Letters of Credit

Author(s): James G. Barnes and James E. Byrne

Source: The Business Lawyer , FALL 2017, Vol. 72, No. 4 (FALL 2017), pp. 1119-1128
Published by: American Bar Association

Stable URL: https://www.jstor.org/stable/10.2307/26419181

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Letters of Credit

By James G. Barnes and James E. Byrne*

This survey concentrates on the most significant letter of credit (“LC”)1 issues
addressed in cases decided in the United States in the year 2016.2

PRE-HONOR CASES
Pre-honor cases are those in which a dispute arises before a demand for pay-
ment under an LC has been honored. These actions typically involve a beneficiary
or other presenter claiming wrongful dishonor by the issuer, and they focus on:
(i) whether the issuer gave timely and sufficient notice of dishonor,3 (ii) whether
the discrepancies stated in that notice justify dishonor,4 or (iii) whether there are
extraordinary reasons requiring or permitting dishonor, such as forgery or material
fraud,5 injunction, governmental order, or insolvency.

* James G. Barnes practices law with Baker & McKenzie LLP in Chicago, Illinois. James E. Byrne
directs the Institute of International Banking Law & Practice, Inc. (“IIBLP”). Mr. Barnes chaired the
Subcommittee on Letters of Credit from 1991 to 1996, and Professor Byrne from 1996 to 2000. Both
authors have played important roles in the reform of letter of credit law and practice on the national
and international levels, including U.C.C. Article 5, the United Nations Convention on Independent
Guarantees and Standby Letters of Credit, ISP98, UCP600, and most recently the ISP98 Forms. Mr.
Barnes assumed primary responsibility for this survey. Professor Byrne served as an expert in the So-
ciete Anonyme Marocain (see infra note 10) and Dorchester Financial (see infra note 27) cases. The re-
search assistance of IIBLP Associate Counsel Justin B. Berger, IIBLP Research Director Karl Marxen,
and IIBLP Research Associates Greg M. Caffas (J.D. 2017, George Mason University School of Law),
Matthew J. Kozakowski (J.D. Candidate 2018, George Mason University School of Law), and Chris-
topher Robertson (J.D. Candidate 2018, George Mason University School of Law) is gratefully ac-
knowledged. Mr. Barnes and Professor Byrne have co-authored this survey annually since 1992.
1. Unless otherwise indicated, “LC” or “credit” means “letter of credit,” “U.C.C.” refers to Revised
U.C.C. Article 5 (2011), “ICC” refers to the International Chamber of Commerce, “UCP600” refers to
the Uniform Customs and Practice for Documentary Credits, 2007 revision (ICC Pub. No. 600), and
“ISP98” refers to the International Standby Practices (ICC Pub. No. 590). “ISP98 Forms” refers to the
annotated standby forms (numbered 1 through 8 and 11.1), freely available at www.iiblp.org/
resources/isp-forms/. The texts of these laws, rules, and ISP98 Forms 1 and 2 are reprinted in LC
RULES & LAWS: CRITICAL TEXTS FOR INDEPENDENT UNDERTAKINGS (James E. Byrne ed., 6th ed. 2014).
2. This survey also includes a few non-case developments and a few non-U.S. cases of interest in
the LC field. For articles of interest and for abstracts of all available LC cases, see 2017 ANNUAL REVIEW
OF INTERNATIONAL BANKING LAW & PRACTICE (James E. Byrne et al. eds., 2017). LC cases decided shortly
before or after 2016 may be covered in a prior or subsequent year’s The Business Lawyer survey.
3. See U.C.C. § 5-108(b)–(d) (2011).
4. See id. § 5-108(a).
5. See id. § 5-109(a).

