Article

Factual Summary: Buyer and its principals agreed with Seller to purchase automobile manufacturing plant located in Guacara, Carabubo State, Venezuela and its equipment. Buyer would receive 100% of the Seller’s stock and the equipment and machinery for USD 16,000,000 and Seller represented that there was no government expropriation order for the plant or equipment. Of this amount, USD 5,000,000 was paid at the time of sale, a standby LC for USD 11,315,000 was issued by Issuer at the request of Buyer in favor of Seller. The LC provided that it was payable in three installments on presentation of Seller certifying that the installment was due in accordance with the contract, its place of issuance was New York, and it was subject to UCP600.

Several weeks after issuance of the LC, the Venezuelan government issued a decree expropriating the plant and its equipment. Whether the decree was effective immediately or in the future was disputed and party provided translations had large discrepancies.

A week after issuance of the decree, Seller asked Issuer’s Miami, Florida branch if it would make one payment, instead of three, for a discount of 3% of its face value. It was disputed whether the discount agreement was finalized, but USD 11,007,158.34 was deposited into Seller’s account at Issuer. Subsequently, Buyer informed Issuer of the decree, asserting that any statement that the LC proceeds were due would violate the contract and should be refused. Issuer then removed the funds from Seller’s account and so informed Seller, stating that the decree provided that Seller was the owner of the plant, that Seller’s assets had been expropriated, and that Seller knew these facts when it approached Issuer. Issuer also stated, however, that “[w]e would also like to inform you that our Letter of Credit . . . of which you are the beneficiary is still valid until December 2014 and will be honored upon proper presentation.”

Subsequently, Seller demanded payment which was refused on “technical grounds” and that the demand “[was] not in conformity with reality facts [sic] per [the Decree].” A re-presentation was also refused on both unstated technical grounds and because the demand did not conform to the facts.

Seller sued Issuer for “breach of the letter of credit”, conversion, civil theft, unjust enrichment, and “money had and received”. Issuer filed an interpleader counterclaim against Seller and brought Buyer in as a third party. Issuer moved for summary judgment on its claim for interpleader and Seller sought to have it dismissed. The Judge denied Issuer’s motion and granted Seller’s as Issuer did not demonstrate that it would be open to multiple contending liabilities.

Legal Analysis:

  1. Independence Principle

The Judge stated that an issuer may not refuse to honor a complying presentation on the basis of its reimbursement agreement with the applicant or the underlying contract between the beneficiary and the applicant.

  1. LC Fraud

The Judge observed that the fraud exception based on fraud in the underlying transaction or the fraudulent character of a document is “limited” and only available where the fraud is “material”, that is, “material fraud “occurs only when the beneficiary has no colorable right to expect to honor and where there is no basis in fact to support such a right to honor”, quoting from Official Comment 1 to UCC § 5-109.

  1. Interpleader

The Judge ruled that interpleader is inappropriate since the liability of the issuer to Buyer differs from the obligation to Seller, causing the claims to be related to different funds. Alternatively, the Judge ruled that Issuer had not established a basis for its liability to Buyer. The Judge noted that Issuer argued that it faced a potential claim for wrongful honor if it paid Seller because Buyer had warned it of fraud in the underlying transaction. The Judge observed that Issuer misunderstood the import of an action for wrongful honor under UCC § 5-111(b) (Remedies). “Wrongful honor occurs when an issuer honors a letter of credit where the demand does not comply with the terms specified by that letter, thereby breaching the issuer’s obligation to the applicant—obligations which include paying a demand only where that demand conforms to the requirements of the letter of credit . . . [n]othing in the [New York U.C.C.] suggests that wrongful honor includes the situation at issue here, where an issuer honors a letter of credit after being informed of fraud in the underlying transaction.” Indeed, the Judge noted that UCC § 5-109(a) permitted an issuer to pay even if it is notified of fraud. The Judge concluded “[w]ere an issuing bank permitted to interplead the applicant and the beneficiary of a letter of credit whenever a beneficiary complained of fraud in the underlying transaction, letters of credit would be deprived of ‘their chief virtue of predictable reliability as a payment mechanism’, quoting from Voest-Apline Int’l Corp., 707 F.2d at 682.” He also observed that use of interpleader with its relatively low standard would permit Buyer to “circumvent the high showing necessary to obtain a court injunction against payment on a letter of credit merely by notifying the issuer of fraud and encouraging it to seek interpleader.”

  1. Tort Claims:

Conversion, Civil Theft, Money Had and Received, and Unjust Enrichment.

Issuer argued that the tort claims should be dismissed because they are based on a breach of the discounting contract, violating the so-called “independent tort doctrine” which requires a tort claim to be based on something other than the contract. The Judge, however, noted that these claims assume performance of the discounting contract by issuer and denied its motion for judgment on the pleadings.

Issuer also argued that the action based on a private cause of action for a violation of criminal theft law. The Judge noted that an element of this action, felonious intent, was not supported by any facts but only bare unsupported allegations. Indeed, the Judge noted that allegations in the complaint setting forth the reasons given by issuer suggest that it acted in good faith, justifying dismissal.

Comments:

  1. “Purportedly Signed”. According to the opinion, the LC stated that it is available against the presentation of documents “purportedly signed by an officer of [Seller].” Such a phrase is unnecessary in an LC since it is independent and confuses everyone’s rights and obligations.

TEXT OF LC:

The opinion gives the terms of the LC as:

[A]vailable against presentation of [Seller’s] draft at 180 Days Date, drawn on Interaudi Bank, New York bearing the clause: Drawn under Documentary Letter of Credit No. IMP-009/13[“] [and] accompanied by the following document: [Seller’s] Written Statement purportedly signed by an officer of Great Wall de Venezuela C.A. stating “We hereby certify that Installment No. is due in accordance with the contract dated for the purpose of purchasing shares and assembly plant, Automoviles Great Wall in Venezuela.”

(Letter of Credit.) The Letter of Credit further states that its “Place of Issue” is New York, New York, and that “[e]xcept so far as otherwise expressly stated[,] this [Letter of Credit] is subject to the ’Uniform Customs and Practice for Documentary Credits’ (2007 Revision) fixed by the International Chamber of Commerce (Publication No. 600).”

[ZTS]

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of the ICC or Coastline Solutions.