Article

Note: Elemco Testing Company, Inc., Elemco Electrical Construction Co., Inc., and Elemco Industries, Inc. (Employers) were bound under a collective bargaining agreement to fund various employment benefits and to maintain a surety bond to secure contributions for the Local 25 electrical workers union, which were administered by the Electrical Industry Board of Nassau and Suffolk Counties, New York (Beneficiary). Employers filed for bankruptcy under Chapter 11 of title 11 of the U.S. Code in November 2008 while they were allegedly in default on payment of accrued employee contributions. During the bankruptcy proceedings, the Suffolk County National Bank (Issuer) agreed to issue a USD 50,000 standby on behalf of Employers to Beneficiary as substitution of the surety bond. On 15 June 2009, the bankruptcy court issued an interim order incorporating this agreement and authorizing the issuance of the USD 50,000 standby for the benefit of Beneficiary to expire upon either a sale of Employers' assets, Employers obtaining a surety bond, or 31 December 2009. On 4 September 2009, Issuer issued the LC which stated that payment would be made upon presentation of the operative LC instrument as well as a final order from the bankruptcy court stating that Employers have failed to satisfactorily pay off their debt to Beneficiary. The LC, however, stated that it would expire on 4 September 2010. On 1 September 2010, Beneficiary demanded payment, presenting the LC instrument as well as the requisite order from the bankruptcy court to Issuer, but Issuer refused to honor the LC.

Beneficiary then sued Issuer to recover payment pursuant to the LC. The Supreme Court of New York, Suffolk County, Molia, J., denied Beneficiary's motion for summary judgment, ruling that there was a triable issue of fact regarding expiration of the LC. On appeal, the New York Appellate Division, Second Department in a per curiam opinion reversed the denial of Beneficiary's summary judgment motion.

Beneficiary argued that it complied with the conditions of the LC while Issuer pointed to the interim order which stated the LC would expire upon sale of Employers' assets and differed from the terms of the standby. The appellate court ruled that issuers of LCs must pay provided the LC terms are met. The appellate court noted that the rights of LC beneficiaries are independent of any underlying agreement between the beneficiary and the applicant, and the issuer is bound to the terms of the LC irrespective of any such underlying agreement. Furthermore, the appellate court ruled that New York has a longstanding practice of strict construction of the terms of LCs. Accordingly, Beneficiary, having made a prima facie showing of compliance with the stated terms of the LC, was entitled to summary judgment. The opinion stated "the fact that the Bankruptcy Court order set forth a termination date for the letter of credit that was at variance with the stated terms of the instrument itself is not a defense to the Bank's refusal to make payment in accordance with its obligation to the plaintiffs."

[JEB/ael]

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