Factual Summary: Applicant secured a construc-tion loan from beneficiary to a third party Spanish company backed by a standby LC. The LC provided for presentation "of a written certificate 'in the form of a letter on beneficiary's letterhead or in the form of a tested telex.'" The Reimbursement Agreement provided that applicant would "immediately upon demand without set-off, counterclaim or other deduction of any nature whatsoever," reimburse issuing bank for any amount paid under the LC to beneficiary. When the third party recipient of the loan failed to make an interest payment, beneficiary declared the loan in default and foreclosed on the property. After unsuccessful attempts at auction, applicant and issuing bank entered into a second agreement that if issuing bank purchased the property and sold it privately for profit, in an attempt to reduce applicant's debt to issuing bank, applicant would remain obligated to repay issuing bank the balance due under the Reimbursement Agreement. The applicant also indemnified issuing bank "against all loss, cost or expense suffered or incurred by [issuing bank] arising by reason of the issuance of the Letter of Credit," and that if issuing bank bought the properties, applicant would hold issuing bank harmless for costs associated with the purchase and sale of the property..85 2001 LC CASE SUMMARIES When applicant then filed for reorganization under Chapter 11 bankruptcy relief, beneficiary drew on the LC, and was paid. The issuer then filed a proof of claim in the bankruptcy proceeding for money due under the Reimbursement Agreement. The applicant objected and the issuer moved for summary judgement. The Bankruptcy Court granted the issuer's motion, allowing the claim.

Legal Analysis

1. Wrongful Honor: The applicant argued that the issuer had wrongfully honored a non-complying presentation. Unrebutted testimony, however, established that a presentation was made by tested telex. The court ruled that there was no outstanding issue of material fact. 2. Wrongful Honor: The applicant argued that a condition precedent to drawing on the LC was a "reasonable effort" by the beneficiary to liquidate that collateral it held. The applicant contended that the issuer wrongfully failed to require adequate documentation regarding the liquidation. The court rejected the applicant's arguments on the ground that the terms of the LC were satisfied and based on the terms of the Reimbursement Agreement that the applicant agreed to repay issuing bank without deduction in the reimbursement agreement.


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.