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Note: To assure payment of claims and premiums under a worker’s compensation insurance policy, Sommet Group, LLC (Insured/Applicant) caused Avenue Bank (Issuer) to issue a standby letter of credit in the amount of USD 250,000 in favor of Guarantee Insurance Company (Insurer/Beneficiary).

When Insured defaulted on its obligations, Insurer/Beneficiary drew on the standby in the full amount. Before honoring, Issuer entered into a “Funds Held Agreement” with Insurer/Beneficiary, by which Insurer/Beneficiary would return any balance of the standby proceeds unused after a deadline to issuer. The agreement provided that Insurer/Beneficiary “would ‘cause any funds remaining in the Funds Held Account to [be] disbursed to the bank.’” When the deadline passed, Issuer demanded repayment of the unused proceeds in the amount of USD 137,982.52 but Insurer/Beneficiary refused, claiming that the proceeds were encumbered due to a Delaware court order in which an action between a third party insurer Insured/Applicant.

Issuer then sued Insurer/Beneficiary for breach of the agreement regarding the proceeds. The trial court granted judgment on the pleadings in favor of Issuer. On appeal, affirmed.

Insurer/Beneficiary argued that it never agreed to disburse the funds, relying on a distinction between causing the funds to be disbursed and disbursing them. The appellate court rejected this argument; notifying that there is no fundamental difference.

Implied Insurer/Beneficiary also argued that Issuer knew that a third party had an interest in the proceeds, entitling the third party insurer to claim against the proceed as well as the named beneficiary. Noting that the named beneficiary of the standby was only Insured/Beneficiary and not the third party and that this obligation was refutable in the agreement, the appellate court stated that “we fail to see how [third party] is in any way connected to the contractual obligations existing between [Issuer] and [Insurer/Beneficiary].”

[SJD]

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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.