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Note: Crittenden Hospital Association (Applicant) requested First Community Bank of Eastern Arkansas (Issuer) to issue a USD 300,000 standby letter of credit in favor of Arch Specialty Insurance Co. (Beneficiary). Due to what the opinion said “looks like an administrative slip-up,” Issuer issued two standbys, which “differ[ed] slightly.” One was issued in the form provided by Beneficiary, and the other on Issuer’s own form. Beneficiary’s Form LC reflected “the Bank’s promise to honor [Beneficiary’s USD 300,000] sight draft drawn on the Bank … [and] [i]t require[d] ‘[t]he original of this Letter of Credit, and all amendments, if any, [to] accompany all drawings ... hereunder.’”

After Applicant filed for bankruptcy protection, Beneficiary drew on the Beneficiary’s Form LC by presenting a sight draft and a copy of the standby LC, and indicated that it would submit the original standby LC if Issuer promised to honor. Fifteen business days after the first presentation, Issuer sent a letter to Beneficiary dishonoring the presentation for three reasons, including failure to present the required original standby LC. Three and a half months later, Beneficiary’s agent presented the original standby, but failed to present a draft or any other document.

Beneficiary sued Issuer for wrongful dishonor. Both parties moved for summary judgment. The U.S. District Court for the Eastern District of Arkansas, Jonesborough Division, Marshall, J., granted Beneficiary’s motion and denied Issuer’s. The Judge awarded Beneficiary USD 300,000.00 in principal, USD 44,457.53 in prejudgment interest, court costs, and post-judgment interest.

The opinion addressed four issues: 1) whether both LCs were valid, 2) whether the subsequent presentation of the original LC cured the first discrepant presentation; 3) whether presentation of a copy of the LC strictly complies with the terms and conditions of the LC; and 4) whether Issuer was precluded from asserting the discrepancies.

The Judge rejected Issuer’s argument that Beneficiary’s drawings violated the automatic stay imposed when Applicant filed for bankruptcy protection, and noted that the proceeds of LC were Beneficiary’s “assets.” The Judge further noted that there was no inconsistency between draws on the LC and not filing a claim as a creditor in the bankruptcy. Indeed, the Judge stated that Beneficiary could pursue its claims against Issuer, even when it was estopped from asserting a claim against Applicant.

As to the validity of the LCs, the Judge concluded that “[i]t makes no material difference that [Issuer] issued a letter of credit on its own form before issuing one on [Beneficiary’s] form.” The Judge characterized the two LCs as “two different contracts; and nothing in the record suggests that the [Beneficiary’s] form—executed by the [Issuer] and containing all material terms—fails as a contract. To have two partially overlapping letters of credit is perhaps unusual… but it doesn't make the [Beneficiary's] form void.”

Issuer argued that neither presentation complied because “the 2014 attempt lacked the original letter; the 2015 attempt lacked a sight draft.” Beneficiary responded by asserting that “even if each attempt failed alone, they succeeded together.” Applying New York law, the Judge did not accept Beneficiary’s argument, and noted that it cited “no authority for a three-and-a-half-month-long presentment. And its January 2015 letters to the [Issuer] threatened legal action for improper dishonor, belying the new long-presentment argument.”

Citing Ladenburg Thalmann & Co. Inc. v. Signature Bank, 2015 N.Y. Slip Op. 02224 (N.Y. App. Div. March 19, 2015) noted in 2016 Annual Review of International Banking Law & Practice at 407, Beneficiary argued that “strict compliance doesn’t mean slavish compliance.” The Judge distinguished Ladenburg Thalmann from the facts of the instant case, and noted that the Ladenburg Thalmann case involved “a presentment that included a copy—rather than an original—of an amendment to a letter of credit.” The Judge rejected the characterization of the Ladenburg Thalmann decision as “a movement away from strict compliance.” The Judge instead described it as “a court feeling out the doctrine’s edges.” Unlike in Ladenburg Thalmann, the Judge noted that Beneficiary “omitted not a superseded amendment, but the original letter itself. In its place [Beneficiary] offered not a Bank-verified copy, but one—as far as the [Issuer] knew—of unknown provenance,” and observed “[t]hat the [Issuer] could see the original letter after committing to honor the sight draft isn't enough.”

Beneficiary also contended that Issuer was precluded from dishonoring the presentation because of its delay in giving notice of dishonor. The Judge agreed, citing New York UCC Section 5-108 (b), finding that the Issuer must “do one of three things within seven business days of receiving a presentment: honor it; accept a draft (if the letter provided for delayed honor); or ‘give notice ... of discrepancies in the presentation.’” Issuer argued that there were no discrepancies to revise “‘because no draw was actually made pursuant to the plain terms’ of the letter.” The Judge rejected this argument, and noted that “it’s beyond dispute that [Beneficiary] tried to present the letter of credit; the differences between [Beneficiary]’s attempt and the letter’s terms—such as the missing original in December 2014 and the missing sight draft in April 2015—were discrepancies.”

Comment: This decision illustrates the problems that arise by requiring presentation of the original operative LC and the silliness of a court giving effect to that requirement when the bank is aware of the LC number and there is no nominated bank.

It also raises an interesting series of questions about the nature of the documents and the ability of a beneficiary to cure a discrepant presentation.

[GAC]

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