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Note: To pay for the sale of frozen shrimp, Crystal Cove Seafood Corp. (Buyer) provided a series of commercial LCs issued by Bank Leumi USA and Brown Brothers Harriman & Co. (Issuers) in favor of Good Luck Product Co. (Seller) in 2008. Over the course of the contract, Seller drew on the LCs, but Buyer claimed that Seller had mishandled some shipments, causing Issuer not to make full payment under the LCs. Seller also claimed that Buyer wrongfully prohibited payment over discrepancies in the documents that had previously been waived by Buyer. Seller further claimed that Buyer retained presented documents in its exclusive control that were required under the LCs.

To address these concerns, Seller contacted Buyer from January 2010 to April 2010 via email to encourage payment. Buyer admitted that balances were owed and that money would be wired. When it was not, Seller sought assistance of an attorney to obtain payment from Buyer. Buyer responded through its counsel that money would come and a lawsuit was unnecessary. Over several more exchanges, Buyer finally stated that it would pay no more than USD 100,000.

After that exchange, Seller sued Buyer on 17 March 2014 for breach of contract, violation of UCC § 2-709, unjust enrichment and fraud. Buyer immediately moved to dismiss the complaint, claiming the statute of limitations had run under the four year UCC period. Seller responded with a motion to amend the complaint to include facts and arguments to toll the statute of limitations and bolster previously made claims. The United States District Court for the Eastern District of New York, Seybert, J., granted the motion to dismiss in part and denied it in part and granted the motion to amend the complaint in part.

The court noted that the action was initially filed on 17 March 2014 and that the last breach occurred on 22 November 2008. Because the statute of limitations was four years, the complaint was filed too late unless the motion to amend could be granted. However, "To determine whether an amended claim is futile, courts analyze whether the proposed pleading would withstand a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6)."

The court then granted the motion to amend on the equitable estoppel and the fraud allegations. The court found that the email chain and the assurances that no suit need be filed made equitable estoppel appropriate in this case. Because Buyer stated in the email that balances were owed and payment would be forthcoming, those statements served as acknowledgement in 2010 that a breach occurred. The acknowledgement tolled the statute of limitations until that time, so the complaint had been filed on time. Also, because Buyer's assurances that Seller did not need to file suit induced Seller to rely on Buyer's statements, equitable estoppel applied to prevent Buyer from pleading the statute of limitations.

On the fraud allegations, the court ruled that misrepresentations made by applicants to issuing banks regarding transactions under letters of credit could be a basis for fraud by third parties. While suits for fraud for matters outside the contract are normally barred, the court ruled that third party fraud suits could be litigated if the fraud was based on duties collateral or extraneous to the contract. The court also ruled that an applicant has a duty to a beneficiary to be honest about the transactions to issuing banks. Because this duty is collateral or extraneous to the contract, then if it is breached, an action for fraud could lie. The Judge noted, "A misrepresentation of present fact, which is collateral or extraneous to the terms of the parties' original agreement . . . can be the basis for a fraudulent inducement claim." "[Buyer]'s relationship with the [Issuers], therefore, plausibly presents a separate legal duty from its obligations to perform under the contract."

[JAH]

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This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.