Article

Factual Summary: The bank issued two standby letters of credit as security for any claims paid by the beneficiary under surety bonds that had been issued for the applicant in regard to two projects, one in the state of Washington and the other in Oregon. After the beneficiary was required to pay on the performance bonds posted for the applicant's work in Washington, it drew drafts under each letter of credit. The issuer refused to honor the drafts because it believed that one of the letters of credit was issued for the Oregon project. The beneficiary sued the issuer and moved for summary judgment on the ground that it had properly presented both drafts and that the issuer "failed to comply with the UCP by refusing to honor valid drafts and by not notifying the beneficiary of any deficiencies." The beneficiary moved for summary judgment and the trial court granted the beneficiary's motion. On appeal, affirmed.

Legal Analysis

1. Independence Principle; Fraud: While noting that "in determining an issuer's liability for refusal to honor a letter of credit, generally the court must look only to the terms of the letter without regard to those in the Underlying Transaction", the court recognized "an exception to this principle, however, where there is a claim of fraud, in which event it is appropriate for the court to look beyond the terms of the letter of credit."

2. Fraud, Dishonor by Issuer; Rev. UCC § 5- 109: The appellate court noted that under local law "an issuing bank, acting in good faith, may dishonor a draft on a letter of credit if the presentation of the draft would facilitate a commission of a material fraud by the beneficiary", citing Rev. UCC Section 5-109.

3. Independence Principle; Fraud Exception: Citing case law, the appellate court noted that where there is a claim of fraud, "it is proper for the court to go beyond the documentation required by the letter of credit." While the court ruled it would examine a fraud defense, the issuer failed to produce sufficient evidence to raise a material question of fact to support its fraud claim. The court ruled that "the Bank has not met its burden. First, there is no evidence of a representation by the beneficiary. Indeed, the only evidence of record is that the beneficiary merely presented the Bank with the drafts required by the letters. Further, assuming arguendo that Western's drafts acted as some sort of representation, there is no evidence that 2001 LC CASE SUMMARIES it was false. The letters of credit are identical on their face, except for the number, date, expiration date and aggregate amount, and there is no indication anywhere on them that they were for specific construction projects."

4. Fraud; Burden: The appellate court noted that "to withstand summary judgment by establishing a claim for fraud, the Bank had to show that there was a genuine issue of material fact as to the following elements: (1) a representation; (2) its falsity; (3) its materiality; (4) the speaker's knowledge of its falsity or ignorance of its truth; (5) his intent that it should be acted on by the person and in the manner reasonably contemplated; (6) the hearer's ignorance of its falsity; (7) his reliance on its truth; (8) his right to rely thereon; and (9) his consequent and proximate injury." The opinion stated that "[the issuer's] only argument in opposition is that one of the letters of credit was issued for a Bend, Oregon project and has nothing to do with the project in Washington on which the applicant defaulted, causing the beneficiary to assume responsibility under its bonds." The issuer suggested that a notation and an affidavit created an issue of material fact. The affidavit of the loan officer who approved both letters of credit stated "it was my understanding with the two projects, that each letter of credit was for a specific job." The court observed that, at most, this notation suggested one person's undertaking of the purposes of the LCs but also that this information required verification. The loan officer's affidavit, however, contradicted a letter sent to the issuer's president stated that: "there was no discussion on whether the letter of credit was for a specific job or for any jobs the bonding company bonded. The letter of credit did not specify that the letter of credit was limited to a specific job."

Comment: The court correctly ruled that the issuer failed to raise a material question of fact regarding whether the standbys were linked to a specific project. Even if the issuer had done so, however, the beneficiary would be entitled to summary judgment so long as the documents complied and there was a colorable basis for its drawing.

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