Factual Summary: Bank issued a $1,000,000 LC in favor of beneficiary. Letter of Credit Reimbursement Agreement obligated the applicant to reimburse the issuer for any amounts paid to the beneficiary under the LC, except where the issuer acted with willful misconduct or gross negligence. Failure to reimburse the issuer would also obligate applicant for interest on any overdue amount at 12% per annum as well as attorney's fees.

When the beneficiary drew on the LC, the issuer dishonored due to allegations that the beneficiary had defrauded the applicant in the underlying contract. The beneficiary then sued the issuer for wrongful dishonor. The issuer counterclaimed against the applicant, seeking reimbursement of costs and attorney's fees. Following entry of judgment in favor of the beneficiary, the issuer moved for summary judgment on its reimbursement claim against the applicant.

The applicant resisted, claiming that the issuer had refused payment on the LC in response to a business deal that had gone sour between the applicant and a telecommunications finance company closely affiliated with the issuer. The applicant alleged that the finance company's foreclosure and sale of the applicant's assets, which caused the issuer to refuse payment on the LC, discharged any reimbursement obligation.

In a separate transaction, unrelated to the LC, the applicant had entered into an Accounts Receivable Agreement with the finance company, and, when the applicant defaulted on its payments, the finance company conducted a default sale of the applicant's assets in accordance with their agreement. The applicant claimed that the finance company and the issuer were in effect the same company, and that when it satisfied its debt to the finance company its obligation to reimburse the issuer was discharged.

The issuer and the finance company shared the same corporate address and phone number, and for a time the finance company's president also served as the issuer's president. Additionally, the applicant claimed that it had received a fax and a letter indicating a close and overlapping relationship between the issuer and the finance company.

The issuer had a close relationship with the finance company and the finance company's president, though no longer on the issuer's Board of Directors, did own 10% of the shares of the issuer's stock. Nonetheless, the court concluded that there was no connection between the two debts.

The court awarded summary judgment to the issuer.

Legal Analysis:

1. Reimbursement: Relying on the "law of the case" doctrine, limiting "redetermination of rulings made earlier in the same lawsuit," the court concluded that its determination that the issuer was obligated to honor the LC obligated it to conclude that the applicant was obligated to reimburse the issuer.

The applicant had argued that the prior ruling did not control because it involved a different agreement and a different contracting party (i.e., the beneficiary versus the issuer). The court rejected this claim, stating that even though the applicant was technically correct, its obligation to reimburse the issuer under the Letter of Credit Reimbursement agreement was not changed.

2. Reimbursement: Collateral Security Interest Did Not Discharge Applicant's Obligation to Issuer: The applicant argued that any debt it owed to the issuer was discharged by the issuer's dealings with an affiliated finance company, relying on UCC Section 9-504(4) which provides that "[w]hen collateral is disposed of by a secured party after default, the disposition transfers to a purchaser for value all of the debtor's rights therein, discharges the security interest under which it is made and any security interest or lien subordinate thereto." The applicant admitted that its debt to the finance company was from a separate agreement not part of its agreement with the issuer, but it contended that the issuer and the finance company were part of the same corporate structure, asserting that the sale of its assets by the finance company served to discharge its debt to both the issuer and the finance company.

The court rejected this argument, finding no evidentiary basis cognizable at law to conclude that the two companies were actually one. On the contrary, affidavits submitted at trial showed that the companies were not formally affiliated and that the applicant's debts to each company were entirely separate. The one letter and one fax submitted by the applicant to prove such an interrelationship was not enough for it to meet the its burden of proof.



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.