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Note: To ensure that it paid dealerships and repair centers for work performed on tires protected under consumer protection plans, Millennium Protection Group, Inc. (Applicant/Protection Company) obtained bonds from Lexon Insurance Co., Bond Safeguard Insurance Co., and Acstar Insurance Co. (Bonding Companies/Beneficiaries). The bonds were in turn collateralized by ten standby letters of credit issued by Wachovia Bank, succeeded in interest by Wells Fargo Bank, N.A. (Issuer), in favor of Bonding Companies/Beneficiaries. Applicant/Protection Company’s certificates of deposit (CD) secured the LCs.

In addition, Harrison (President of Protection Company), in his capacity as president of Applicant/Protection Company, executed a Continuing Letter of Credit Agreement for each LC that authorized Issuer to “honor any presentation or drawing under the [letters of credit] that appears on its face substantially to comply with the terms and conditions of the [letters of credit].” A security agreement allowed Issuer to set off funds paid on the LCs against the CDs. The Security Agreement prohibited Applicant/Protection Company from assigning its rights and interests under the Security Agreement without Issuer’s written consent. The LCs required the Beneficiary to certify in writing that they were entitled to the amount drawn.

When Protection Company/Applicant filed for bankruptcy under U.S. Bankruptcy Code Chapter 7 (Liquidation), Beneficiaries formally requested payment under seven of the ten LCs. Because the requests complied with the terms of their respective LCs, Issuer honored them. Issuer then proceeded to liquidate Applicant/Protection Company’s certificates of deposit and its deposit account for a total of USD 190,261.22. President of Protection Company contended that Issuer held USD 342,577.06 of Applicant’s funds in certificates of deposit, and that the payout to Beneficiaries under the LCs was in the amount of USD 176,250, leaving an unaccounted remaining balance of USD 166,327.06.

Applicant’s bankruptcy was closed after its Chapter 7 Trustee abandoned all of the estate claims. President of Protection Company, in his capacity as president of Applicant/Protection Company, moved to reopen the bankruptcy proceeding to recover USD 176,250 distributed by Issuer to Beneficiaries under the seven LCs. The Bankruptcy Court, however, denied President of Protection Company’s motion, concluding that the claims belonged to Applicant/Protection Company and not to President of Protection Company.

President of Protection Company also sued Issuer in state court for breach of contract, fraud by omission, and conversion. Issuer removed the action to federal district court and the parties filed a series of motions. Issuer moved to dismiss President of Protection Company for lack of standing. The U.S. District Court for the Northern District of Texas, Fitzwater, J., denied the motion.

Statute of Limitations: UCC § 5-111(b): Issuer argued that summary judgment was appropriate because the claims were outside the statute of limitations of US UCC § 5.111(b) (Remedies) which provides that an action arising under UCC Article 5 (Letters of Credit) must commence within one year after either the relevant letter of credit’s expiration date or the accrual of the cause of action, whichever occurs later. Explaining that President of Protection Company’s claim asserts that Issuer “wrongfully releas[ed] [Applicant/Protection Company’s] funds to [Beneficiary] in violation of … the Parties’ contracts”, the Judge denied the motion on the grounds that § 5.111(b) relates to Issuer’s breach deriving from “honor[ing] a draft or demand in breach of its obligation to the [President of Protection Company].” Because President of Protection Company did not make a claim under the UCC Article 5 within the time permitted, the Judge ruled that Issuer had failed to establish its defense as a matter of law.

Breach of Contract: President of Protection Company moved for summary judgment on its breach of contract claim, arguing that Issuer violated the terms of the automatic stay in Applicant’s bankruptcy by making payment and also breached the Letter of Credit Agreement by making payment after the LCs were cancelled and by paying twice under one of the LCs. The Judge ruled that President of Protection Company had failed to state the elements for a breach of contract in his claim. President of Protection Company’s only support for his claim that Issuer made payments on cancelled LCs was from an unidentified document listing four LC numbers deemed cancelled. However, Issuer presented evidence showing that the three LCs in question were not cancelled, which established a genuine issue of material fact.

The Judge also ruled that President of Protection Company’s motion for summary judgment for breach of contract also failed because President of Protection Company did not adequately show that Issuer made double payment under one LC. President of Protection Company stated that the Letter of Credit Agreement or Security Agreement required Applicant/Protection Company to obtain an LC for 25% of the value of a bond for USD 250,000. President of Protection Company claimed that Issuer paid an additional USD 37,500 on the USD 62,500 LC (the LC valued at 25% of the bond at issue). The Judged explained that this claim failed because President of Protection Company did not demonstrate to the Judge that Applicant was required by either the Letter of Credit Agreement or Security Agreement to obtain an LC in the amount of USD 62,500 for the bond.

Fraud: President of Protection Company argued that Issuer committed fraud when it moved to lift the automatic stay in Applicant/Protection Company’s bankruptcy in order to reimburse itself for two LC payments. President of Protection Company stated that at the time of this filing, Issuer had already received payment from more than two LCs. President of Protection Company further argued that Issuer failed to disclose that it “convert[ed] [Applicant/Protection Company’s] funds (wrongfully) following its payments to [Beneficiaries].” The Judge denied this motion for summary judgment, explaining that President of Protection Company failed to present any evidence that President of Protection Company or Applicant relied on these alleged nondisclosures or that either suffered injury based on this reliance.

Conversion: The Judge denied President of Protection Company’s motion for summary judgment for conversion. President of Protection Company argued the LCs had been cancelled and thus, when Issuer made payment under the LCs and then reimbursed itself using the collateral bonds the Issuer was in violation of the bankruptcy stay and in violation of the LC agreement. President of Protection Company also argued that Issuer made two payments under the same LC for an amount that exceeded the LC value. The Judge explained that President of Protection Company failed to establish beyond peradventure that Issuer had converted Applicant/Protection Company’s funds by making payment on LCs that were already cancelled and by making payment on one LC twice. President of Protection Company also failed to demonstrate that Issuer converted the balance of USD 166,327.06. President of Protection Company’s claim failed to meet the summary judgment standard because Issuer introduced evidence that directly countered the basis of President of Protection Company’s claim.

[SRJ]

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