Article

Factual Summary:

To finance the purchase and subsequent resale of steel billets to an Israeli corporation, applicant caused the establishment of a credit facility. Pursuant to that facility, two LCs were issued in favor of separate beneficiaries. Subsequently, the applicant requested that the issuer loan the remaining amounts needed to operate the Israeli Emergency Wheat Program. The applicant's president informed the issuer that under Israeli law the arrangement had to be made with an Israeli company. In connection with this arrangement, the applicant made partial reimbursement of the credit facility and the issuer opened a letter of credit at the request of an Israeli corporation, Olges, owned by the applicant's president. The reimbursement agreement between the issuer and Olges required reimbursement was to be made by Olges and/or the applicant under the credit facility within 90 days after payment under the credit.

At this point, the relationship between the parties began to turn sour. The issuer repeatedly requested information regarding the credit facility. The applicant failed to pay the issuer the remaining use ofthe credit facility when due. The issuer the requested that the applicant provide information pursuant to the Olges letter of credit. The applicant did not comply with the issuer's requests. Thereupon, after the expiration of the 90-day period, the issuer provided notice to the applicant that it was in default with regard to both the credit facility and the LC, and sued the applicant to recover the amounts paid under both arrangements. Judgment was rendered in favor of the issuer.

Subsequently, the applicant brought this action against the issuer in connection with the credit issued on behalf of Olges in connection with the Israeli Emergency Wheat Program. The applicant alleged the issuer was liable to it for breach of contract, tortious interference with contract, and bad faith. Both parties moved for summary judgment.

Legal Analysis:

1. Reimbursement: Application: The applicant claimed that the commencement of the 90-day period in the application was contingent on the issuer syndicating the balance of the financing for the project and, therefore, that the issuer's demand for payment violated the agreement, constituted tortious interference, and breached the issuer's duty of good faith. Specifically, the applicant argued that it was to repay the issuer from the proceeds of wheat sales from the Israeli stockpile, which would not occur until after the expiration of the 90-day period. Therefore, according to the applicant, repayment could not possibly be anticipated within 90 days. The agreement clearly provided for reimbursement within 90 days of payment under the credit.

The court found the applicant's argument without merit. First, it rejected the applicant's contention that parol evidence must be admitted as evidence of the parties' intent. The court noted that, by their own terms, the reimbursement agreement and a financing agreement between the applicant and Ogles contained the entire agreement of the parties. Unable to find any ambiguity in the agreement, the court did not mention syndication in connection with reimbursement and ruled that parol evidence regarding repayment was not admissible.

2. Reimbursement: Lender Liability: Second, the applicant argued that repayment in 90 days was "totally inconsistent with good banking practice" because repayment was to be made out of the proceeds of the wheat sales. The court found this argument unpersuasive because it failed to consider the 70,000 tons of wheat in excess of the Israeli stockpile requirements that could have been sold to repay the issuer. In addition, the court noted that under its contract with the government of Israel, Ogles' projected gross revenue exceed the amount due under the reimbursement agreement. After considering all of the applicant's arguments, the court held that the issuer was entirely within its rights pursuant to the reimbursement agreement to demand repayment within 90 days.

The court also noted that the issuer had other grounds for declaring the applicant and Ogles in default. The reimbursement agreement provided that the applicant and Ogles were to provide the issuer with access to their books and records upon demand. The issuer made a number of requests to inspect their records, and both the applicant and Ogles repeatedly refused its requests. By doing so, the court found that they were in default of the reimbursement agreement. Upon default, the agreement authorized the issuer to demand repayment. Therefore, the issuer did not violate the agreement by demanding repayment.

3. Reimbursement: Tortious Interference: The court rejected the applicant's tortious interference claim. To succeed on a claim for tortious interference, a plaintiff must show that the defendant has interfered with business relations between the plaintiff and a third party, either with the sole purpose of harming the plaintiff or by dishonest, unfair or improper means. PPX Enterprises, Inc. v. Audiofidelity Enterprises, Inc., 818 F.2d 266, 269 (2nd Cir. 1987). The court found that the issuer was merely exercising its contractual rights, and therefore did not act improperly or with the intent to harm the applicant.

4. Reimbursement: Lender Liability: Convenant of Good Faith: The court also rejected the applicant's claim that the issuer breached its implied obligation of good faith by demanding repayment within 90 days. The court noted that the implied obligation of good faith "does not extend so far as to undermine a party's 'general right to act in its own interests.'" M/A-COMSecurity Corp. v. Galesi, 904 F.2d 134, 136 (2nd Cir. 1990) (quoting Van Valkenburgh, Nooger & Neville, Inc. v. Hayden Publishing Co., 281 N.E.2d 142, cert. Denied, 409 U.S. 875 (1972). Therefore, because the issuer was exercising its rights under the reimbursement agreement, it was not in violation of its obligation of good faith.

Conclusion:

Rejecting each of the applicant's arguments, the court found that the issuer was within its rights under the reimbursement agreement to demand repayment after the expiration of the 90-day period. According to the court, the issuer did not breach the agreement, tortiously interfere with the applicant's contract with the government of Israel, or breach its duty of good faith with the applicant by demanding performance in accordance with the terms of the reimbursement agreement. Thus, the court granted the issuer's motion for summary judgment.

Comment:

This case illustrates the exposure of banks to lender liability actions. The award of summary judgment kept this case from a jury. Even though the result is satisfactory, any litigation requires time and imposes costs on the bank.

@1998 INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

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