Article

Factual Summary:To support natural gas swap agreements, Applicant and Beneficiary named a credit support provider and executed standby letters of credit to support one another pursuant to a Master Agreement to support their potential mutual indebtedness from time to time as a result of trading in the commodities market. Applicant had become indebted to Beneficiary for CA$ 2,311,205 for three swap transactions. However, since Beneficiary's credit support provider, its parent corporation, Enron Corp., filed for Chapter 11 (reorganization) Bankruptcy protection eight days prior to Applicant's indebtedness, Applicant took the position that, since Beneficiary was in default, it was not obligated to pay. It brought an action to enjoin Beneficiary from drawing on the credit. Finding injunctive relief inappropriate, the court dismissed the action.

Legal Analysis:

1. Injunction, Irreparable Harm: Applicant contended that 1) Beneficiary would owe Applicant at some point in the future as a result of a market turn and 2) Beneficiary becoming insolvent. The court stated that Applicant had failed to show irreparable harm. The court admonished the Applicant for having "no proper basis for granting injunctive relief." Instead, the court found the Applicant's argument was based on what it called a "double future contingency". Applicant argued if the injunction were granted "[i]f funds are paid under the letter of credit and the [Beneficiary] is found to be insolvent, any indebtedness to the Applicant arising from future swap transactions will be lost to the Applicant." Such a "double future contingency" was not sufficient to show necessary irreparable harm. First, a market turn was anything but a certainty that could be relied upon by Applicant. Second, it was not certain that even if there was a market turn that Beneficiary would become insolvent.

2. Injunction, Balance of Convenience: Weighing that the Applicant owed money to Beneficiary for gas already delivered, the court found that there was a balance in favor of Beneficiary under the test for an injunction. In so doing, the court rejected Applicant's argument for granting the injunction based on the Applicant's argument that "if the injunction is granted, the [Beneficiary] will still be protected by the letter of credit as to any balance ultimately falling due to the [Beneficiary] on any future swap transactions."

3. Injunction, Insolvency; Injunction, Standard: Beneficiary argued that:

"insolvency is not a test for an injunction" involving LCs. The court stated that "granting of this relief had the potential to seriously disrupt the contractual rights and obligations of counterparties in this commercial arena to such an extent that this interlocutory Order was not appropriate."

4. Injunction, Standard: In denying the requested relief, the court noted "impact of a decision to grant the injunction sought would impact hundreds or thousands of similar contracts." It indicated that there is "a very high hurdle for a litigant seeking an exceptional order."

Note: Although, the Beneficiary argued Applicant must show that the assets were to be used fraudulently or for improper purposes to justify injunctive relief, the court did not address this point.

Comment:

While the decision is quite correct, it is even more so when the absence of a drawing is taken into account.

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