Article

Factual Summary: To provide an earnest money deposit for a condominium purchase, Applicant/Buyer obtained a US$277,180 letter of credit from Issuer in favor of Beneficiary/Sellers Agent. After Applicant/ Buyer filed for protection under a voluntary Chapter 13 (personal reorganization) Bankruptcy petition, Beneficiary demanded payment of US$207,885 on the LC, claiming that Applicant/Buyer had defaulted on the purchase contract. Although, Issuer acknowledged receipt of the presentation, it did not pay. Instead Issuer initiated an adversary proceeding in Applicant's bankruptcy action interpleading Applicant, Beneficiary, and the Bankruptcy Trustee to determine the status of the LC and the parties' respective underlying agreements. This proceeding was dismissed.

Beneficiary then sued Issuer in federal court for wrongful dishonor. When Beneficiary moved for summary judgment, the Judge granted its motion.


Legal Analysis:

1. Elements to Prove Wrongful Dishonor: The Judge listed the elements of a cause of action for wrongful dishonor of a LC, namely that the beneficiary must show the issuance of an LC, timely presentation of the document required in the LC to effectuate a demand for payment, and a failure to pay on the part of the issuer.

2. Wrongful Dishonor: Issuer admitted that the documents were presented prior to expiry and complied with the terms and conditions of the LC. While it acknowledged receipt of the presentation, Issuer apparently failed to give a notice of refusal. The Judge ruled that Beneficiary had proven wrongful dishonor.

3. Bankruptcy; Independence; Rev. UCC §5- 103(4): Issuer sought to avoid deciding whether to honor and whom to pay by claiming that payment would affect Applicant's bankruptcy estate. The Judge rejected this ploy, citing Rev. UCC §5-103(4) and a long line of cases for the proposition that LCs and their proceeds are separate from the bankruptcy estate.

4. Damages; Attorney's Fees; Rev. §5-111(e): Issuer argued that Beneficiary was not entitled to attorney's fees in connection with the adversarial proceeding in the bankruptcy case under Rev. UCC §5-111(e). Noting that Beneficiary brought its action under Rev UCC Article 5, the Judge ruled that it was the "prevailing party" and retained jurisdiction to determine attorney's fees.

Comments:

1. Preclusion; US Rev. §5-108(d); UCP600 Article 14: While the Judge ruled in favor of Beneficiary on the question of compliance, the question need not have been reached. By failing to give any notice of refusal, Issuer was precluded from asserting that the documents did not comply with the terms and conditions of the standby under UCP600 Article 16 and US UCC §5-108(d).

To the extent that Issuer argued that the Bankruptcy stay prevented it from giving a notice of refusal, that argument should have been rejected.

2. The opinion noted that the second cause of action was "for violation of International Standby Practices ... ." It also noted that there was "no dispute that the LOC is governed by the Uniform Commercial Practices of the International Chamber of Commerce (UCP), ICC Publication No. 600 ... ." It also noted that Beneficiary had argued that Issuer "had seven days to honor the presentation ... ."

These references are confusing. The reference to "International Standby Practices" could refer to the International Standard Banking Practices (ISBP), customary practices related to standbys and not the standby rules endorsed by the International Chamber of Commerce (ICC Publication No. 590). The reference to UCP600 would seem to so suggest.

However, the argument that Issuer had 7 banking days in which to give notice of refusal does not derive from UCP600 which is UCP600 Article 14(b) (Standard for Examination of Documents) and allows a maximum of 5 banking days. Seven days is the standard under ISP98 Rule 5.01(a) (Timely Notice of Dishonour), UCP500 Article 14(d)(i) (Discrepant Documents and Notice), or US UCC §5-108(b) (Issuer's Rights and Obligations).

[JEB/yn]

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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.