Article

Factual Summary: To support its obligations for the supply and installation of a flare system in India, Applicant/Seller applied to Issuer for issuance of several counter standby letters of credit from its Chicago branch to its branch in Mumbai, which then issued its bank guarantees (treated by the parties and the court as letters of credit) in favor of Beneficiary/Buyer.

Applicant/Seller alleged it performed under the supply contract and that Beneficiary/Buyer fraudulently drew on Issuer’s bank guarantees. An Oklahoma state court (Tulsa County District Court) granted Applicant/Seller an ex parte injunction against Issuer, prohibiting it from “transferring or paying [Beneficiary/Buyer]”. Applicant/Seller also filed for an injunction in the Mumbai court. Shortly before the hearing in Mumbai, Issuer's Mumbai branch honored Beneficiary/Buyer’s demands under its bank guarantees. Applicant/Seller sued Issuer for (1) wrongful honor and breach of Loan Agreement, (2) misappropriation of funds based on (involuntary) reimbursement; and (3) indirect contempt of court (which was remanded to the state court that had issued the restraining order).

Legal Analysis:

Legal Analysis:

Wrongful Honor and Breach of Credit Agreement:

The first claim alleged wrongful honor and breach of the parties’ agreements for lending as well as LC issuance. Issuer moved for dismissal, arguing that Indian law governed the bank guarantees and that Applicant/Seller had failed to allege a violation of Indian law. The Judge noted that the parties’ Credit Agreement provided that Oklahoma law governed and that it set out the terms and conditions purportedly applicable to any letters of credit issued by Issuer on Applicant/Seller’s behalf, including the following:

“In the event of any inconsistency between the terms and conditions of this Agreement and the terms and conditions of any form of letter of credit application or other agreement submitted by Borrowers to, or entered into by Borrowers with, the Issuing Bank relating to any Letter of Credit, the terms of this Agreement shall control.”

The opinion states: “Although the Bank Guarantees are significant to the case, the Court finds that Zeeco’s cause of action ultimately rests upon the Credit Agreement. […] Accordingly, the Court finds that Oklahoma law applies to this claim.”

Issuer then argued that even if Oklahoma law governed, Applicant/Seller failed to allege Issuer’s lack of good faith when honoring the bank guarantees and withdrawing funds from Applicant/Seller’s account as reimbursement. The Judge disagreed and found that Applicant/Seller had in fact alleged lack of good faith, including “JPMorgan’s knowledge that Fernas’s draw was without basis and would facilitate a material fraud on Zeeco, coupled with JPMorgan’s knowledge of [the U.S. and Indian court proceedings]”.

Issuer also argued that the claim should be dismissed because Issuer’s Mumbai branch “should be treated as a ‘separate juridical entity’ and Zeeco did not include the Mumbai Branch in this suit.” The Judge disagreed: “It is clear from the plain language of the Bank Guarantees that JPMorgan Chase Bank, N.A., is the relevant entity that undertook to pay Fernas. Half of the Bank Guarantees specifically state, ‘We, JPMorgan Chase Bank, N.A., … issuing this Guarantee through its branch at Mumbai …’.”

The Judge concluded: “If JPMorgan Chase Bank, N.A., is the entity that undertook to pay Fernas under these Bank Guarantees, then the payment to Fernas would amount to JPMorgan Chase Bank, N.A., honoring the Bank Guarantees. Zeeco’s wrongful honor claim would then be properly brought against JPMorgan Chase Bank, N.A. This inquiry strikes the Court as overly fact-dependent for a dismissal motion.”

The opinion includes an interpretation of the “separate juridical entity” provision in UCC Article 5. The fourth sentence in UCC 5-116(b) is consistent with UCP500 (and UCP600, ISP98, and URDG 758) in providing for the treatment of bank branches as separate banks. The opinion states that this UCC provision “only applies if the affected parties have not agreed upon a choice of law.” This interpretation is unfortunate and unnecessary given the interpretation of the Credit Agreement as making UCC 5-109(b) applicable to any claim of wrongful honor of any letter of credit issued from any of the Issuer’s branches. In any event, this interpretation has attracted resistance. See DCW June 2018, pages 8-9, reprint of the May 18, 2018 email to the American Bar Association’s UCC Letter of Credit subcommittee from James G. Barnes criticizing this interpretation in the Zeeco opinion of the “separate juridical entity” provision of UCC 5-116.

Misappropriation of Funds:

Regarding the second claim, Applicant/Seller argued that Issuer had misappropriated funds by having reimbursed itself from Applicant/Seller’s account. Issuer argued that it did not misappropriate funds because Applicant/Seller had agreed to reimbursement for any payment made on its Counter Standbys “regardless of whether the draw was fraudulent”. The Court pointed out that because Oklahoma law (UCC 5-109(a)(2)) “requires that honor of a letter of credit after notification of fraud be conducted in good faith, if at all, it follows that reimbursement from an applicant’s account following the wrongful honor of a letter of credit would support a conversion-like claim under Oklahoma law.” Accordingly, the Court denied Issuer’s motion to dismiss this second claim by Applicant/Seller in support of its complaint seeking restitution from Issuer.

Subsequent History

On 8 February 2019, counsel for Zeeco, Inc. filed a “Joint Stipulation of Dismissal with Prejudice” with the United States District Court for the Northern District of Oklahoma signed by counsel for Zeeco, Inc. and JPMorgan Chase, N.A. The stipulation cited U.S. Fed. R. Civ. Pro. 41(a)(1)(A)(ii), which provides that a plaintiff may “dismiss an action without a court order by filing…(ii) a stipulation of dismissal signed by all parties who have appeared.” On the same day, the District Court, Dowdell, J., issued an order granting an unopposed motion filed by JPMorgan Chase, N.A., which requested to “vacate the Opinion and Order dated March 20, 2018…and the Amended Opinion and Order dated March 21, 2018.”

[WMIV/KM/JGB]

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

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.