Article

Factual Summary: Borrower entered into a USD 12,700,000 loan agreement with Lender/Beneficiary for real estate construction. As security for the loan, Applicant, who was a member and manager of Borrower, provided Lender/Beneficiary with a USD 1,600,000 standby letter of credit issued by a bank (Issuer).

The court stated that the standby provided that:

"Issuer would pay the Beneficiary upon the receipt of: (1) the original letter of credit, together with any amendments; (2) a sight draft drawn by Beneficiary on Issuer; and (3) a signed statement by Beneficiary including the following statement 'Beneficiary hereby certifies that [Borrower] is in default under a certain promissory note payable to [Lender/Beneficiary] dated 07/02/07 in the amount of $12,700,000.00 & all renewals, extensions, modifications & substitutions'".

The opinion states that the standby was "renewed" in 2009 and 2010 and "again amended in 2011". The latter amendment changed the applicant to "DHH, LLC" and stated that the expiration date was 31 August 2011.

When Borrower defaulted on the loan, Lender/Beneficiary promised Applicant "that it would enter into good faith negotiations for a settlement of the [loan] if [Applicant] would renew the letter of credit". Relying on Lender/Beneficiary's promise, Applicant caused the standby to be renewed before its expiration. However, Lender/Beneficiary did not take steps to settle the loan as it promised.

When Borrower failed to meet the amount due under the loan agreement, Lender/Beneficiary threatened to draw upon the standby to compensate for the missed payment.

Applicant then sued Beneficiary/Lender to enjoin it from drawing on the standby and for a declaration that the standby was "null, void, and without legal effect". The trial court granted a Temporary Restraining Order enjoining Beneficiary/Lender from drawing on the letter of credit, ruling that it would cause irreparable harm to Applicant. The action was removed from the Illinois state courts to the U.S. federal court and Beneficiary/Lender filed a motion to dismiss which was granted.

Legal Analysis:

1. Promissory Estoppel; Independence: Applicant alleged that Beneficiary/Lender should be estopped from drawing on the standby under the doctrine of promissory estoppel because it fraudulently induced Applicant to obtain an extension. Noting that LCs are independent of the underlying agreements, the Judge concluded that "the letter of credit cannot be challenged based on allegations of a promise to negotiate a settlement of the underlying loan agreement". He rejected the theory of promissory estoppel in such a situation because it would compromise the independent character of an LC and would undermine the "utility" of LCs. Accordingly, the action was dismissed for failure to state a cause of action.

2. Injunction Against Presentation: Applicant had obtained an injunction against presentation under the LCs in the state court. In ruling that there was no cause of action against Beneficiary for breach of contract on a theory of promissory estoppel, the federal Judge on removal also ruled that there was no basis for the injunction, equating an injunction against presentation with an injunction against payment.

Comment(s):

This standby contained a merger or integration clause to the effect that it was a final and exclusive formulation of the Issuer's obligation. According to the Judge, " the letter of credit stated that the Issuer's 'obligation cannot be modified by any reference in this Letter of Credit, or any document to which this Letter of Credit may be related'".

[JEB/kae/cmh]

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