Factual Summary: To assure payment of a lease of a broadcast radio station by lessee in connection with a sales agreement, the surety (the applicant) authorized his bank to issue an LC for $45,000 in favor of beneficiary. The LC provided that beneficiary could draw $5,000 if lessee failed to make a monthly payment, or that beneficiary was permitted to draw the entire sum of the LC within ten days of the original credit's expiration if a substitute letter of credit had not been received.

Although all monthly payments were made, beneficiary drew on the LC because no substitute LC had been provided, claiming that $17,500 was due for expenses additional to the monthly payments. The lessee agreed, stating that "Broker [lessee] is indebted to Licensee [beneficiary] for the sum of $17,500 under the Time Brokerage Agreement for the term ending March 15, 1997 which amounts shall be considered paid in full by application of funds from the Time Brokerage Agreement Letter of Credit."

The applicant/surety sued the beneficiary for conversion and unjust enrichment. The trial court granted the beneficiary's motion for summary judgment. The appellate court reversed and remanded the case to the trial court for further proceedings.

Legal Analysis:

1. Independence: The beneficiary argued that the LC permitted drawing if either of the two contingencies, default or failure to provide a substitute LC, occurred. Since no substitute LC had been provided, the beneficiary contended that the trial court was correct in concluding that she was entitled to draw down the balance on the original LC even though all monthly payments had been made, and, strictly speaking, no substitute LC was appropriate under the underlying lease.

Looking only to the LC, which it recognized was independent, the trial court granted the beneficiary's motion for summary judgment. The appellate court disagreed, indicating that the LC did not provide the sole basis for a decision. It noted that the underlying sales agreement provided for a second LC to provide for liquidated damages and that parol evidence suggested that the second LC was for non-lease payments. Although the appellate court accepted the LC rule that, "the bank's obligation to the beneficiary is independent of the beneficiary's performance under the contract," it stated that "[w]here ... the issue concerns a dispute between the parties to the underlying contract after the issuing bank has honored its obligations under the letter of credit, courts may consider the underlying transaction in determining whether the beneficiary has performed the terms of the credit." While the appellate court agreed with the trial court's conclusion that the "draw-down was properly made under the provisions of the letter of credit," it concluded that "a material issue of fact remains as to whether [beneficiary] may retain the proceeds pursuant to the underlying contract."



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.