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Note: Lexon Insurance Company (Surety) posted eight bonds valued USD 11,163,300 to secure the lease obligations of Linder Oil Company (Lessee) owed to the United States Department of the Interior (Lessor). To secure indemnity claims, Lessee/Applicant obtained two standby letters of credit issued by First NBC Bank (Issuer) in favor of Surety/Beneficiary.

Subsequently, Issuer faced insolvency and entered a Consent Order with the Federal Deposit Insurance Company (FDIC) under the FDIC’s corporate capacity. During that period, the letters of credit automatically renewed despite the Consent Order stipulating a cessation of “lending to borrows”, according to Surety’s complaint. When the state of Louisiana closed Issuer and appointed FDIC (Receiver) as receiver, Receiver repudiated the LCs. Surety/Beneficiary then presented drafts demanding payment to which Receiver did not respond. Surety/Beneficiary also “filed proofs of claim with [Receiver]” regarding the repudiated LCs, which Receiver disallowed. Accordingly, Surety/Beneficiary sued Receiver for wrongful dishonor and “improper repudiation” seeking USD 9,985,500 in damages. Receiver moved to dismiss the complaint under Fed. R. Civ. Pro. 12(b)(6). The United States District Court for the Eastern District of Louisiana, Lemelle, J., granted Receiver’s motion and dismissed the complaint without prejudice.

The Judge noted that U.S. law provided Receiver with the power to repudiate contracts of insolvent banks “within a reasonable period of time considering surrounding facts and circumstances, including prejudice to the parties.” Surety/Beneficiary’s complaint, however, “relie[d] primarily on actions taken by [Receiver] prior to its appointment as receiver” and instead in its corporate capacity whose “roles, obligation, and liabilities...are distinct.” As a result, the issue was “not a situation where [Receiver] has before it either a provable claim or an unprovable claim that would prevent it by limited authority to repudiate a letter of credit under which the claim or attempted draw was trying to be made and was rejected.” Thus, the repudiation was “reasonably carried out” and “damages were fixed at the time of the declaration of insolvency.” Because Surety/Beneficiary failed to state a claim against Receiver, the Judge dismissed the complaint and granted Surety/Beneficiary forty days of discovery to “make the record complete.”

[MJK]

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