Article

Factual Summary: Developer borrowed funds from Lender in order to build and maintain a mobile home community, securing the loan with a standby LC issued by Issuer requiring presentation of a sight draft and the original standby. The underlying loan agreement provided for reductions of the standby corresponding to the increase of the value of the property used as collateral. It stated that "the Letter of Credit shall be reviewed by [Beneficiary] and appropriate reductions made every six (6) months after capital improvements are made to the property upon written notice of the amount of the reduction to [Applicant] and [Issuer], such written notice of reduction shall not be later than thirty (30) days after [Applicant's] request for reduction".

Applicant and Beneficiary repeatedly amended the LC, although they did not follow the procedure set forth in the underlying agreement. The Judge stated that Issuer and Beneficiary agreed that by January 18, 2010, the Letter of Credit had been reduced to USD 3,189,693.69. Beneficiary alleged that the amendments were only effected when Applicant sent a request for a reduction to Beneficiary, and, upon Beneficiary's consent, Issuer issued an amended LC. Issuer did not agree that this process was followed for each amendment.

A dispute arose when Issuer advanced USD 937,333.09 to Applicant for property improvements and sought a corresponding reduction in the LC to which Beneficiary refused to consent, noting that the loan agreement provided for one reduction per six-month period, and pointing out that one had already taken place in the past six months. Claiming Beneficiary had "implicitly consented" to the requested reduction based on "course of dealing," Issuer reduced the balance by the requested amount, leaving a total balance of USD 1,907,861.15.

After Applicant defaulted, Beneficiary drew on the letter of credit, claiming the full balance. Issuer only paid the reduced amount. Lender then sued Issuer for the balance. Issuer counterclaimed for a declaratory judgment and attorney's fees, and filed a third party complaint. Both parties moved for judgment on the pleadings and Issuer moved to join a surety. In a prior ruling, the Judge denied the motions for judgment but permitted joinder. Both parties moved for summary judgment; Issuer's motion was then denied and Beneficiary's motion was granted.

Legal Analysis:

Independence; Amendment, Consent, Course of Dealing; US Rev. UCC § 5-103(d); US Rev UCC § 5-106(b); Reduction: When Beneficiary claimed that it had not consented to a reduction in the amount of the standby letter of credit requested by Applicant, Issuer responded that it had followed the same procedure as it had for prior reductions. Beneficiary asserted that the terms of the underlying loan agreement only allowed for one reduction every six months.

1. Independence: Issuer argued that it had acted properly in reducing the balance on the standby and that Beneficiary had improperly rejected it under the terms of the underlying agreements between it and the Applicant. Noting the independent character of an LC under US revised UCC § 5-103(d) and within case law and the absence of any claim of LC Fraud by Issuer, the Judge ruled that Issuer's arguments and defenses were eliminated. The Judge stated that Issuer's "obligations to [Beneficiary] are those expressed in the Letter of Credit itself, and those obligations do not change with any of these other extraneous matters. [Issuer] was required, by the express terms of the Letter of Credit, to pay the stated amount upon [Beneficiary]'s presentation of a sight draft and the original Letter of Credit. . . . [Issuer] was therefore required to pay the face amount of the Letter of Credit."

2. Amendment; Consent: The Judge rejected Issuer's argument that an amendment should be implied, noting that US Rev. UCC §5-104 requires a signed "record" (writing) and that US Rev. UCC §5- 106(b) requires the consent of the beneficiary to an amendment. The Judge noted that Official Comment 2 to Rev. UCC §5-106 indicated that beneficiary consent can be implied but stated "[t]his does not mean that the commentary envisions a scenario in which a letter of credit can be amended by implication through the conduct of the parties." The Judge further stated "[Issuer] incorrectly conflates consent to an amendment (Section 5-106), which may be made through implication, with the requirement that an amendment itself be made through a record (Section 5-104). There is no known support in the law for the proposition than an amendment to a letter of credit can be made by implication, as opposed to consent to an amendment, which can be made through implication." Moreover, that Beneficiary "took action denying the requested sixth reduction, which constitutes the opposite of consent to such a (nonexistent) amendment."

3. Course of Dealing: Issuer argued that a course of dealing between Beneficiary and Applicant consent to the amendment should be implied. The Judge noted that the formal process for a reduction, i.e., requiring written approval by the Beneficiary, was not followed with regard to the disputed reductions. The Judge rejected Issuer's argument that the equitable principles of waiver and estoppel due to this course of dealing estop Beneficiary from denying that it consented to the reductions. Apart from being barred from looking to the underlying contracts between Beneficiary and Applicant, the Judge noted that Issuer was not a party to this agreement.

Comments:

This opinion corrects a troubled prior opinion which seemed to suggest that it was a question of fact whether beneficiary consent to an amendment could be implied from prior conduct in a situation where it had expressly refused to consent. It properly grants summary judgment to the beneficiary as a matter of law.

[JEB/vg]

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