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Note: When the City of Coachella (Beneficiary) drew on an LC issued in its favor by Harbor Real Asset Fund LP (Issuer) for the account of Walker Design Services LLC (Principal) drawing was dishonored and Beneficiary sued Issuer for wrongful dishonor. The U.S. District Court for the Central District of California, Larson, J., ruled in favor of Issuer. On appeal, the US Court of Appeals for the Ninth Circuit, Kleinfeld, Tallman, and Pollack, JJ. affirmed in a Memorandum opinion.

Looking to California's version of US Revised UCC Section 5-116, the Appellate Court noted that the law of Utah, where Issuer was located, governed.

Under this law, the Appellate Court noted that the examination of a presentation is "what amounts to a ministerial evaluation of the letter of credit and the demand presented to it to see if the demand complies. The panel cited Ward Petroleum Corp. v. Fed. Deposit Ins. Corp., 903 F.2d 1297, 1299 (10th Cir. 1990) (quoting Am. Coleman Co. v. Intrawest Bank, 887 F.2d 1382, 1386 (10th Cir. 1989), ("The duty of the issuing Bank is ministerial in nature, confined to checking the presented documents carefully against what the letter of credit requires.")).

The opinion noted that the LC applied to "'that certain agreement entered into between the City of Coachella... and Walker Design Services, LLC.' They further stated that the letter would be paid on presentation of the City's 'written statement... certifying that there ha[d] been a failure of the Principal to perform the above agreement.'"

The demand presented stated that Applicant "failed to perform under the terms of the agreement between the City of Coachella and Coachella Capital, not between the City and Walker Design." Accordingly, the opinion concluded that the demand did not comply.

Comment:

Without a more detailed recitation of the text of the LC, or an understanding of the relationship between the parties and the full statement of demand, it is impossible to comment on the correctness of this decision, which, on its face, appears to be a simple application of the strict compliance rule. One wonders, however, why such a straightforward case was taken to the appellate level.

What is troubling about this decision, however, is the glib recitation of the characterization of examination as "ministerial". While it is not entirely clear what this term means, it suggests that there is an absence of professional judgment. As anyone who has examined documents is well aware, there are many situations in LC examination where professional judgment is required and the fiction that the actions of an examiner are merely "ministerial" does little to advance serious LC jurisprudence.

[JEB/sal]

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