficiary would not agree to these terms if they knew that it meant that Beneficiary was not fully secured against the risk of default.

[JEB/jdc]

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