Legal Case Summaries

Article

Note: As part of eleven sale-leaseback transactions regarding power plant units located in Maryland, several entities (collectively, Owner Lessors)¹ acquired undivided interests in the Morgantown and Dickerson power facilities and leased those interests to GenOn Mid-Atlantic, LLC (Lessee), a wholesale power company. Under each leaseback agreement, Lessee and Owner Lessors executed separate Lease and Participation Agreements requiring Lessee to ensure its performance by providing “qualified”² security in favor of Owner Lessors. As qualified security, Lessee provided eleven letters of credit issued by JPMorgan Chase Bank, N.A. (JPMorgan) in favor of Owner Lessors. Those letters of credit were subsequently “replaced” with LCs issued by Natixis, New York Branch (Issuer), pursuant to a Payment Agreement between Lessee and Natixis Funding Corp. (Issuer Affiliate/Applicant). Under the Payment Agreement, Lessee paid Issuer Affiliate/Applicant USD 131,466,787.56 while Issuer Affiliate/Applicant applied for and promised to reimburse Issuer for any amounts drawn by Owner Lessors under the Natixis LCs. The LC terms provided that Owner Lessors could demand payment in the event that Lessee either defaulted, failed to timely pay rent, or failed to provide within 30 days of expiration or termination, qualified replacement security.

As one of the Owner Lessors, Dickerson OL2 LLC (Beneficiary) received from Issuer a Notice of Termination regarding its LC effective in 60 days. Before the LC expired, and citing Lessee’s failure to timely provide qualified replacement security, Beneficiary fully drew on the LC for USD 821,466.77. Issuer dishonored. Subsequently, Beneficiary sued Issuer citing New York’s UCC Article 5 (Letters of Credit) sections 5-108 and 5-111(a), seeking summary judgment in lieu of complaint alleging that its demand complied with the LC terms and that its request for judgment was properly made under New York law regarding an instrument for the payment of money only. Issuer moved to dismiss the action arguing that the same issues were being litigated in Natixis Funding Corp. v. GenOn Mid-Atlantic, LLC (the Natixis Action).³ The Supreme Court of New York, Masley, J., granted judgment in favor of Beneficiary.

Although the instant action and Natixis Action were substantially related, the Judge refused to dismiss the case noting that “this court resolved all of the New York Uniform Commercial Code (UCC) and fraud issues raised in the action at bar relating to the [Issuer] letter of credit” and “incorporated” that order in the instant opinion. Turning to the merits of Beneficiary’s motion, the Judge rejected Issuer’s argument that the case was inappropriate for accelerated treatment because Issuer “failed to raise any…triable issues” regarding the documentary evidence offered by Beneficiary sufficient to undermine granting judgment as a matter of law. Looking both to the LC text and the demand made by Beneficiary, the Judge noted that the demand “strictly complie[d] with the terms and conditions” of the LC and did not exceed the amount available thereunder. Issuer had dishonored with a refusal stating “sufficient funds are not available for drawing under the Letter of Credit to satisfy the Drawing Request at this time”. As in the Natixis Action, the Judge cited New York’s UCC Article 5 sections 5-103 and 5-109, which state the independence principle and fraud exception, respectively. The Judge noted that “no ground exists that would permit [Issuer] to dishonor a facially compliant draw request” and granted judgment in favor of Beneficiary plus interest and costs.

[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.