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Note: Forge Group Power Pty. Ltd (Lessee/Beneficiary) leased a power station in Australia that included four GE turbines from a company related to Power Rental Asset Co Two, LLC (Lessor/Applicant). After Lessee/Beneficiary entered bankruptcy proceedings in Australia, a dispute arose between the parties over who had a “superior right” to the turbines. An “Interim Arrangement Deed” was drawn up by the parties in which they agreed to allow Lessor/Applicant to re-lease the property to a third party in exchange for a USD 44 Million “letter of credit” (LC) which was opened in favor of Lessee/Beneficiary by Bank of America (Issuer) in California.

The Deed stated:

“[Lessee/Beneficiary] may make demand under the Bond and is entitled to receive . . . the proceeds of the Bond if. . .

  1. a finding or determination is made in the Australian Proceeding to the substantive effect that any of [Lessee/Beneficiary] or the Receivers have a superior right or title to, or interest in, the Turbines than that (if any) of [Lessor/Applicant];
  2. any period within which any party to the Australian Proceeding may appeal from a final or summary judgement or order in the Australian Proceeding to the effect referred to in [section (A)] has expired without any party having initiated any such appeal in that period; and
  3. [Lessee/Beneficiary] has provided to the [Lessor/Applicant] five Business Days’ notice in writing of its intention to make demand under the Bond.”

In the Australian Bankruptcy Proceedings, the Supreme Court of New South Wales determined that Lessee/Beneficiary had a superior interest in the turbines. Lessor/Applicant appealed to the Supreme Court of South Wales, which affirmed the trial court’s decision. Lessor/Applicant then appealed to the High Court of Australia, which declined to hear the appeal on the merits.

When Lessee/Beneficiary informed Lessor/Applicant that it would draw on the LC, Lessor/Applicant sued Lessee/Beneficiary in California state court. The case was removed to the U.S. federal courts, where the United States District Court for the Northern District of California, Seeborg, J., denied the application for an injunction.

Lessor/Applicant claimed that a natural reading of subsection (B) of the deed suggests that if any appeal was filed in the Australian Proceeding, Lessee/Beneficiary would be unable to draw on the standby. The Judge rejected this argument, observing that the balance of equities did not tip in favor of Lessor/Applicant and that there was no evidence of the likelihood of success on the merits.

The Judge noted Lessor/Applicant’s argument that a literal reading of Clause B of the Deed would prevent a drawing, but stated that it “may be correct that a literal, hyper-technical, reading of the language of condition (B) suggests that the mere fact a timely appeal is ever filed precludes satisfaction of the condition.”Instead, the Judge accepted Lessee/Beneficiary’s argument that “Australian law, like the law here, does not permit such a reading, given the resulting absurdity. Were [Lessor/Applicant] allowed to foreclose recovery permanently under the letter of credit merely by filing an appeal, the very posting of the letter of credit would be rendered meaningless.”

The “Interim Arrangement Deed” entitled the bank undertaking a “bond.” The opinion substitutes “letter of credit,” which is proper under U.S. law. U.S. Section 5-102 (a) (10) “letter of credit” defines a letter of credit, and the “bond” falls within this definition. Because the undertaking operates to assure payment of an obligation and not a contemporaneous sale of goods, this summary defines it as a standby letter of credit, although there is no legal difference between a standby or commercial letter of credit, or an independent guarantee/ “bond” for that matter.

[ARB/VLG]

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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.