Article

Topics: Wrongful Dishonor; Beneficiary

Note: Melvin Weiss (Applicant) obtained a standby letter of credit issued by HSBC (Issuer) in favor of Benetton U.S.A Corp. (Beneficiary) in order to securitize Westban Corp. and ESW Corp.'s purchases of Beneficiary's merchandise for resale. Subject to UCP500, the LC was issued in 1995 with an automatic annual extension clause to support continuing purchases. It was payable up to a maximum amount of US$500,000 in event of Westban or ESW's debt to Beneficiary on the merchandise resale businesses.

Due to Beneficiary's corporate restructuring, Westban and ESW purchased merchandise from Benetton Group S.p.a. merchandise from 1995 to 2002 and from Benetton Trading USA, Inc. from 2002 through 2008. By 2008, Westban and ESW were US$1,000,000 in debt to Benetton Trading USA, Inc. With the understanding that the LC was security against Westban and ESW's possible debts on their licenses to resell Benetton merchandise and not restricted to sales to the named Beneficiary, which never sold merchandise to Westban or ESW, Beneficiary drew on the LC for the maximum amount of US$500,000 and transferred that amount to Benetton Trading USA to alleviate the outstanding debts of Westban and ESW.

Applicant then sued Beneficiary and Benetton Trading USA, arguing that no debt was owed to the named Beneficiary and that Benetton Trading USA did not have rights under the LC. The Supreme Court of New York, Nassau County, Mahon, J., dismissed Applicant's motion for summary judgment and defendants' cross-motion for summary judgment, because of outstanding issues of fact as between Benetton U.S.A. and Benetton Trading, in whose favor the LC was issued and with whom Westban and ESW primarily dealt.

Comment:

The case raises an interesting LC question, namely whether a beneficiary may draw on a standby for amounts owed to other entities. There is, in principle, no reason why it cannot do so provided that the terms of the LC accommodate such a drawing.

This case recites the text of the standby which is set forth below. It is a clean standby requiring only presentation of a sight draft. Assuming that a sight draft had been presented, the use of the proceeds is irrelevant and a post drawing question provided that there was a colorable basis for the drawing (i.e. no LC fraud or abuse). While this result should follow on a full hearing, the matter could have readily been addressed on summary disposition.

Text:

The standby as reprinted in the opinion stated:

July 25, 1995

BENEFICIARY:

BENETTON U.S.A CORPORATION

SS EAST 59TH STREET

NEW YORK, NY 10022

ATTENTION: GIANCARLO BRIGUGLIU

RE: IRREVOCABLE STANDBY LETTER OF CREDIT NO.: S113744

GENTLEMEN:

FOR THE ACCOUNT OF MELVYN I. WEISS WE HEREBY ISSUE IN YOUR FAVOR OUR IRREVOCABLE LETTER OF CREDIT NO. S113744, FOR A MAXIMUM AMOUNT OF $500,000.00 (FIVE HUNDRED THOUSAND DOLLARS).

THIS LETTER OF CREDIT IS EFFECTIVE IMMEDIATELY.

THIS LETTER OF CREDIT EXPIRES AT OUR COUNTERS ON JULY 31, 2996.

FUNDS UNDER THIS LETTER OF CREDIT ARE AVAILABLE TO YOU AGAINST YOUR DRAFT(S) AT SIGHT DRAWN ON US, MENTIONING THEREON OUR LETTER OF CREDIT NUMBER S11344 AND THE ORIGINAL OF THIS LETTER OF CREDIT.

IT IS A CONDITION OF THIS LETTER OF CREDIT THAT IT SHALL BE DEEMED AUTOMATICALLY EXTENDED WITHOUT AMENDMENT FOR ADDITIONAL PERIODS OF ONE YEAR FROM THE PRESENT AND EACH FUTURE EXPIRATION DATE, UNLESS SIXTY (60) DAYS PRIOR TO THE THEN RELEVANT EXPIRATION DATE WE NOTIFY YOU IN WRITING BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, THAT WE ELECT NOT TO RENEW THIS LETTER OF CREDIT FOR ANY ADDITIONAL PERIOD.

UPON YOUR RECEIPT OF SUCH NOTIFICATION, YOU ARE AUTHORIZED TO DRAW YOU ONE (1) SIGHT DRAFT ON US MENTIONING THEREON OUR LETTER OF CREDIT.

PARTIAL DRAWINGS ARE PERMITTED

WE HEREBY AGREE WITH YOU THAT EACH DRAFT DRAWN UNDER AND IN COMPLIANCE WITH THE TERMS AND CONDITIONS OF THIS LETTER OF CREDIT WILL BE DULY HONOURED IF PRESENTED ON OR BEFORE THE EXPIRATION DATE.

THIS LETTER OF CREDIT IS TRANSFERABLE WHOLE ONLY BUT NOT IN PART. HOWEVER NO TRANSFER SHALL BE EFFECTIVE UNLESS ADVICE OF OUR REF. NO. S113744

SUCH TRANSFER IS RECEIVED BY US IN THE FORM ATTACHED SIGNED BY YOU. THIS STAND BY LETTER OF CREDIT MAY BE TRANSFERRED ONE OR MORE TIMES. THE RIGHT TO TRANSFER THIS LETTER OF CREDIT IS NOT SUBJECT TO THE CONSENT OF THE ACCOUNT PARTY.

UNLESS OTHERWISE EXPRESSLY STATED, THIS LETTER OF CREDIT IS SUBJECT TOT THE UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS (1993 REVISION) INTERNATIONAL CHAMBER OF COMMERCE. PUBLICATION NO. 500.

VERY TRULY YOURS

/s/

AUTHORIZED SIGNATURE /s/ AUTHORIZED SIGNATURE

[JEB/dgs]

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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.