Article

Factual Summary:

A standby letter of credit for US$ 117, 850, 000 was issued to secure obligations under a construction contract. By its terms, the beneficiary was entitled to make a drawing if the applicant defaulted on the construction contract in the amount of the damages up to the amount of the standby. The applicant's insolvency was a default under of the contract.

When the applicant became insolvent, the beneficiary terminated the contract and made a presentation for $79,329,000. The applicant disputed the amount of the draw, contending that the beneficiary owed it significant amounts and that the beneficiary had not suffered $79 million in damages. Accordingly, the applicant notified the issuer that the statement in the drawing certificate was fraudulent. The issuer then informed the beneficiary that it had to conduct an investigation into the matter before honoring the demand. The underlying dispute was in arbitration.

Fearing the financial collapse of the issuer, the beneficiary obtained a temporary restraining order which required the issuer to post a bond or to set aside funds to satisfy the demand. The beneficiary then sued to compel payment and the applicant intervened. The court granted summary judgement to the beneficiary. On appeal, the Supreme Court of New York, Appellate Division, First Department affirmed.


Legal Analysis:

1. Wrongful Dishonor: Summary Judgement:In this case, the court stated that the default noted in the certificate of drawing related to the applicant's insolvency and not to any default in the performance of the underlying construction contract. Therefore, the beneficiary's right to draw on the LC was at least "colorable" and, therefore, the bank's dishonor was wrongful as a matter of law. The issuer and applicants' claim of faulty representations by the beneficiary in its certificate of drawing failed to raise a triable issue of fact.

2. Expedited Disclosure: The appellate court concluded that requests by issuer and applicants for expedited discovery prior to entry of summary judgement were properly denied and did not impact the summary judgement since they related to recovery under the underlying contract and not to the independent LC.

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