Type of Lawsuit: Applicant sued beneficiary for unjust enrichment.

Parties: Plaintiff/Applicant/Appellee/Cross-Appellant- West Shore Ventures Ltd. (Coun-sel: S.R. Chamberlain) Defendant/Transferee/Beneficiary/Lessor/Appellant/Cross Appellee- K.P.N. Holding Ltd. (Counsel: J.B. Rotstein) Issuing Bank- Bank of Montreal

Underlying Transaction: Ten-year commercial property lease.

LC: Standby Letter of Credit for US$850,000. Silent as to governing rules.

Decision: The British Columbia Court of Appeal, Lambert, Hall and Saunders JJ.A., affirmed a summary judgment of The British Columbia Supreme Court, Kirkpatrick, J., granting applicant repayment in full of the proceeds of the LC.

Rationale: Where the terms of the LC require the beneficiary to refund any excess drawing, retention of an excess constitutes unjust enrichment which is actionable by the applicant.

Prior History: West Shore Ventures Ltd. v. K.P.N. Holding Ltd. C990080, 1999 B.C.D. Civ. J. 1646, 1999 B.C.D. Civ. J. LEXIS 1381 (B.C. S.C. 1999); abstracted at 2000 Annual Survey 391..

Factual Summary: To secure a related company's obligations as tenant under the lease, applicant provided a standby in favor of the lessor/beneficiary and pledged guaranteed investment certificates to the issuer as security. The terms of the letter of credit specifically incorporated terms from the lease, which provided that if the obligation to the beneficiary were less than amount drawn on the LC, the beneficiary would repay the difference to the issuer. The lease stated, in part: "... the Lessor shall also be entitled to draw upon such Letter or Letters of Credit for the full amount of monies represented thereby as prepaid rent and or fulfillment of the other obligations of the Lessee in respect of this lease, without limitation to any other rights or remedies of the Lessor at law or in equity if any one or more of the events as set out in clause 8.1(d), (e), (f), (g) or (h) should occur provided however, that if the obligations of the Lessee to the Lessor hereunder are less than the amount drawn down on the Letter of Credit, the Lessor, upon determination of such amount, will repay to the party providing the Letter of Credit such difference, and provided further, that the drawing down of the Letter or Letters of Credit shall not relieve the Lessor of any of its obligations it otherwise would have to the Lessee." emphasis added Subsequently, a default occurred and a drawing on the LC was honored. Meanwhile, the tenant for which applicant supplied the LC became insolvent. Since the related company was unable to reimburse the issuer, the issuer moved against applicant's security. Applicant disaffirmed the lease, paid the landlord the 3 month's rent required under local insolvency law and informed it that it was entitled to recover any portion of proceeds not required to fulfill the related company's obligation under the lease. Beneficiary refused, and applicant sued for a refund of the proceeds. The trial court awarded judgement to the applicant. Beneficiary appealed, and the applicant cross-appealed. Held: affirmed.

Legal Analysis

1. Proceeds: Where the landlord's rights are limited to three month's rent under local insolvency law and tenant had no further obligations under the lease, the landlord has no right to hold proceeds of an LC where it is obligated by the lease and the LC to repay the difference between the amount of the drawing and the amount actually owed.

2. Unjust Enrichment: The appellate court found unjust enrichment in the beneficiary's draw down of the LC since "there were no obligations of any kind secured by the letter of credit after the trustee in bankruptcy surrendered possession and terminated the tenancy." The court noted that an LC may be worded in such a way that obligations under it survive bankruptcy, but this LC secured no obligations after tenant's bankruptcy.


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.