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Note: Under the International Brotherhood of Electrical Workers (IBEW), Local Union No. 351 (Union/Beneficiary) collective bargaining agreement, Access Communication Services, Inc. (Employer/ Applicant) was required to contribute a percentage of the union employees' wages to various IBEW employee benefit funds. As required by the bargaining agreement, Employer/Applicant obtained a USD 35,000 standby LC issued by Newfield National Bank (Issuer) to assure payment of its contribution. On completion of an audit indicating that Employer/ Applicant had under-contributed to the benefit fund by USD 168,994.91, Union/Beneficiary drew on the LC. Alleging fraud in the audit preparation and challenging Union/Beneficiary's demand for payment of the LC, Employer/Applicant sued Union/ Beneficiary, seeking a temporary restraining order preventing payment. Union/Beneficiary then filed a counterclaim against Employer/Applicant, alleging that it was "entitled to the proceeds of the [LC]" because of underpayment to the employee benefit funds, and that Issuer had no basis to refuse to pay the monies.

After a trial, the Superior Court of New Jersey, Law Division, Gloucester County, Morgan, J., concluded that Employer/Applicant's underpayment was USD 4,993.73, the significant reduction due to miscounting non-union workers, and that there was no fraud in the audit, and ordered Issuer to release the recalculated amount of damages from the LC, dismissing the counterclaim. On appeal, the New Jersey Superior Court, Appellate Division affirmed in a per curium opinion.

The appellate court relied on New Jersey's Uniform Commercial Code, §12A:5-109(2)(b), which states in relevant part, "[i]f an applicant claims that a required document is forged or materially fraudulent or that honor of the presentation would facilitate a material fraud by the beneficiary on the issuer or applicant, a court of competent jurisdiction may temporarily or permanently enjoin the issuer from honoring a presentation."

The appellate court upheld the temporary injunction because of the fraud allegations, stating that although the trial judge "ultimately found no fraud had been committed, he was not statutorily required to authorize the disbursement of the entire account. Rather, the judge had recalculated the amount of damages to which [Union/Beneficiary] was entitled and limited of [Union/Beneficiary]'s claim to [USD] 4,993.73." The appellate court stated that partial release of the funds was appropriate because, "a plain reading of the LOC... states that "partial draws [are] permitted up to the aggregate amount of [USD] 35,000." This provision clearly and unequivocally anticipates demands for less than the total amount of the LOC, thereby disproving [Union/ Beneficiary]'s contention that there is a requirement for [Issuer] to release all funds in the LOC."

Union / Beneficiary contended that N.J.S.A.§12A:5-111(e) entitled it to attorney fees and trial costs. The appellate court declined to consider this claim because the issue was not raised below, was not jurisdictional in nature, and did not implicate public interest.

Excerpts of the Text of the Standby from the Opinion:

"The LOC provides IBEW would be able to draw from the [USD] 35,000 if it provided the following documents:

1. A draft at sight drawn on Newfield National Bank, duly endorsed on its reverse side thereof by the Beneficiary, specifically referencing this Letter of Credit Number.

2. The original Letter of Credit and any amendments attached thereto.

3. A dated statement issued on the letterhead of the Beneficiary and purportedly signed by an authorized representative stating: Access Communication Services[,] Inc[.] has failed to pay employee benefit contributions as required pursuant to that certain written Collective Bargaining Agreement between I.B.E.W. Local Union #351 and Access Communications Services[,] Inc[.] We therefore demand payment in the amount of [USD] 35,000.00 as same is due and owing.

Partial draws were permitted up to the aggregate amount of [USD] 35,000."

Comment: Would the appellate court have affirmed if partial draws were not permitted?

[MJS]

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