Article

Factual Summary: At the request of Applicant, Issuer issued a standby letter of credit in favor of Beneficiary. The LC was secured by a certificate of deposit allegedly owned by Debtor. When Beneficiary demanded payment from Issuer, Applicant and Debtor sued in the state court to enjoin Beneficiary from drawing on the LC. The state court then issued an injunction to stop payment on the LC until the dispute could be resolved as to whether or not money was due to Beneficiary. Beneficiary filed counterclaims in the state court to determine its rights under the LC.

Subsequently, Debtor filed for bankruptcy. Beneficiary then sought to bring its case to the active trial docket with regard to its claims against the codefendants other than Debtor, and to determine issues related to the LC not pertaining to money owed by Debtor. Beneficiary then filed a motion in state court seeking to dissolve the injunction against drawing on the LC issued by Bank.

In response, Trustee moved in the bankruptcy proceedings to enjoin Beneficiary from pursuing either motion in the state court action. The Bankruptcy Court of the Northern District of Alabama, Stilson, J., denied Trustee's attempt to enjoin Beneficiary.

Legal Analysis:

1. Preliminary Injunction. The Judge stated that to succeed in obtaining a preliminary "anti-suit" injunction, Trustee must show that the estate would be "irreparably harmed by the continuation of the state court action." It must also prove that Beneficiary "would not be irreparably harmed if the preliminary injunction is granted." Trustee argued that allowing Beneficiary to draw on the LC would serve to decrease the value of the estate, because it would allow Beneficiary to draw on the Debtor's Certificate of Deposit (which serves as security to the LC). The Judge rejected this argument because if the Debtor owns the Certificate, it is property of the estate and Beneficiary would need a court order to begin drawing down on it. Further, the Judge observed that Beneficiary would be irreparably harmed by an injunction because its rights to the LC, "a separate and independent obligation," would be unduly delayed.

2. Independence Principle. The Judge noted that the independence principle supports the "pay first, litigate later" principle, which meant that a preliminary injunction would "eliminate the benefit of having obtained the letter of credit - the assurance of prompt payment."

Comment:

The result in this case is correct. Moreover, the Judge reached this result by taking into account the nature of the LC and the expectations surrounding it in assessing irreparable harm and the effect of an injunction on all parties. What the decision fails to do, however, is to invoke Rev. U.C.C. §5-109 and its requirement that there be material fraud. This standard should apply to an action to enjoin dissolution of an injunction in the same sense as it would to the injunction itself.

[JEB/eml]

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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.