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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
1996 LC CASE SUMMARIES D.N. CV95 0147594 S, D.N. CV95 0146207 S, 1996 Conn. Super. LEXIS 1291 (Conn. Super. Ct. 1996)
Topics:
Evergreen Clause; Automatic Renewal.
Type of Lawsuit:
Issuer sued applicant for replevin of goods used to secure the applicant's reimbursement obligations.
Principals:
Plaintiff/Issuer: First Fidelity Bank;
Defendant/Applicant: Greenwich Stationery Co.
Underlying Transaction:
Commercial lease.
LC:
Standby for US $50,000. Silent as to whether subject to UCP.
Procedural History:
The Superior Court of Connecticut, Judicial District of Stamford, Tobin, J., granted the applicant's motion for injunction against replevin.
Rule:
Issuer who had not shown probability that judgment would be rendered in its favor because the expiry date of the standby could not be determined was enjoined from bringing a replevin action against the security supporting the standby.
Article
Factual Summary: Bank arranged with applicant to sell the assets of a stationary company in which the issuer held a security interest. As a condition to financing the sale by issuing a note, the bank required the purchaser to secure a lease agreement. To obtain the lease, the bank issued a standby letter of credit in favor of the landlord. The application for the letter of credit stated that it expired on January 31, 1994 but was "Renewable to April 30, 2000." The final text of the credit stated that it would be
automatically extended without amendment for an additional period of one year from the present or future expiration date unless 60 days prior to such date we shall notify you by registered letter that we elect not to extend this letter of credit for any such additional period. In this event, you may draw hereunder provided your draft is accompanied by your certificate that the underlying obligation of the applicant is still outstanding.
Experiencing liquidity problems, the applicant requested an extension on the note. The issuer declined to extend, but, through an admitted error, allowed the expiration date of the standby to be automatically extended for one year. The applicant did manage to make the final payment on the note several weeks late.
The issuer later requested financial information from the applicant for its review of its obligations under the standby. Unhappy that the issuer had not extended the note, the applicant refused to supply the information. The bank thereupon sent notice that it would not extend the L/C for another year. When the beneficiary received the notice, it drew the full amount of the standby.
The issuer then brought a replevin action, a prejudgment remedy, to seize the applicant's pledged goods. The applicant sought temporary injunctive relief from replevin until the underlying dispute over the expiry date of the credit was settled.
The court, noting that the situation was caused by an "overly zealous loan officer" and an "obstinate" applicant who refused to provide the financial data to the bank, granted the temporary injunction against replevin.
Legal Analysis:
1. Evergreen clause: The court heard and searched for evidence on the expiry date of the credit and concluded that "in the frenetic lease and purchase negotiations . . . the question of the duration of the Letter of Credit was not given the focus that hindsight now dictates it deserved." The court ruled that the issuer had not "demonstrated probable cause that judgment would be rendered in this matter in favor of the plaintiff, Bank." The court also concluded that since there was no actual default on the lease, the collateral was not in jeopardy.
Comment:
This case illustrates the need for specificity regarding automatic extension provisions not only in the L/C but in the reimbursement agreement and in aligning the two. Unfortunately, the latter is often beyond the scope of L/C operations.
©1997 INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE
COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE
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.