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Note: International Cards Co. Ltd. (Applicant) served as an intermediary “acquirer” in Jordan and Palestine for MasterCard International Inc. (Beneficiary), by which Applicant agreed to forward payments to merchants for acquired transactions on behalf of Beneficiary. As collateral, Applicant posted a standby letter of credit for USD 2,780,000 in favor of Beneficiary. The opinion does not state whether the standby was subject to any practice rules. After receiving continuing unresolved complaints from the merchants regarding untimely payments from 2010 to 2013, Beneficiary terminated Applicant’s membership in Beneficiary’s global electronic payment system. In connection with this termination, Beneficiary drew on the standby for USD 2,780,000 claiming “funds either (i) paid by [Beneficiary] to [Beneficiary’s] Merchants, or (ii) Due and payable to [Beneficiary’s] Merchants.” Issuer honored, and the proceeds were held by Beneficiary.

Applicant sued Beneficiary alleging breach of contract, breach of the implied covenant of good faith and fair dealing, and conversion by virtue of drawing on the standby. Beneficiary then counterclaimed for breach of contract and for a declaratory judgment that its drawdown of Applicant’s letter of credit was proper. The United States District Court for the Southern District of New York, Schofield, J., granted Beneficiary’s motion for summary judgment as to Applicant’s claim for breach of the implied covenant of good faith and fair dealing but denied Beneficiary’s motion as to all other claims.

The Judge concluded that there were outstanding issues of fact regarding the extent of payments due. As to Beneficiary’s claim that its drawdown from the standby was proper, the Judge noted that the claim was for conversion of the funds deposited with the Issuer. The Judge observed that this issue could not be resolved until it was determined whether and to what extent Applicant was behind in its payments to merchants.

Comment: One wonders why the Applicant sued for conversion instead of under UCC § 5-110 (Warranties) for breach of warranty. Indeed, one wonders how a claim for conversion could be stated since the funds paid under the standby were the funds of the Issuer and not the Applicant.

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