Factual Summary: To finance the sale of an interest in an insurance company to the applicant, a promissory note was issued and secured by an LC. A second LC, secured by a deposit from the applicant, was issued by a London bank to secure reimbursement of the first LC.

Shortly after the sale, the insurance company experienced severe financial difficulties and filed a petition for rehabilitation in a Pennsylvania court. At the request of the Pennsylvania Insurance Commissioner, an injunction was issued by the Commonwealth Court of Pennsylvania preventing payment or a drawing on the second but not the first LC, in order to preserve the assets of the rehabilitated estate. It was alleged that the applicant's deposit securing the LC secured another obligation owed to the insurance company by the applicant, and therefore the funds belonged to the rehabilitation estate rather than to the beneficiary. Neither the issuer of the first LC nor its beneficiary were named as parties nor served with process although the beneficiary had notice of a scheduled hearing.

Since a drawing on the first LC would trigger a drawing on the second one, when the beneficiary attempted to draw on the first LC an ex parte injunction was sought and entered against the beneficiary and issuer of the first LC. The issuer then refused to pay, although it acknowledged that the presentation was fully compliant. One of the documents presented to the issuer was a sight draft, which was date-stamped and signed by a representative of the issuer.

The beneficiary brought this action in Illinois seeking a declaration that the Pennsylvania order did not constitute a defense to the Illinois issuer of the first LC. On cross motion, the court awarded summary judgement to the issuer on two counts and dismissed the other counts. On appeal, affirmed.

Legal Analysis:

1. Full Faith & Credit: The court affirmed the trial court's dismissal of the wrongful dishonor claim as an improper collateral attack on the Pennsylvania injunction and stated that it was without authority to disturb the Pennsylvania court's orders. It was found that the Pennsylvania court's exercise of personal jurisdiction over the beneficiary did not violate due process because the beneficiary, even though a non-resident, had purposefully availed itself of Pennsylvania's jurisdiction through its business dealings. While the injunction may have interfered with a freely negotiated business transaction, the court stated that until the Pennsylvania court's decision was reversed by itself or a higher court, the injunction had to be respected. In response to the beneficiary's argument that the Pennsylvania court lacked jurisdiction for want of service on either party, the court cited a Pennsylvania procedural statute. It provided that written note is not required if irreparable and immediate damage will be sustained. Since the parties did receive information about a hearing and there would have been irreparable harm, the court ruled there was no need for written service.

2. What Constitutes Acceptance: The beneficiary claimed alternately that when the sight draft was received, date-stamped, and signed, it was "accepted," rendering the injunction too late to prevent payment, making the issuer's decision to obey the injunction a wrongful dishonor, or that at least enough of a material dispute existed to preclude summary judgment on that issue.

The court ruled that, under Prior UCC Section 5-112, the receipt of the draft did not constitute acceptance obligating the issuer to pay. It stated:

"The distinction between 'receipt' of documents (triggering the running of the three day period), and 'acceptance' of a draft (triggering the bank's duty to pay), suggests that when, in the ordinary course of business, a bank employee date stamps and initials documentary drafts (i) to acknowledge their receipt and (ii) to note the time at which the running of the three-day period begins to run, the action is not 'acceptance' of those drafts within the meaning of Article 5. The Pennsylvania court's injunction, learned shortly after the representative acknowledged receipt of [the beneficiary's] sight draft, was not too late to enjoin payment. Thus, [the issuer], which abided by the injunction, cannot be held liable for 'wrongful' dishonor of Fanslow's draw documents."

3. Good Faith: The beneficiary argued that by informing the insurance trustee about its office in Pennsylvania and thus exposing itself to the Pennsylvania court's jurisdiction, the issuer violated its duty of good faith. The court rejected this argument, noting that whether the bank informed the court or not, it was subject to the court's jurisdiction.



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.