Contribution between Co-Applicants

Note: Bank issued a LC for US$ 1,500,000 that was eventually increased to US$ 2,000,000 for a corporation on the basis of a hypothecation agreement between its three principal shareholders. Plaintiff/ applicant, a minority stockholder pledged as collateral for the increase his interest in all securities held in his custodial account with the issuer. Later, he became ill and informed defendant/applicant that he no longer wished to continue to secure the LC beyond its expiry date.

Nonetheless, defendant/applicant continued to extend the LC without plaintiff/applicant's knowledge or consent, based upon a corporate board resolution authorizing the defendant/applicant to transact business with the issuer on behalf of the corporation. On learning of the extensions of the LC without his consent, plaintiff/applicant sought to terminate the Hypothecation Agreement with the bank, but the bank refused to the extent that any obligation was outstanding. Beneficiary subsequently made three drawings on the LC totaling "about US$ 1,000,000". The corporation was therefore obliged to reimburse the issuer. Defendant/applicant did so by way of a personal loan to the company.

Subsequently, defendant/applicant and issuer entered into an Assignment Agreement, apparently without plaintiff/applicant's knowledge, whereby issuer assigned plaintiff/applicant's Hypothecation Agreement to the defendant/applicant, the securities thereunder, and issuer's claim to be reimbursed by the corporation for the final drawing. After the LC was cancelled and at defendant/applicant's direction, issuer liquidated securities worth US$ 230,000 from plaintiff/applicant's custodial account and credited the money to defendant/applicant. After several transfers the total removed from plaintiff/applicant's account by the defendant/applicant was US$ 380,990.33. Approximately US$ 360,000 remained in plaintiff/ applicant's account that issuer refused to release to the plaintiff/applicant.

Plaintiff/applicant then commenced an action against co-applicant and issuer for breach of a hypothecation agreement, breach of an oral agreement, breach of a credit agreement and conversion in the New York County Court for the return of the funds, and contended that the Assignment Agreement was invalid due to lack of consideration because the LC had expired. The Supreme Court of New York County, Ramos, J. granted defendant's motion for summary judgment and dismissed all of plaintiff/applicant's claims. The court also dismissed plaintiff/applicant's cross-motion for summary judgment. On appeal, the Supreme Court of New York, Appellate Division, First Department, Ellerin, P.J., Rosenberger, Nardelli, Mazzarelli, and Friedman, JJ., reversed, granting plaintiff/applicant partial summary judgment and ordering the issuer to return $360,000, and reversed an order that denied defendants' payment of plaintiff's legal fees.

Plaintiff/applicant asserted that because there were no outstanding obligations of the corporation to the issuer at termination of the LC, the security interest expired and the issuer's assignment to the defendant/ applicant was invalid. Plaintiff/applicant also claimed that the assignment was not supported by consideration as the defendant/applicant testified at deposition that "he didn't pay anything" for the Hypothecation Agreement. The appellate court accepted the plaintiff/applicant's arguments in part, stating, "the issuer may not assign a claim in excess of what it is owed. As the LC ha[d] expired, there will be no further draws on [the plaintiff/applicant's] collateral to repay draws by the [issuer]. Thus, the [remaining] funds should be returned to him [by the issuer]".

Plaintiff/applicant alleged fraud on the grounds that defendant/applicant misrepresented that the LC would not be extended beyond its original date of expiry. The court rejected this argument, stating "plaintiff/applicant cannot show that he was damaged in any way by the alleged falsehood. As a minority shareholder, [plaintiff/applicant] could not have unilaterally stopped the corporation from requesting the extensions even if he had been present at the board meeting, because the decision was supported by the majority shareholder as well as other shareholders."



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.