Article

Factual Summary: A standby issued in favor of a commercial landlord for the account of the applicant/ tenant operating a restaurant required that the landlord/beneficiary certify "that applicant is in default of its payment obligations under that certain lease between beneficiary and applicant." Applicant ceased daily operation of the restaurant due to a reduction in business caused by road construction in front of the leased premises, but continued to pay rent. The beneficiary declared the lease to be in default nonetheless, because the applicant had vacated the premises in violation of the lease and invoked a rent acceleration clause. When the applicant failed to pay the remainder of the rent, the beneficiary demanded payment within seven days, threatening to "pursue additional remedies available to beneficiary under the lease." Instead of paying, the applicant brought an action to enjoin the beneficiary from drawing on the LC, claiming that the rent acceleration clause was void as a matter of law. The trial court granted "a temporary injunction enjoining beneficiary from (1) declaring its tenant, applicant to be in default under a lease with beneficiary and (2) presenting and demanding payment under a letter of credit." On appeal, reversed.

Legal Analysis

1.-Independence Doctrine and Judicial Injunction: The appellate court noted that the LC agreement "is a separate contract between the issuer and the beneficiary that is independent of the underlying obligations. This principle, the 'independence doctrine,' is designed to preserve the commercial vitality of letters of credit the issuer must determine whether payment is due the. beneficiary without regard to whether the account party and beneficiary have discharged their respective obligations to one another."

2. Injunction Standard; Fraud: The beneficiary "contended that Texas law prohibits enjoining presentment of a letter of credit absent proof of material fraud that vitiates the entire transaction." The appellate court agreed, noting that "presentment of a letter of credit may not be enjoined unless there is evidence of fraud by the beneficiary. To justify enjoining the presentment of a letter of credit, the fraud must be extreme." The applicant had argued that a drawing under a default clause of that lease was a penalty that was void under local law and therefore may constitute such fraud. The court did not agree, stating, "even if the acceleration clause is ultimately held to be an unenforceable penalty, as urged by applicant, we cannot say that beneficiary has committed anything approaching the intentional or unscrupulous conduct that would deprive applicant of any benefit of the lease agreement and transform the letter of credit into a means for perpetrating a fraud." The beneficiary's "reliance on it does not constitute fraud required by the business and commerce code to justify enjoining the beneficiary from presenting the letter of credit."

3. Injunction, Condition Precedent: The LC required that the beneficiary certify "that applicant is in default of its payment obligations under that certain lease between beneficiary and applicant." The trial court had enjoined the beneficiary from making the statement required by the LC that the applicant had defaulted on the lease. The appellate court reversed, refusing to enjoin the beneficiary from making such a declaration because such an injunction would have been "but another way of barring beneficiary from presenting the letter of credit and is prohibited".

4. Injunction, Adequate Remedy at Law: The appellate court noted that the applicant would have to demonstrate injuries for which there can be no legal measure of damages to secure an injunction. The appellate court concluded, however, that the applicant "had an adequate remedy at law: a suit for money damages against the beneficiary for wrongful presentment of the letter of credit on the underlying lease agreement." Since this remedy at law was available to the applicant, the appellate court ruled that the trial court had abused its discretion in enjoining the beneficiary.

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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.