Underlying Transaction: Insolvency.

Note: To cover any shortages in the grain storage facilities it operated, Anderson Grain Company obtained a US$ 500,000 bond from Ranger Insurance Company. To secure the bond, a standby LC for $250,000 was issued in favor of the bonding company as beneficiary, and when the first issuer declined to renew, a replacement LC for $200,000 was obtained from Dai Ichi Kangyo Bank. Subsequently, the applicant decided to replace the $500,000 bond with one offered by another company and asked the bonding company to return the second LC that secured the bond. The beneficiary returned the LC from the first issuer which had already expired and not the active LC from the second issuer, a step not noticed by the applicant. The bond then expired without any claims for grain shortages made against it but the second LC remained active. After the expiration of the bond, the applicant grain company became insolvent and sought to reorganize under Chapter 11. The first bond company filed an uncontested claim for approxi-mately US$ 130,000 in unpaid premiums. Under the reorganization plan, the applicant merged with Zipp Industries, and paid the creditors, including the bond company, with stock and a promissory note for 90% of their claims. After the plan was accepted, the bonding company presented documents, and drew on the LC from the second issuer in the amount of $130,000 for the unpaid premiums. The reorganized applicant then objected to the beneficiary's claim in the bankruptcy proceedings, arguing that the claim was paid when the issuer honored the LC for the same amount. The bankruptcy court sustained the appellant's objection and disallowed the beneficiary's claim. The successor to the applicant then filed this action in the Texas District Court for Hockley County for breach of contract, breach of warranty, fraud, and negligent misrepresentation, stating that the benefi-ciary unlawfully drew on the LC. The beneficiary moved for summary judgment, arguing that the applicant's claims were barred by the doctrines of waiver, estoppel, and res judicata because of the prior bankruptcy litigation. The trial court, Kupper, J., granted the beneficiary's motion. On appeal, to the Court of Appeals of Texas, 7 th District, Boyd, J., affirmed. Relying on the doctrine of judicial estoppel, applicable where a sworn legal declaration in one proceeding differs from a position taken in a subsequent proceeding, the appellate court accepted the beneficiary's argument that the appellant could not prevent the beneficiary's claim both in bankruptcy and under the LC. The court noted that "if the applicant were successful, the effect would be that it had used the judicial system to deprive beneficiary both of its bankruptcy debt claim and the money that gave rise to that claim" and concluded "that result is inequitable." In its conclusions, the appellate court also rejected the appellant's claim that the trial court erred because it excluded evidence under the parol evidence rule. The appellant argued that the beneficiary had breached a provision of the underlying agreement (which the barred evidence would have allegedly proven), and that the breach restricted the beneficiary's right to draw on the LC. In rejecting this argument, the court stated that the appellant failed to recognize an LC's independence from the

Underlying Transaction for which any agreement between the applicant and the beneficiary "would not modify the terms of the letter...." The court also rejected the appellant's argument that local law provided that when a beneficiary draws on an LC, it warrants that the necessary conditions. 2001 LC CASE SUMMARIES had been met, for which the beneficiary breached the warranty in this case. Rather, the court accepted the reasoning of the beneficiary, which argued that the statute was inapplicable because the LC contained no condition precedent. The court concluded, "to impose a condition not stated in the letter would do violence to the express language of the letter that 'it is not subject to any agreement, requirement, or qualification' and would be contrary to the independence principle."


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.