Article

Factual Summary: To finance its performance of a contract with the Jordanian Education Ministry to sell computer equipment and services, Financier extended a line of credit to Seller. This arrangement was subsequently modified so that Financier issued two performance standbys subject to ISP98 in the amount of US$330,104.80 each in favor of the Education Ministry for the account of Seller. Financier also obtained a guarantee from Guarantor, Export- Import Bank of the United States, an export credit agency of the US Government. As part of this arrangement, Seller was required to obtain two standby LCs to assure repayment of Financier's standbys which Issuer issued in favor of Financier.

The standbys, as amended, required a draft, Financier/Beneficiary's statement of a default, and presentation of the original operative instrument. The default statement was to state that:

"THE AMOUNT OF OUR DRAFT REPRESENTS FUNDS DUE US AS A RESULT OF DRAWING OF OUR LETTER OF CREDIT BY ORDER OF [APPLICANT/ SELLER] UNDER THE TERMS OF THE CONTRACT NO. (1/27/2000); LOAN NO. 3684-JO ISSUED BY MINISTRY OF EDUCATION - THE HASHEMITE KINGDOM OF JORDAN."

Although the opinion does not so state, the Education Ministry apparently drew on Financier/ Beneficiary's two standbys, triggering Financier/ Beneficiary's drawing on the two standbys in its favor on 29 April 2003. On 9 May 2003, Issuer sent a "Notice of Dishonor" citing the following discrepancies:

"1 - Draft is not drawn on [Issuer].

2 - The Language on beneficiary's statement is not as per Standby (amendment number one)."

Financier/Beneficiary cured the discrepancies referenced in the Notice of Dishonor and represented the documents on 14 May 2003. The opinion indicates that there is a factual dispute regarding whether Issuer gave a Notice of Dishonor in response to the re-presentation but states that Issuer failed to refer to the absence of the original LC.

Financier/Beneficiary then filed a claim with Guarantor and, on payment, assigned its claim against Issuer to Guarantor. The assignment covered:

"[A]ll of its right title and interest in, and all sums of money now due or to become due to [Financier/Beneficiary] [] under the Loan Agreement by and between [Financier/ Beneficiary] [] and [Applicant/Seller] . . . and any and all other instruments and property incident to [[Applicant/Seller's]] indebtedness under the Loan, including but not limited to, security and/or guarantee agreements."

Guarantor/Assignee then sued Issuer for wrongful dishonor, breach of contract, and unjust enrichment. Both parties moved for summary judgment. The trial court granted Guarantor/Assignee's motion on the grounds of wrongful dishonor and breach of contract, but granted summary judgment to Issuer on the claim of unjust enrichment.

Legal Analysis:

1. Assignment of Claim to Wrongful Dishonor; Assignment of Proceeds; US Rev. UCC § 5-114; ISP98 Rule 6; ISP98 Rule 7: Issuer argued that Guarantor/Assignee lacked standing because Issuer did not consent to the assignment of beneficiary rights, citing California's version of US Revised UCC Section 5-114(c) which provides that "[a]n issuer or nominated person need not recognize an assignment of proceeds of a letter of credit until it consents to the assignment." Issuer also cited ISP98 Rule 6.07(a)(i) which is similar and Rule 6.07(b)(i), implying that even if the assignment of the proceeds was acknowledged Issuer still had no obligation running to Guarantor/Assignee.

The Judge dismissed this argument, noting that Issuer had overlooked the crucial fact that the named beneficiary had made presentment and it was to the named beneficiary that Issuer dishonored. The Judge framed the situation not as to the right to proceeds under the LCs, but as to the right to bring a claim for wrongful dishonor, with the concomitant remedy of damages. The Judge concluded that neither the ISP98 nor that section of the Cal. Com. Code were applicable to the assignment of the vested claim. Resorting, effectively, to the general common law of contracts it determined that Guarantor/Assignee had standing to bring suit against Issuer for the wrongful dishonor claim.

2. Preclusion; Waiver; ISP98 Rule 5.03; US Rev. UCC § 5-108(c): Because Beneficiary represented, the question of wrongful dishonor focused of the re-presentation or second presentation. Issuer argued that Beneficiary had failed to comply strictly with the terms and conditions of the LC in that it had failed to present the operative credit instrument.

Guarantor/Assignee replied by asserting that because Issuer had failed to give notice of the failure to present the operative instrument, it had "waived any defect", citing US Rev. UCC § 5-108(c) and ISP98 Rule 5.03.

