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Note: In 1999, International Cards Co. Ltd. (Applicant) contracted with MasterCard International Inc. (Beneficiary) to become a “member” of Beneficiary’s credit card network requiring Applicant to forward payments to merchants in Jordan and Palestine for acquired transactions on behalf of Beneficiary. Subsequently, Applicant obtained a USD 2,780,000 letter of credit to assure its performance in favor of Beneficiary. Following continuous and unresolved complaints from local merchants regarding untimely payments between 2010 and 2013, Beneficiary made a full demand on the LC, claiming that the proceeds were “due and payable” to Beneficiary or its merchants, which was honored. The next day, Beneficiary terminated Applicant’s membership citing breach of the underlying agreement.

Applicant sued Beneficiary alleging breach of contract, breach of the implied covenant of good faith and fair dealing and “conversion of the [USD]2.78 million collateral letter of credit.” Beneficiary counterclaimed for breach of contract. Prior to trial, the court granted Beneficiary’s motion for summary judgment regarding breach of the implied covenant of good faith and fair dealing, but denied the motion as to breach of contract and conversion. The jury returned a verdict in favor of Applicant on its conversion claim, awarding Applicant USD 2,780,000. The jury also found for Beneficiary on its breach of contract claim but awarded no damages. Beneficiary moved for judgment as a matter of law (JMOL) regarding the conversion verdict, which the trial court denied. Applicant appealed the trial court’s partial denial of summary judgment and Beneficiary cross-appealed its denied request for JMOL. The United States Court of Appeals for the Second Circuit, Cabranes, Parker and Matsumoto, JJ., affirmed.

Applicant argued that the trial court erred in its denial of summary judgment regarding breach of contract and breach of the implied covenant of good faith on the basis that the agreement between Applicant and Beneficiary stated an “exclusive list” of grounds for terminating membership. The appellate court disagreed, however, noting that the agreement allocated “explicit reservation of termination authority” with Beneficiary. Moreover, because Beneficiary was authorized by the contract to terminate Applicant’s membership and Applicant “alleged no separate injury” resulting from the breach of the implied covenant of good faith, denial of summary judgment was appropriate. In affirming the trial court’s denial of Beneficiary’s motion for JMOL, the appellate court noted the “ample evidence” available to the jury to support the claim, primarily because Beneficiary had claimed that the LC proceeds were “due and payable” despite at trial “admitt[ing] that it knew of no such accounts when it made this certification.”

Comment: It is unclear to what law the LC was subject, but one presumes Applicant could have pursued Beneficiary under UCC 5-110 (Warranties). Indeed, how could a claim for conversion could be stated as the funds paid under the LC were those of the Issuer and not Applicant?

[MJK]

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