Article

Prior History: Jaffe v. Bank of America, N.A., 276 Fed.Appx. 932, 2008 WL 1934492 (11th Cir. May 5, 2008) [USA] noted at 2009 Annual Review at 450, affirming D.C. No. 07-21093, 2008 WL 623031 (S.D.Fla. March 6, 2008) [USA]. Jaffe v. Bank of America, N.A., ___ F. Supp. 2d ___, 2009 WL 2567488 (S.D.Fla. August 18, 2009) [USA], abstracted in this volume.

Note: John and Barbara Jaffe (Applicants) had sought to enjoin Bank of America (Issuer) from honoring its standby LC payable to the Agricultural Bank of China (Beneficiary) and alleged breach of fiduciary duty, fraud, negligent misrepresentation, unjust enrichment, and civil conspiracy in connection with construction of a US$6 million luxury yacht by FoShan Polymarine Engineering Co. Ltd. of China. The litigation included issuance of a temporary restraining order, a preliminary injunction, an appeal to the U.S. Court of Appeals for the Eleventh Circuit, and a trial at which the court ruled that the allegations had not been proven and entered judgment for Issuer and Beneficiary, vacating the preliminary injunction.

Subsequently, Issuer moved for an award of the costs, expenses, and attorney's fees incurred in connection with the case and Beneficiary moved for a judgment on the injunction bond that had been posted by Applicants when the court granted the preliminary injunction. The U.S. District Court for the Southern District of Florida, Miami Division, King, J., granted both motions.

In many countries, an award of attorney's fees to the prevailing party would not be remarkable, but in the U.S. such fees are not available unless provided for by agreement, statute, or in special limited circumstances where the litigation leads to the creation of a fund for multiple persons. US Rev. UCC Section 5-111(e) (Remedies) contains a provision that was designed to discourage frivolous LC litigation that mandates that "[r]easonable attorney's fees and other expenses of litigation must be awarded to the prevailing party in an action in which a remedy is sought under this article". This provision has been adopted in all U.S. jurisdictions except Alabama, Connecticut, and New Jersey, and Texas, which provide that such fees "may" be awarded, leaving the matter to the discretion of the court. Alaska and Wyoming also have slightly modified versions, but retain the mandatory language. New York omits the subsection. Official Comment 6 states: "[t]he court must award attorney's fees to the prevailing party, whether that party is an applicant, a beneficiary, an issuer, a nominated person, or adviser".

Issuer argued that it was entitled to fees and expenses on two grounds, the statute and the agreement by which Applicants applied for issuance of the standby. Issuer contended that it was entitled to such fees because it prevailed and because the action for injunctive relief is specifically authorized in Rev. UCC Article 5. Applicants argued that their litigation sought to prove that Beneficiary had committed fraud. The Judge noted that the Amended Complaint expressly sought to enjoin Issuer but also noted that the effect of the proof of LC fraud would have led to an order prohibiting Issuer from paying in any event. It stated that "the entire purpose of the litigation was to prove that [Beneficiary] or [Issuer] unlawfully procured the letter of credit so that [Applicants] could obtain an injunction precluding [Issuer] from honoring [Beneficiary]'s request for payment".

Issuer also argued that it was entitled to such costs and fees under the Application and Agreement for Standby Letter of Credit executed in connection with the issuance of the LC. It provided:

Applicant will indemnify and hold [Issuer] harmless from and against ... all costs and expenses (including reasonable attorneys' fees and allocated costs of in-house counsel and legal expenses) of all claims or legal proceedings arising out of the issuance by [Issuer] of the Letter of Credit or incident to the collection of amounts owed by Applicant hereunder or the: enforcement of the rights of [Issuer] hereunder, including, without limitation, legal proceedings related to any court order, injunction, or other process or decree restraining or seeking to restrain [Issuer] from paying any amount under the Letter of Credit.

The Judge dismissed Applicants' argument that the version that they signed did not contain this provision, noting their stipulation that they had signed it and were bound by it, the introduction without objection of the full agreement, and the identification of it in one of the Applicants' testimony. Accordingly, the Judge ruled that Issuer was entitled to such expenses by virtue of the LC application.

Two law firms represented Issuer at different times. The billing for the various attorneys ranged from US$150 per hour to US$375 and law clerks at US$125 per hour. One firm billed for 1,172.95 hours and the other for 724.65 hours. Noting that the amount requested was not opposed by Applicants, the Judge awarded a total of US$450,967.94 in attorney's fees as well as US$18,175.09 in costs.

The Judge also ruled that Beneficiary was entitled to award of the US$150,000 injunction bond that had been posted by Applicants. He noted that the injunction order provided "that it was conditioned upon the payment of a $150,000 bond 'for the payment of such costs and damages as may be incurred or suffered by any party who was found to be wrongfully enjoined'". He also noted that Beneficiary had opposed issuance of the injunction and had incurred loss of interest at 5% annually for a minimum of two years, or more than US$600,000.

Comments:

US Revised UCC Section 5-109(b)(2) (Fraud and Forgery) provides "a beneficiary, issuer, or nominated person who may be adversely affected is adequately protected against loss that it may suffer because the relief is granted," and most other legal systems have rules to protect a person adversely affected by the entry of an injunction or freeze order. Issuers, nominated banks, and beneficiaries faced with injunctions or freeze orders should carefully consider requesting such relief. In doing so, they should take into account the likely length of such litigation. In the Jaffe case, the bond was not adequate to cover the lost interest and the Beneficiary incurred a loss of US$450,000 in interest.

[JEB/jdc]

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.