Factual Summary: Repayment of a loan agreement between beneficiary and applicant for an aggregate amount of $150,000,000 was to be made in sixteen equal quarterly installments. To secure the loan, the applicant's parent corporation issued a guaranty, and bank issued a revolving standby letter of credit. The credit provided that issuer

... open[s] our irrevocable revolving Letter of Credit no. LCG9400036 in favor of you, [beneficiary], for account of [applicant], up to USD 11,500,000.00 payable against your sight draft drawn on us accompanied by your signed statement stating that the amount drawn on us represents the principal, interest thereon, default interest thereon and all related amount which has become due payable to you by [the applicant] under the terms of the Agreement under Ref. No. GWE-1229 between [the applicant] and you dated September 16, 1994 ("Agreement"), and that such payment has not been fully made by [applicant] and that the amount received from us will be applied in satisfaction of such payments.

This Letter of Credit shall be revolved and reinstated every three months within the period of validity of this Letter of Credit mentioned below.

When applicant failed to pay an installment due, the beneficiary demanded immediate repayment of the outstanding balance from applicant's parent company, and presented documents under the letter of credit. The issuer paid the amount of that installment as demanded.

After having paid the first installment for $11.5M, the issuer refused to pay a drawing on the next installment, claiming that it had not been reimbursed by the applicant for the previous payment and that the amount available under the credit was otherwise exhausted. The issuer based its claim on the language in the first paragraph of the LC stating that the issuer opened a "revolving letter of credit ... in favor of [beneficiary], for the account of [applicant], up to USD 11,500,000.00", and that because there is no plain language entitling the beneficiary to make multiple drawings that in the aggregate exceed $11.5M, the total amount of the credit is capped at $11.5M, until the applicant reimburses the issuer thus reinstating the availability of the LC for future drawings. After an exchange of letters in which the issuer took the position that its obligation to make further payments under the standby was contingent on replenishment of the credit by the applicant, the beneficiary brought an action against issuer for wrongful dishonor and anticipatory repudiation, seeking damages, or declaratory relief in the alternative. On the beneficiary's motion, the court entered summary judgment for it, and awarded damages in the amount of $12,468,875 ($11.5M plus interest from December 30, 1999) and $68,756,400.58 (the remaining balance of the loan, $64,108,532.01 plus interest from February 15, 2000).

Legal Analysis:

1. Summary Judgment: The court stated, "[t]his action is well suited to determination by summary judgment because it solely presents legal issues relating to an exchange of documents", citingBanque Worms, New York Branch v. Banque Commerciale Privee,, 679 F. Supp. 1173, 1178 (S.D.N.Y. 1988) [U.S.A.].

2. Revolving Clause: The issuer maintained that after the initial drawing, the standby only allowed the beneficiary to draw if the issuer was reimbursed by the applicant for the previous drawing, thus replenishing it. In a letter, its counsel stated, "[w]e do not believe there is any basis for interpreting any language in the Letter of Credit to mean that the beneficiary is entitled to make repeated drawings under the Letter of Credit each in the amount of $11,500,000 (or less) which in the aggregate will exceed $11,500,000 outstanding at any one time. It would be wholly inconsistent with the plain language of the Letter of Credit for it to be interpreted as permitting a series of $11,500,000 drawings by the beneficiary unless the issuing bank has been reimbursed for earlier drawings, thereby 'reinstating' the availability under the Letter of Credit for future drawings." The issuer also argued that under the beneficiary's interpretation there was no cap on the number of drawings.

The court indicated that, contrary to issuer's claims, "the terms of the Letter of Credit are clear and unambiguous." It noted that "[t]he Letter of Credit does not spell out a repayment obligation, limit the number of times a withdrawal can be made on a quarterly basis, nor does it limit the aggregate amount withdrawn, prior to reimbursement by [the applicant]. However, it directly ties the amount to be withdrawn by [the beneficiary], to the 'amounts [sic] which has become due payable to [the beneficiary] by [the applicant] under the terms of the Agreement under Ref. No. GWE-1229 ... and that such payment has not been fully made by [the applicant] and that the amount received from [the issuer] will be applied in satisfaction of such payments.' The Letter of Credit also limits the amount drawn by [the beneficiary] to the amount due [the beneficiary] by [the applicant], and provides for withdrawals up to $11,500,000, on a quarterly basis upon presentation of proper documentation. No 'cap' is stated in the Letter of Credit other than the amount due [beneficiary] by [applicant] under the loan agreement. No other terms or conditions were placed in the Letter of Credit and any outside obligations between [the parties], not set forth in the Letter of Credit, are not relevant on this motion for summary judgment."

The court then noted that "[p]ursuant to the terms of the Letter of Credit, the reinstatement periods, following its issuance on September 16, 1994, fall on successive December 17, March 17, June 17 and September 17 dates, and as amended, continue until its expiration on November 9, 2001, unless the last installment under the loan agreement (for the aggregate amount of $150,000,000), is settled."

In granting summary judgement to the beneficiary, the court treated the "revolved and reinstated every three months" term as operating automatically up to the amount due on the underlying transaction, and without regard to whether the issuer was reimbursed for previous drawings.

3. Collusion: The issuer urged that there might have been collusion between the applicant and beneficiary to defraud it, were the credit interpreted as suggested by the beneficiary. Rejecting this argument, the court noted that "defendant's idle and unsubstantiated speculation regarding possible collusion ... to defraud [the issuer], is insufficient to defeat the motion for summary judgment."

4. Anticipatory Repudiation: Since issuer made clear its intention not to make any further payments on the letter of credit until it was reimbursed by the applicant for the prior payment, the court ruled that the issuer's refusal to continue payments constituted a repudiation of its future contractual duties, entitling the beneficiary to immediate recovery of the total outstanding balance owed to the beneficiary by the applicant.

5. Attorney's Fees: The beneficiary had sought attorney's fees. Noting that such fees can only be awarded when permitted by an agreement (the American Rule), the court denied the request.



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.