Article

Note: To secure their obligations under a commercial lease, Michael and Linda Newman (Lessees) obtained a USD 25,000 letter of credit issued by Republic National Bank (Issuer). Lessees also obtained a USD 300,000 line of credit from Issuerwhich Lessees collateralized by depositing USD 500,000 worth of stock certificates with Issuer. Issuer was subsequently acquired by HSBC Bank USA, N.A. (Successor). After Lessees’ business wound down, Lessees attempted to have the LC cancelled on two occasions with the second request including the original LC. Apparently, Successor failed to cancel the LC “for reasons that are unknown.” Subsequently, with Lessees’ line of credit cancelled, Successor agreed to release the collateral previously held by Issuer if Lessees agreed to deposit USD 25,000 into a savings account as collateral for the LC. Lessees agreed.

After providing the collateral, however, Lessees again attempted to cancel the LC; again, Successor inexplicably refused. Thereafter, Lessees sued Successor but that action was abandoned after failing to serve Successor with a complaint. Nearly a decade later, Lessees sued Successor for conversion, breach of contract, unjust enrichment, including a request for punitive damages. Following discovery, Successor moved for summary judgment seeking to dismiss the complaint. The Supreme Court of New York, Kalish, J., granted summary judgment in favor of Successor.

Successor argued that the complaint was untimely as the claims brought by Lessees accrued when Successor released the collateral but failed to cancel the LC. Lessees argued that the limitations period ought to be extended under the continuing wrong doctrine. Apparently, the savings account into which Lessees deposited USD 25,000 was subsequently marked as “pending miscellaneous debit”, thus constituting an “improper restraint” on Lessees’ funds. During discovery, however, Lessees conceded that since having filed their second complaint, the funds became accessible and they had made “substantial withdrawals”. The Judge noted that application of the continuing wrong doctrine would be inappropriate as there was no evidence of continued wrongful acts following Successor’s failure to cancel the LC; moreover, there was no evidence that “funds were ever removed” from the savings account and Lessees failed to point to any “damages arising from the alleged restriction on the funds”. The Judge noted that New York law provides a three year limitations period for conversion; a general six-year period for breach of contract claims; and, where the breach claim is based on the same facts as an unjust enrichment claim, the equitable claim also carries a six-year limitations period. Accordingly, the Judge dismissed the conversion, breach of contract and unjust enrichment claims as time barred. While Lessees argued they were entitled to some damages pursuant to Successor’s rules of deposit, the Judge noted that Lessees had conceded that they never agreed to Successor’s rules of deposit. Lessees had only agreed to Issuer’s rules.

Lessees’ final claims for attorneys’ fees and punitive damages were also dismissed as Lessees failed to establish any basis on which fees could be afforded and also failed to provide any evidence of “willful misconduct” justifying punitive damages.

[MJK]

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.