Legal Case Summaries

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Note: Lexon Insurance Company, Inc. (Surety) posted eight bonds for USD 11,163,300 in favor of the United States Department of the Interior (Lessor) to secure the offshore lease obligations of Linder Oil Company (Lessee). To assure repayment on any claims by Lessor, Lessee/Applicant obtained two UCP600 standby letters of credit cumulatively for USD 9,985,500 issued by First NBC Bank (Issuer) in favor of Surety/Beneficiary.

Subsequently, Issuer faced insolvency and was closed by the State of Louisiana. Issuer later entered into a Consent Order with the U.S. Federal Deposit Insurance Corporation (FDIC) under its corporate capacity. After the FDIC-R (Receiver) was appointed receiver over Issuer, Receiver purported to repudiate the standbys. Surety/Beneficiary then demanded payment on the standbys; before that time, however, Surety/Beneficiary had not made any demands and “no claims had been made on the bonds by” Lessor. Thereafter, Surety/Beneficiary sued Receiver for wrongful dishonor and “improper repudiation” of the standbys. Surety/Beneficiary’s first complaint was dismissed with leave to amend. Surety/Beneficiary filed an amended five-count complaint¹ seeking damages for (i) untimely repudiation of the standbys; (ii) breach of contract by Receiver “in approving the [standbys] in writing”; (iii) compensatory damages; and (iv) that Receiver lacked statutory authority to repudiate the standbys because they “are not considered contracts”. Receiver moved to dismiss the complaint for failure to state claims. The United States District Court for the Eastern District of Louisiana, Lemelle, J., dismissed the complaint.

The Judge construed Receiver’s motion to dismiss as a motion for summary judgment on all claims because Receiver included materials outside of the allegations set forth in the amended complaint. As to whether Receiver timely repudiated the standbys, the Judge noted that Congress authorized the FDIC to repudiate contracts (1) for which the institution in receivership is a party; (2) “that the receiver determines to be burdensome”; and (3) that in the receiver’s discretion, would “promote the orderly administration of the institution’s affairs.”² Repudiation must also be done “within a reasonable time following…appointment as receiver.” While an improper repudiation may allow a plaintiff to recover “all manner of contractual damages”, a plaintiff will be limited to “actual direct compensatory damages” for a properly repudiated contract. With respect to letters of credit, the Judge cited Credit Life Insurance Co. v. FDIC,³ for the proposition that no damages would be recoverable absent “the triggering event” occurring before the institution declared insolvency, i.e., that a demand for payment be “due and owing” at the time of insolvency. Moreover, the Judge noted that whether a repudiation occurs within a reasonable time following appointment is a “factual inquiry” turning on not just timing but “all surrounding circumstances”. After citing several cases where courts had decided that repudiations made after 100 or more days or were reasonable, the Judge noted that “[t]here is no genuine issue of material fact as to whether the FDIC repudiated the [standbys] in a timely fashion or whether [Surety/Beneficiary] suffered prejudice”. Although 153 days had lapsed between Receiver’s appointment and its repudiation of the standbys, the Judge noted that Receiver had “engaged in several settlement attempts with non-party [Lessee] and other acts short of repudiating” the standbys. Thus, on its first claim, Surety/Beneficiary failed to demonstrate any prejudice to itself from the alleged delay in repudiation and Surety/Beneficiary “suffered no actual damages regarding the [standbys] because no funds ha[d] been claimed by [Lessor]. The triggering event…never occurred and thus [Surety/Beneficiary] ha[d] suffered no actual direct compensatory damages” as required by statute.

The Judge then turned to the issue of whether Surety/Beneficiary could recover damages based on its claim of breach of contract. Despite stating its cause for breach based on Receiver “approving the [standbys] in writing”, Receiver defended on the basis that any “renewal” of the standbys was made, if at all, by the FDIC in its corporate capacity, which the Judge noted, is “distinct” from the FDIC as receiver. The evidence demonstrated that it was the FDIC in its corporate capacity which failed to timely notify Surety/Beneficiary that it would not renew the standbys. Accordingly, the Judge dismissed the breach of contract claim against Receiver and concluded that all of Surety/Beneficiary’s outstanding claims remained “conclusory and repetitive, failing to show material factual support for their contentions” and dismissed the amended complaint.

Excerpts from Standbys: “1. This Letter of Credit shall be automatically extended for additional periods of one year from the present or each future expiration date unless we have notified you in writing, not less than sixty (60) days before such date, that we elect not to renew this Letter of Credit. Our notice of such election shall be sent by registered mail to the above address, attention ‘Bond Department’.

2. Any draft(s) drawn by you under this Letter of Credit shall be accompanied by your written certification that you, as Surety, have executed or procured the execution of bond(s), undertaking(s), agreement(s) of indemnity, or other instrument(s) of suretyship on behalf of [Lessee]…and that either or the following alternatives exists: (a) Claim(s) have been or may be made thereunder or premiums have not been paid and that in your sole judgment as Surety the funds represented by your draft(s) are required for your protection and for the protection of your Co-Surety(ies) and Reinsurer(s) if any; (b) Our notice of election not to renew has been received and that you have not been released from liability under the bond(s), undertaking(s), agreement(s), or instruments aforesaid and the proceeds of your draft(s) will be held by you as collateral against loss, cost or expense including satisfaction of any and all unpaid premium(s) thereunder.

3. We hereby represent and affirm that the execution of this Letter of Credit will not constitute a violation of any law or regulation which may limit the amount of credit which can be extended by this bank to any single borrower or customer.

4. Your acceptance of this Credit will constitute your agreement to repay to us funds paid to you hereunder to the extent that such funds exceed the total of your loss, cost and expense (including unpaid premium(s) under the mentioned bonds(s), undertaking(s), agreements(s), or instruments(s)).

5. Unless otherwise expressly stated, this Credit is subject to the Uniform Customs and Practices for Documentary Credits, 2007 Revision, International Chamber of Commerce Publication No. 600 (the ‘UCP’) and as to matters not governed by the UCP, shall be governed by and construed in accordance with the laws of the State of Louisiana and applicable U.S. Federal Law without regard to principles of conflict of law. Provided, however, that notwithstanding Article 36 of such publication, if this IRREVOCABLE LETTER OF CREDIT expires while we are closed as a result of a cause beyond our control, we will honor a presentation under this IRREVOCABLE LETTER OF CREDIT when such honor would otherwise be due provided that the presentation is made within 30 days following the resumption of our business.”

[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.