Issuer responded "it was only obligated to inform [Beneficiary] of any discrepancies in the documents that [Beneficiary] actually submitted at the time of draft." The Judge ruled that "because [Issuer] defendant omitted [Beneficiary's] failure to present the original letters of credit as a basis for dishonor in its notices of discrepancies, it waived the defect as a grounds for dishonor."

3. Independence: Issuer argued that its obligation to honor was conditioned on proof by Beneficiary that Applicant had failed to perform the underlying contract as a condition precedent because the LC referenced the underlying contract. Issuer argued that the independence principle "does not apply when a letter of credit references the terms of the underlying contract."

As originally issued, the demand statement included the phrase "AS A RESULT OF THE FAILURE OF [APPLICANT/SELLER] TO PERFORM", but this clause was deleted by amendment. The drawing by Beneficiary used the terminology of the amendment.

Reviewing the purpose of standbys to shift the risk of payment, the Judge stated: "Letters of credit achieve this purpose by de-linking the letter of credit from the underlying contract. This concept is known as the 'independence principle,' and is the 'primary characteristic of a letter of credit.'" Accordingly, the Judge concluded the terms of the underlying contract were "insufficient to create an explicit condition precedent for payment under the [Issuer] LOCs."

4. LC Fraud: Issuer also argued that the drawing amounted to LC Fraud because Beneficiary "had no legitimate basis for asserting a claim under the [Issuer] LOCs."

Citing Rev. UCC § 5-109, the Judge stated that there was no evidence that Issuer or Jordanian Buyer "engaged in active fraud in connection with its attempted draws on the [Issuer] LOCs." The Judge noted that: "The limited facts available to the Court on this point are more indicative of a dispute as to performance between the [Buyer] and [Seller] than of material fraud." In addition, the Judge declined Applicant's request that it "apply the rationale of the fraud exception despite the absence of evidence indicating fraud by any party", noting that such a result would "eviscerate" the independent character of the LC.

5. Unjust Enrichment: Applicant also alleged that Guarantor's theory of unjust enrichment was not actionable. Noting that California does not recognize an unjust enrichment theory where, as here, there is an enforceable contract, the Judge granted summary judgment on this theory in favor of Issuer.

Comment: Notice of Refusal; Waiver and Preclusion; Independence; LC Fraud or Abuse; US Rev. UCC § 5-109(a); US Rev. UCC § 5- 111(a); Assignee

The arguments raised in this case on behalf of Issuer reveal amazing creativity on the part of its attorneys.

1. Notice of Refusal: The suggestion that Issuer need not address discrepancies in re-presented documents or give notice regarding them ignores the purpose of re-presentation, of giving notice of refusal, of cure, and of the preclusion doctrine. This case is an illustration of the "one bite" doctrine, namely that Issuer should have raised non-presentation of the original LC at the time of the first presentation since it was not presented and cannot raise it later.

2. Waiver and Preclusion: The opinion confused the doctrine of preclusion with waiver, perhaps because the Judge relied on pre-revised UCC Article 5 cases that contained a similar confusion. Under Rev. UCC § 5-108(c), the mercantile doctrine of preclusion is firmly embraced in LC law. Unlike waiver, preclusion operates where the issuer or confirmer has failed to act and does not require an express action. Unlike estoppels, preclusion operates even where the discrepancy could not be cured or where there is no reasonable reliance on the absence of notice.

3. Independence: In addressing policy-based reasons as to why the reference in the LC to the underlying contract should not operate to condition the issuer's obligation, it is surprising that the opinion did not refer to the statutory formulation of independence in Rev. UCC § 5-103(d) and, more significantly, § 5-108(e), requiring that nondocumentary conditions in an LC be disregarded "as if they were not stated".

4. LC Fraud or Abuse; US Rev. UCC § 5- 109(a): It is equally surprising that in refusing Issuer's request to apply the fraud exception despite no evidence of material fraud, the opinion did not note that US Rev. UCC § 5-109(a) requires a finding that there has been forgery or material fraud for the fraud exception to apply.

5. US Rev. UCC § 5-111(a); Assignee: The question also arises as to how this contractual assignee can bring an action for wrongful dishonor under Rev. UCC § 5-111(a) which requires that the plaintiff be a beneficiary (including a transferee beneficiary), successor beneficiary, or a nominated person acting in its own behalf. Indeed, an assignee of proceeds (which the plaintiff was not) would not qualify.

[JEB/wa/csb]

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