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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
2010 LC CASE SUMMARIES 66 A.D.3d 438 (N.Y. App. Div. 2009) [USA]
Topics: US Rev. UCC § 5-110; Warranty; Fraud
Type of Lawsuit: Applicant sued Beneficiary for fraud.
Parties: Plaintiff/Appellant/Builder/Applicant/Surety-Amran Niazi, Transcorp, et. al. (Counsel: Dasil E. Velez, Port Washington) Defendant/Respondent/Beneficiary-JP Morgan Chase Bank (Counsel: Mary Ellen Shuttleworth of Herrick, Feinstein LLP, New York)
Underlying Transaction: Extension of construction loan.
LC: LC. Silent as to amount and governing rules.
Decision: The Supreme Court of NY Appellate Division First Department, Mazzarelli, J.P., and Friedman, Catterson, Renwick, and Abdus-Salaam, JJ., affirmed the judgment of the Supreme Court of New York County, Shulman, J., which had dismissed the complaint.
Rationale: Where Beneficiary does not owe Applicant/Surety a fiduciary duty to notify Applicant/Surety of a default by the principal, a drawing on the LC due to a default does not constitute fraud.
Article
Factual Summary: Applicant/Surety obtained a letter of credit to secure Beneficiary's extension of a construction loan to nonparty real estate developer (Borrower). When Borrower failed to repay the loan on its maturity date, thereby defaulting on the loan, Beneficiary drew on the LC. The loan documents provided that Beneficiary was not required to notify Borrower or Applicant/Surety of Borrower's default, to notify Borrower or Applicant/Surety of Beneficiary's intent to drawn down on the LC, or to provide an opportunity to cure.
Applicant/Surety brought this action against Beneficiary for fraud, seeking as damages future profits lost from its inability to complete jobs, a result of the drawing of the LC. The trial court dismissed the complaint. On appeal, the dismissal was affirmed.
Legal Analysis:
1. Fraud: Applicant/Surety argued that Beneficiary improperly drew down on the letter of credit by misrepresenting to Issuer that Borrower was in default. The appellate court found that "there is no merit to [Applicant/Surety's] claim that [Beneficiary] owed them a fiduciary duty to notify them of [Borrower's] default...and any arguable benefit that [Applicants/Surety's] may have received under the building loan agreement, which does not specifically identify [Applicant/Surety] as intended beneficiaries...was clearly incidental...and would not entitle [Applicant/Surety's] to any notice or opportunity to cure that [Borrower] may have been entitled to under the agreement."
Comment:
This action was based on a claim of fraud. It involved claims by a surety against a beneficiary/ lender. It is unclear from the opinion whether there was a separate contract between beneficiary/lender and surety. The claim of fraud, however, parallels that of wrongful drawing and of a breach of the Revised UCC Section 5-110 (Warranties) warranty. There is no mention of this section in the discussion but one wonders whether it would provide a basis for attorney's fees under Revised UCC Section 5- 111 (Remedies) for the Beneficiary which was the prevailing party.
[JEB/anf]
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