Type of Lawsuit: Applicant sought injunctive relief against beneficiary and issuer to prevent payment on an LC.

Parties: Plaintiff/Applicant/Buyer- Commco Tech., LLC a/k/a Broadstream Communica-tions Corp. (Counsel: James J. Tancredi, Day, Berry & Howard, LLP) Defendant/Beneficiary/Seller- Science Applications Int'l Corp. (Counsel: James R. Fogarty, Fogarty, Cohen, Selby & Nemiroff, LLC). Defendant/Issuer- U.S. Bank (Counsel: William S. Fish, Jr., Tyler, Cooper & Alcorn, LLP)

Underlying Transaction: Purchase of computer software and hardware.

LC: Irrevocable standby LC for US$ 7,120,000. Silent as to governing rules. Decision: Applying the law of Minnesota, the location of the issuer, the U.S. Bankruptcy Court for the District of Connecticut, Shiff, J., vacated the temporary restraining order granted to the applicant by the Connecticut Superior Court and denied applicant's claim for permanent injunctive relief.

Rationale: Where parties to an LC agree that an existing LC remains viable under a subsequent payment contract as collateral, the LC is enforceable.

Factual Summary: Applicant purchased computer software and hardware from beneficiary, and bank issued standby LC to assure payment. After a repayment dispute between applicant and beneficiary, both parties entered into a Settlement Agreement to restructure the debt and a corresponding Promissory Note issued by applicant. The beneficiary refused to agree to the insertion of a clause in the Promissory Note stating that the LC would be honored only "in the event the applicant fails to pay this note in full when due." The parties also incorporated into their Promissory Note a statement recognizing the beneficiary's right to draw on the LC "in whole or in part, at any time in order to partially satisfy amounts owed payee pursuant to this Note." Because the LC had expired by the time the applicant and beneficiary entered into the Settlement Agreement and created the Promissory Note, the applicant had the issuer extend the expiration date of the LC. The issuer charged the applicant a fee for the extension of the LC and the applicant did not contest this fee, even though it occurred after the Settlement Agreement and the Promissory Note. The applicant rearranged its financial affairs and sued issuer and beneficiary in state court for a temporary restraining order (T.R.O.) prohibiting payment on the LC on the grounds that any attempt to draw by the beneficiary would be fraudulent because the Settlement Agreement stipulated that the LC only secured payments that were outstanding prior to the Settlement Agreement. The state court granted a T.R.O. on the grounds that the beneficiary's drawing would cause irreparable harm. Subsequently, the applicant commenced Chapter 11 bankruptcy proceedings. On a motion by the beneficiary, the U.S. Bankruptcy Court vacated the state court's T.R.O. and denied the applicant's motion for permanent injunction.

Legal Analysis:

1.Irreparable Harm, Drawing on LC During Bankruptcy Proceedings: Applicant argued that if the funds held by issuer to collateralise the LC were applied to reimburse a drawing by the beneficiary, efforts to liquidate would be irreparably harmed. The bankruptcy court rejected this argument, stating that "there was no persuasive evidence" of such harm because the applicant could not show that efforts to liquidate its assets would be affected by the beneficiary's drawing on the LC.

2. Success on the Merits, Fraud: The applicant argued that a drawing under the LC would be fraudulent. Applying Revised UCC Section 5-109, the court noted that the applicant would have to prove the likelihood of success on the merits that the 2001 LC CASE SUMMARIES


The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.