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1120 The Business Lawyer; Vol. 72, Fall 2017

DISCREPANCY DEFENSES AND PRECLUSION

Arch Specialty Insurance Co. v. First Community Bank of Eastern Arkansas6 is an
especially smart, short, and readable opinion awarding summary judgment for
the beneficiary in a wrongful dishonor case. The court, applying New York
law, was persuaded that the issuer had a strict compliance defense because
the beneficiary failed to present the original letter of credit.7 However, because
the issuer failed to give a notice of dishonor within seven business days of receiv-
ing the beneficiary’s presentation, the court ruled that the issuer was precluded
from asserting that defense under New York U.C.C. sections 5-108(b) and (c).
The court also ruled that the beneficiary’s wrongful dishonor claim was unaf-
fected by the applicant’s bankruptcy.8 Finally, the court awarded 9 percent pre-
judgment interest running from the seventh day after presentation to the issuer
upon application of New York U.C.C. section 5-111(d), treating the issue as a
substantive entitlement “to be made whole.”9
Societe Anonyme Marocain De L’Industrie Du Raffinage v. Bank of America N.A.10
involved a standby LC issued to support the second installment due on a sale
and shipment of crude oil. The LC provided for automatic reduction “BY THE
AMOUNT OF ANY PAYMENT MADE BY BANK OF AMERICA, N.A. IN
FAVOR OF BENEFICIARY REFERRING TO THIS STANDBY LETTER OF
CREDIT.”11 Payment by the issuer outside the LC satisfied the issuer’s “credit
overdrawn” defense (based on automatic reductions) and also gave rise to an
LC fraud defense (based on the beneficiary’s presentation of a false “unpaid” in-
voice). Because the LC was issued from Pennsylvania, the court in New York ap-
plied Pennsylvania law to the issuer’s discrepancy and fraud defenses. The court
dismissed the plaintiff-beneficiary’s wrongful dishonor claim and awarded attor-
ney’s fees to the issuer under Pennsylvania U.C.C. section 5-111(e).12
In Mago International v. LHB AG,13 the U.S. Court of Appeals for the Second
Circuit affirmed summary judgment for a German confirming bank that had dis-
honored the plaintiff beneficiary’s presentation of unsigned copies of bills of lad-
ing. The letter of credit called for a “photocopy of B/L evidencing shipment of the

6. No. 3:15-cv-223-DPM, 2016 WL 4473438 (E.D. Ark. Aug. 23, 2016).

7. Id. at *2 (applying N.Y. U.C.C. LAW § 5-108 (Consol. 2016)). The opinion in Arch Specialty ap-
propriately distinguishes non-presentation of an LC from non-presentation of an LC amendment under
an LC requiring presentation of the original LC and all amendments. Id.; see Ladenburg Thalmann &
Co. v. Signature Bank, 6 N.Y.S.3d 33 (App. Div. 2015), discussed in James G. Barnes & James E. Byrne,
Letters of Credit, 71 BUS. LAW. 1299, 1300–01 (2016).
8. Arch Specialty, 2016 WL 4473438, at *1.
9. Id. at *3 (applying N.Y. U.C.C. LAW § 5-111 (Consol. 2016)). U.C.C. section 5-111 mandates
payment to a prevailing beneficiary of interest from the date of dishonor as well as attorney’s fees,
while excluding consequential damage remedies.
10. No. 653329/15, 2016 WL 488665 (N.Y. Sup. Ct. Feb. 8, 2016).
11. Id. at *5 n.5.
12. Id. at *4–6 (applying 13 PA. CONS. STAT. §§ 5108, 5111, 5116 (2016)). The New York U.C.C.
omits the uniform subsection 5-111(e) regarding attorney’s fees.
13. 833 F.3d 270 (2d Cir. 2016); see also James G. Barnes & James E. Byrne, Letters of Credit, 70
BUS. LAW. 1219, 1223–24 (2015) (discussing the trial court decision and noting that the parties ini-
tially agreed in this case to treat a German LC confirmation as a New York law governed guaranty).

