Article

Note:This is a dispute arising out of a contract brewing agreement whereby Beneficiary, Stroh's Brewery Company, agreed to manufacture and package two malt beverages, "Two Dogs" and "Hard Rock", for Applicant, Northland Beverage Company. To assure payment, Applicant provided a standby letter of credit in the amount of US$400,000 issued by First Union National Bank. Applicant's owners and shareholders used their personal assets as security for the letter of credit. They sued Beneficiary for conversion, breach of contract, unjust enrichment, promissory estoppel, negligence and for wrongful drawing on the LC in violation of a promise not to draw unless Applicant's account was in default.

Beneficiary maintained that it was justified in collecting on the letter of credit because Applicant was US$ 327,767.16 past due on its payments, and moved to dismiss based on the statute of limitations and failure to state a claim upon which relief could be granted. The U.S. District Court for the Eastern District of Michigan, Southern Division, Zatkoff, J., granted the motion and dismissed all five counts.

Applying the law of Michigan to which the agreement was subject, the court noted any claim arising out of a transaction involving a letter of credit has a one year statute of limitations under Revised UCC Section 5-115. The court ruled that the statute of limitations barred Plaintiffs' contract claims since they initiated their action three years after Beneficiary had drawn on the letter of credit. As part of its analysis, the court concluded that the alleged agreement not to draw on the LC fell under the scope of UCC Article 5.

The court also dismissed Plaintiffs' tort claims, finding that in order to maintain a finding of conversion and negligence in this action, there must be some "breach of duty distinct from the breach of contract." If Plaintiffs were precluded from bringing their contract claims, they could not bring tort claims arising out of the same set of facts. Thus, the court concluded that since the conversion and negligence counts arose out of the same agreement as the contract claims, they did not arise out of a "separate and distinct legal duty."

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