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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
2010 LC CASE SUMMARIES 2010 U.S. Dist. Lexis 27602 (March 18, 2010) [U.S.A.]
Topics: Compliance; Anticipatory Repudiation; U.S. Rev. UCC §5-111(a)
Type of Lawsuit: Beneficiary sued Guarantor for wrongful dishonor and for declaratory judgment that future payments are due.
Parties: Issuer/Bank/Defendant - Bank of the Ozarks (Counsel : David H. Pikus of Pressler, Amery & Ross)
Insurer/Beneficiary/ Plaintiff - Ace American Insurance Company (Counsel: Wendy M. Simkulak of Duane Morris LLP)
Insured/Applicant - Affiliated Foods Southwest, Inc.
Underlying Transaction: Various insurance policies.
LC: Standby LC in the amount of US$143,006.76. Silent as to governing rules.
Decision: The United States District Court for the Southern District of New York, Kaplan, J., granted Guarantor's motion to dismiss the wrongful refusal claim for mootness except for interest, and dismissed the declaratory action.
Rationale: Where there is no outstanding drawing, there is no suggestion that Beneficiary will draw on the LC, and it is likely that the standby will not be extended, it appears speculative that a declaratory judgment would serve any useful purpose.
Where a claim on an LC has been honored, a claim for wrongful refusal is moot except for lost interest caused by the delay.
Article
Factual Summary: As security for insurance policies issued, Insured provided Insurer with "an unconditional, irrevocable, evergreen letter of credit" at its request, in favor of Insurer/Beneficiary issued by Issuer/Bank. "The LC had a one-year term, and, on June 1, 2009, renewed automatically for a successive one year period ending June 1, 2010."
After it became insolvent, Insured/Applicant, acting as debtor-in-possession, petitioned the Bankruptcy Court, seeking authority to use the LC as collateral for its obligations under new post-petition insurance policies. The United States District Court for the Southern District of New York, Kaplan, J., denied the petition.
Insurer/Beneficiary then drew on the standby, presenting complying documents. Issuer sought to have Insurer/Beneficiary submit invoices, documents not required under the LC, in order to ensure that the drawings were made with respect to the pre-petition policies secured by the LC rather than new post-petition policies for which the LC did not operate as security.
Insurer/Beneficiary contended that the LC did not require it to submit any documentation to Issuer with draw requests, and sued Issuer for a declaration of its rights and for wrongful dishonor. Beneficiary also sued Guarantor for wrongful dishonor. Subsequently, Issuer honored. On Issuer's motion to dismiss, the court dismissed except for outstanding interest.
Legal Analysis
1. Mootness: Noting that the LC had been honored after the claim had been filed, the Judge observed that the claim was moot with the exception of the claim for interest.
2. Anticipatory Repudiation: The Judge described Insurer/Beneficiary's claim for damages for the failure to honor future drawings as "frivolous".
3. Compliance: Insurer/Beneficiary also sought a declaratory judgment that it was not required to submit documentation linking the drawing to a pre-petition event. The Judge declined to rule, noting that the LC may be terminated shortly and that there is no suggestion that Beneficiary will draw on the LC within the period. He stated that it appears speculative that a declaratory judgment would serve any useful purpose at this point, especially in light of the improbability of a final determination in time to be of any benefit to anyone.
Comments
1. One wonders whether the doctrine of anticipatory repudiation would be relevant. If the refusal was in effect a repudiation of future complying drawings, it would be relevant under U.S. Rev. UCC §5-111(a) (Remedies).
2. It is troubling that the Judge would hesitate to rule on the question of compliance. The question is one of law, easily settled by looking at the terms of the LC. It is wrongful for issues to require documents in a drawing not stated in the LC.
[JEB/njh]
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