Note: Flo-Pro (Tenant/Applicant), a subsidiary of Fenwick Automotive Products Limited (Parent Company), arranged for a standby letter of credit for US$ 150,000 to be issued by Royal Bank of Canada (Issuer), as a security deposit to Circle Drive Associates, LLC (Original Landlord/Beneficiary). When Original Landlord/Beneficiary assigned its interest in the lease of real property to Iron Horse Drive, LLC (Successor Landlord), Successor Landlord requested Tenant/Applicant to "take such steps as required to have [Issuer] [of the letter of credit] acknowledge as assignment to us or to have them re-issue [it] to [Successor Landlord]". However, Tenant/Applicant failed to do so.

After assignment of the lease, Successor Landlord had possession of the original and an amended standby extending the expiry dates issued to Original Landlord. On behalf of Tenant/Applicant, Parent Company "explained that '[i]t would be convenient if [Successor Landlord] could return' the letter of credit to [Parent Company], which had to 'co-ordinate with three different branches in the bank to cancel' the letter of credit 'and have them issue a new one in replacement.' [Successor Landlord], in turn, asked [Parent Company] whether the bank would commit to issuing the replacement letter of credit before receiving the old one or, if not, how long the replacement process would take 'so that the time period we are without the [letter of credit] in hand is minimized.'"

After two months had passed without Tenant/Applicant causing Issuer to provide a new standby for Successor Landlord, Successor Landlord sent Tenant/Applicant written notice of its default on the lease due to a "failure 'to provide a standby letter of credit as security deposit.'"

Tenant/Applicant sued Successor Landlord for wrongful termination of the lease, and sought a declaration that it is not in default of its lease, and a preliminary injunction to prevent Successor Landlord and First American Realty (Property Manager) from entering or taking possession of the leased premises. Successor Landlord moved to dismiss the complaint for lack of subject-matter jurisdiction. The U.S. District Court, New Hampshire, Joseph N. Laplante, . denied Successor Landlord's motion to dismiss as the citizenship of the parties is diverse and the amount in question exceeds $75,000.

The Judge denied Tenant/Applicant's motion for a preliminary injunction as Tenant/Applicant did not show likelihood of success on the claim of wrongful termination of the lease. Successor Landlord must file an answer to Tenant/Applicant's complaint regarding wrongful termination of the lease.

Tenant/Applicant claimed that the lease was wrongfully terminated as it had been ready to obtain a standby benefitting Successor Landlord but that Original Landlord's refusal to return the original letter of credit prevented Tenant/Applicant from doing so. Therefore, Tenant/Applicant claimed that the failure to re-issue is the fault of the Successor Landlord.

The Judge observed that a letter of credit issued in favored of Original Landlord did not provide any security to Successor Landlord, noting that Rev. UCC §5-112 provided that the right to draw cannot be transferred, making physical possession of the standby useless as security.



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.