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 Letters of Credit 1121

goods to the applicant.”14 The court recognized that the LC was issued subject to
UCP600, including standard international banking practice, which requires that
B/Ls be original and signed, but treats a B/L copy as not a B/L and as not requir-
ing a signature. However, the court held that the LC text controlled in this case,
and that the B/L copy presented could “evidence” shipment only if it was a photo-
copy of a B/L signed by the carrier.15
The opinion is discomfiting in its imposition of a signature requirement where
none is stated in the LC text and where UCP600 negates signature requirements
for transport document copies. More important, the LC was a standby to be used
if the applicant failed to pay within forty-five days after invoice date. Copies of
commercial documents, such as invoices and transport documents, have a differ-
ent function under standby LCs, i.e., to identify a defaulted payment obligation
rather than to meet the perfect tender requirements for paying against docu-
ments covering the sale and delivery of goods in transit.
This opinion unfortunately extends the reputation of New York courts for de-
ciding close compliance disputes against LC beneficiaries, while the LC commu-
nity tries to distinguish standby LC practice from commercial LC practice, par-
ticularly in the examination of live commercial documents versus stale copies.16
In International Union of Operating Engineers v. L.A. Pipeline Construction Co.,17
the Supreme Court of Appeals of West Virginia answers a certified question aris-
ing under state statutes with conflicting public policies. West Virginia’s wage
bond statute provides that a wage bond LC may only be terminated by the Com-
missioner of the Division of Labor, whereas U.C.C. section 5-106(d) provides
that an LC that states that it is perpetual expires after five years. The court opined
that the wage bond statute controlled, with the effect of preventing the issuer of a
wage bond LC from ever terminating its obligation without the Commissioner’s
consent.18
U.C.C. section 5-106(d) is one of the few provisions made non-variable under
section 5-103(c). U.C.C. section 5-102(a)(10), another non-variable provision,

14. Mago Int’l, 833 F.3d at 271.

15. Id. at 271–73. The opinion undertakes to interpret the LC text strictly against the issuer and
concludes that there is no ambiguity in the “evidencing shipment” text because the B/L photocopy
could not evidence shipment given the lack of a signature in the signature block reciting receipt
of goods for carriage. Compare id. at 273, with Credit Agricole Indosuez v. Muslim Commercial
Bank Ltd., [2000] 1 Lloyd’s Rep. 275, 281 (Eng.), http://www.simic.net.cn/upload/2008-07/
20080722081743324.pdf (dismissing issuing bank’s appeal and stating: “The relevant principle
was stated by Lord Diplock in Commercial Banking Co. of Sydney v. Jalsard Pty. Ltd., [1972] 2 Lloyd’s
Rep. 529 at p. 533; [1973] A.C. 279 at p. 283 in the passage cited by Sir Christopher Staughton. That
shows that even though a Court might arrive at a different construction, the banker [plaintiff confirm-
ing bank presenting to defendant issuing bank] can safely act upon a reasonable construction of am-
biguous or unclear terms.”).
16. Prior years’ surveys have addressed this topic. See, e.g., James G. Barnes & James E. Byrne,
Letters of Credit, 67 BUS. LAW. 1281, 1282 n.12 (2012) (contrasting standby practice under ISP98
Rule 4.20 (and Rule 4.07) with standby practice under UCP600, Article 1 of which effectively
says that parts of UCP600 are inapplicable to standbys, but nowhere clarifies which parts (or what
makes a letter of credit a standby)).
17. 786 S.E.2d 620 (W. Va. 2016).
18. Id. at 627.

