Article

Factual Summary: Buyer/Applicant and Seller/Beneficiary entered into a contract for the purchase of 1,000,000 barrels of crude oil. Pursuant to the agreement, Buyer/Applicant was required to obtain a standby LC as security for seventy-percent of the oil purchased. Thirty-percent of the transaction was not secured. The application for the LC was submitted by Carlyle Global Marketing Strategies Commodities Funding 2014-1, Ltd. (Third Party Purchaser) on behalf of Buyer/Applicant. The LC was issued in Scranton, Pennsylvania for USD 45,000,000. Payment on the LC required presentation of (1) an unpaid invoice on the secured quantity of oil, (2) a signed statement by a representative of Seller/Beneficiary, and (3) a letter of indemnity. The text of the LC provided that “any payment” made would reduce the LC’s value.

Upon delivery of the oil to Buyer/Applicant, Seller/Beneficiary issued two invoices, one covering thirty-percent of the oil for an amount of USD 16,144,372.16, and another covering seventy-percent of the oil for USD 37,670,201.78. Following Buyer/Applicant’s failure to make payment on the secured, seventy-percent invoice, Third Party Purchaser wired USD 37,670,201.78 directly to Seller/Beneficiary’s account in Austria as payment of the invoice for that amount.

Contending that the Third Party Purchaser’s transfer of funds did not reduce the obligation on the standby LC because it did not explicitly reference the LC, Seller/Beneficiary presented Issuer with a newly drafted invoice demanding payment of USD 44,978,417.50. Issuer, noting “discrepancies in the letter of indemnity” and omission of a unit price on the new invoice, rejected Seller/Beneficiary’s demand. Using an amended letter of indemnity, Seller/Beneficiary made a second presentation, which was also rejected by Issuer. After the second presentation, Issuer informed Seller/Beneficiary that Seller/Beneficiary had been paid for the seventy-percent quantity of oil with Third Party Purchaser’s funds, reducing its obligation accordingly.

Seller/Beneficiary then made a third presentation to Issuer seeking payment of USD 16,144,372.19, offering an invoice referencing the seventy-percent quantity of oil and original due date. Issuer again rejected Seller/Beneficiary’s request because “the [LC] only secured payment for 70% of the oil delivery…the third presentation resulted in an attempt to overdraw on the [LC]” as its value had been reduced by payment with Third Party Purchaser’s funds.

Buyer/Applicant sued Issuer to enjoin any further demands on the LC. Seller/Beneficiary intervened, cross complaining against Issuer for wrongful dishonor seeking USD 16,144,372.19 plus interest and moving for summary judgment. Issuer moved to dismiss Seller/Beneficiary’s cross action. The Supreme Court of New York, New York County, Ramos, J., granted Issuer’s cross-motion to dismiss.

Legal Analysis:

  1. Fraud, UCC § 5-109(a): Seller/Beneficiary argued that the payment by Third Party Purchaser was not specific to the invoice in that amount but could be applied to any portion of the purchase price and did not reduce the amount, due under the standby because the wire did not expressly state that the funds were related to the standby obligation. Issuer responded that honoring the third presentation would constitute a facilitation of fraud against Buyer/Applicant by over-drawing on the LC, as the Third Party Purchaser’s payment had extinguished the amount due on the seventy percent invoice. The Judge concluded that the standby LC was security for the seventy-percent quantity of oil. Because Seller/Beneficiary’s third presentation constituted an attempt to draw on the LC using a paid invoice, the Judge stated that “[Seller/Beneficiary’s] conduct raise[d] a serious showing of fraud” and concluded that Issuer was not liable for wrongful dishonor.
  2. Independence; Choice of Law, UCC § 5-116(b): Seller/Beneficiary argued its third presentation was an appropriate method under English law to allocate payment on the oil. Buyer/Applicant joined Issuer arguing that the LC was not governed by English law and Seller/Beneficiary’s conduct constituted fraud under appropriate Pennsylvania Law. The Judge noted that, while the contract between Buyer/Applicant and Seller/Beneficiary was governed by English law, the location where the LC was issued dictated Issuer’s liability. Because the LC was issued in Pennsylvania, Issuer was subject to the “doctrine of the independence principle” whereby Issuer was required to honor only if Seller/Beneficiary’s presentation apparently complied with the LC’s terms.
  3. Prevailing Party’s Fees, UCC § 5-111(e): On denying Seller/Beneficiary’s motion for summary judgment and granting Issuer’s cross-motion for dismissal, the Judge referred to a Special Referee the issue of calculating reasonable attorneys’ fees and litigation expenses with an order “to hear and report with recommendations” the parties’ settlement, if any.

[MJK]

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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.