Article

Prior History: Ace Am. Ins. Co. v. Bank of the Ozarks, No. 09 Civ. 8938 (LAK), 2010 WL 1257327, 2010 U.S. Dist. Lexis 27602 (S.D.N.Y. Mar. 18, 2010) [U.S.A.], abstracted at 2011 ANNUAL REVIEW OF INTERNATIONAL BANKING LAW & PRACTICE 381.

Action: As security for insurance policies issued, Bank of the Ozarks (Issuer) issued an "unconditional standby irrevocable letter of credit" subject to the UCP (although the opinion does not indicate which version) on behalf of Affiliated Foods Southwest, Inc. (Applicant/Insured) in favor of ACE American Insurance Company (Beneficiary/Insurer) for the amount of USD 1,376,988. The terms of the standby obligated Issuer to "honor all payment requests submitted by [Beneficiary] up to the stated limits and until the date of expiration ". The terms of the LC further provided that "[t]he obligation of [Issuer] under this Letter of Credit is the individual obligation of the [Issuer], and is in no way contingent upon the reimbursement with respect hereto". The LC also contained an automatic extension clause, which stated that the LC would be automatically renewed for "successive one-year periods 'upon the expiration date ... and upon each anniversary of such date' unless [Issuer] gives sixty days notice of its election not to renew."

Although Applicant filed for bankruptcy in 2009, Issuer did not terminate the standby and Beneficiary submitted a draw request for USD 143,006.76 later that year. Issuer refused to honor, requiring Beneficiary to submit invoices, documents not required under the LC, in order to ensure that the drawings were made with respect to the prebankruptcy policies secured by the LC rather than new post-bankruptcy policies for which the LC did not operate as security. Beneficiary sued Issuer for breach of contract for wrongful dishonor and declaratory judgment that Beneficiary would not be required to submit documentation linking the drawing to the pre-bankruptcy policies. Shortly after Beneficiary submitted its claim, however, Issuer honored. The United States District Court for the Southern District of New York, Kaplan, J., then dismissed Beneficiary's wrongful dishonor claim as moot. Judge Kaplan also dismissed the declaratory judgment claim, reasoning that Issuer was likely to choose not to renew the LC, making a declaratory judgment pointless. Issuer, however, did not terminate the LC.

When Beneficiary presented a demand for USD 100,000 in 2011, Issuer refused to honor claiming that the Beneficiary's drawing "violates the automatic stay resulting from [Applicant's] filing of a bankruptcy petition". Beneficiary then sued for declaratory judgment and breach of contract, claiming that Issuer wrongfully dishonored its demand. Issuer then moved to dismiss the complaint for failure to state a claim or, alternatively to transfer the action to Arkansas. The United States District Court, for the Southern District of New York, Gardephe, J. denied both motions.

The Judge found that the LC was not part of Applicant's bankruptcy proceedings because Issuer continually renewed it, because of its independent nature, and because it was Issuer's obligation. The Judge stated, "When the issuer honors a proper draft under a letter of credit, it does so from its own assets and not from the assets of the customer which caused the letter of credit to be issued." The Judge added that cases have "uniformly rejected" the proposition that the applicant's bankruptcy precludes a beneficiary's right to draw under the letter of credit.

The Judge also found that Beneficiary was entitled to a declaratory judgment ordering Issuer to honor all complying demands until either the exhaustion of funds available or expiration of the LC since this instance was not the first time that Issuer wrongfully dishonored a complying demand from Beneficiary.

Text: As printed in the opinion, the letter of credit, provided in part:

"By order of our client, [Applicant], we hereby establish this Irrevocable Letter of Credit No. 0706035392 in your favor for an amount up to but not exceeding the aggregate sum of One Million Three Hundred Seventy Six Thousand Nine Hundred Ninety Eight Dollars ($1,376,998), effective immediately, and expiring at the offices of [Issuer] on June 1, 2009 unless renewed as hereinafter provided. ...

Funds under this Letter of Credit are available to you against your sight draft(s), drawn on us, bearing the clause 'Drawn under Credit No, 0706035392'."

The Bank further stated that it had

"agree[d] with the drawers, endorsers and bona fide holders of drafts drawn under and in compliance with the terms of this credit that such drafts will be duly honored upon presentation to the drawee. The obligation of the [Issuer] under this Letter of Credit is the individual obligation of the [Issuer], and is in no way contingent upon the reimbursement with respect thereto."

[JEB/kae/jdc]

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