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1122 The Business Lawyer; Vol. 72, Fall 2017

defines “letter of credit” as a “definite undertaking.” A purported letter of credit

that is, or must be interpreted as, perpetual or otherwise indefinite is outside the
scope of U.C.C. Article 5 and other laws and regulations that rely on letter of
credit law to set the scope of undertakings that are independent.19 Accordingly,
knowledgeable LC bankers in the United States try not to issue an undertaking
that might not qualify as a U.C.C. Article 5 “letter of credit” or require cash col-
lateral and otherwise observe regulatory limitations on their issuance of surety-
ship undertakings.20
In Navana Logistics Ltd. v. TW Logistics, LLC,21 the plaintiff freight forwarder
sued Israel Discount Bank of New York for wrongful dishonor of commercial let-
ters of credit, alleging that it “stands in the shoes” of the named beneficiaries,22
and that those beneficiaries are unpaid suppliers seeking payment from the
plaintiff, as well as the applicant-purchaser. The court dismissed this claim be-
cause the plaintiff did not allege that it was a beneficiary or that any beneficiary
ever assigned or transferred any LC rights to it.23 The memorandum and order
covering the wrongful dishonor claim aptly emphasized that an LC “is totally in-
dependent of the underlying transaction, and, as a non-party to those letters of
credit, [plaintiff] Navana has no plausible claim for wrongful dishonor.”24 This
plaintiff clearly lacked standing to sue for wrongful dishonor under the cases
cited in Navana applying New York law before the 2001 effective date of New
York U.C.C. Article 5.25 The same “no standing” result would obtain under
U.C.C. Article 5.26
In Dorchester Financial Holdings Corp. v. Banco BRJ, S.A,27 the defendant Brazil-
ian bank obtained summary judgment in its favor after a hearing on the merits of

19. See, e.g., 12 C.F.R. § 7.1016(a)–(b) (2017) (“General Authority” and “Safety and Soundness
Considerations”); RESTATEMENT (THIRD) OF SURETYSHIP AND GUARANTY § 4(2) (AM. LAW INST. 1996) (“The
Restatement of this subject does not apply to obligations governed by the law of letters of credit.”).
Beneficiaries also may suffer from having to enforce such undertakings under non-LC laws.
20. For an extended discussion of undertakings that provide that they continue until released by
the beneficiary, see James G. Barnes & James E. Byrne, Letters of Credit, 62 BUS. LAW. 1607, 1608–09
(2007); see also ISP98 Form 2 (focusing on duration issues in drafting standby LCs); ISP98 Form 11.1
[U.S.] (focusing on those and other issues as applied to standby LC forms mandated by government
agencies).
21. No. 15-cv-856 (PKC), 2016 WL 796855, at *13 (S.D.N.Y. Feb. 23, 2016).
22. Id. at *13 (quoting second amended complaint).
23. Id. at *13–15.
24. Id. at *14.
25. For another 2016 case applying pre-2001 New York law, see Indoafric Exports Private Ltd. v.
Citibank N.A., No. 15-cv-9386 (VM), 2016 WL 6820726 (S.D.N.Y. Nov. 7, 2016) (general statute of
limitations barred wrongful dishonor and related claims under a confirmation issued and dishonored
in the 1990s), appeal docketed, No. 16-4101 (2d Cir. Dec. 7, 2016).
26. U.C.C. section 5-111 limits wrongful dishonor remedies to a beneficiary, a successor benefi-
ciary, and a nominated person presenting on its own behalf. Who may qualify as such is determined
under U.C.C. sections 5-102 (Definitions), 5-112 (Transfer of Letter of Credit), and 5-113 (Transfer
by Operation of Law).
27. No. 11-CV-1529 (KMW), 2016 WL 1169508 (S.D.N.Y. Mar. 21, 2016). Summary judgment
based on lack of jurisdiction over the bank defendant had been granted earlier but was reversed and
remanded for an evidentiary hearing. See Dorchester Fin. Sec., Inc. v. Banco BRJ, S.A., 722 F.3d 81
(2d Cir. 2013) (per curiam), discussed in James G. Barnes & James E. Byrne, Letters of Credit, 69 BUS.
LAW. 1201, 1204–05 (2014).

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 Letters of Credit 1123

the bank’s defenses that the various documents attributed to it were forgeries,
including a purportedly bank-signed agreement to issue a $100,000,000 LC,
an unauthenticated SWIFT interbank message purporting to verify issuance of
an authentic LC, and a purportedly bank-signed $250,000,000 LC.28 Apart
from testimony by bank officers denying bank involvement, the court relied
on an expert report (from James E. Byrne) about typical LC scam documentation
and the irregularities in the particular documents attributed to the bank. The
opinion includes considerable detail comparing regular LC transactions versus
scam LC promotions, including authenticated SWIFT MT700 series messages
for LCs versus unauthenticated MT 999 messages.
Tesoro Refining & Marketing. Co. v. National Union Fire Insurance. Co.29 held
that an employer’s commercial crime insurance policy covering “theft” did not
cover a credit manager-employee’s forgery of bank LCs purportedly supporting
an insolvent customer’s payment obligations.
Singapore has become an increasingly important forum for LC disputes, in-
cluding inter-bank disputes. In Grains & Industrial Products Trading Pte Ltd v.
Bank of India,30 the beneficiary sued the issuing bank and also the nominated
bank for wrongful dishonor of the beneficiary’s presentation to the nominated
bank of complying documents before the expiry date. The documents were for-
warded to the issuing bank a month later, before payment under the LC would
come due, but after the expiration date. The Singapore Court of Appeal held the
issuing bank liable for wrongful dishonor because the LC authorized presenta-
tion to the nominated bank.31 The nominated bank successfully defended on
the basis that it did not confirm the LC, accept the 180-day time draft presented
to it, or otherwise enter into an enforceable agreement with the beneficiary to
negotiate (i.e., purchase or “discount”).32
The lengthy opinion of the Singapore Court of Appeal includes extensive con-
sideration of the issuing bank’s counterclaim against the nominated bank based
on a one-month delay in forwarding the documents, as to which the majority
preferred a “purposive” interpretation of UCP600 based on market expectation,
and the concurring opinion preferred to limit inquiry to the LC text and
UCP600. This aspect of the case was mooted by the issuing bank’s failure to
plead or prove any loss resulting from delayed forwarding of documents. (It ap-
pears that the underlying transaction was an arranged financing,33 so that the
documents were not original or intrinsically valuable, and that the delay related
to a failure to reach agreement on the “discounting” aspect of the arrangement.)

28. Dorchester Fin., 2016 WL 1169508, at *9.

29. 833 F.3d 470 (5th Cir. 2016), aff’g 96 F. Supp. 3d 638 (W.D. Tex. 2015). The 2015 district
court opinion was discussed in last year’s survey. See Barnes & Byrne, supra note 7, at 1301.
30. 2016 SGCA 32 (Sing.), http://www.singaporelaw.sg/sglaw/laws-of-singapore/case-law/free-
law/court-of-appeal-judgments/18465-grains-and-industrial-products-trading-pte-ltd-v-bank-of-
india-and-another.
31. Id. at paras. 66–67.
32. Id. at paras. 134–35.
33. For a discussion of arranged “structured” or “synthetic” LC financings, see James G. Barnes &
James E. Byrne, Letters of Credit, 66 BUS. LAW. 1135, 1140–41 (2011).

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1124 The Business Lawyer; Vol. 72, Fall 2017

FRAUD DEFENSES AND INJUNCTIONS

U.C.C. section 5-109 applies to an apparently complying presentation that is
subjected to a defense or claim that a required document is forged or materially
fraudulent or that honor would facilitate a material fraud by the beneficiary.34
Issuers are not legally obligated to raise a fraud defense and are reluctant, if
not unable, to do so. Accordingly, most LC fraud claims decided by courts are
raised in emergency actions brought by applicants to obtain pre-honor injunc-
tive relief, and section 5-109 dictates how U.S. courts should balance LC inde-
pendence with fraud deterrence.
There continue to be very few U.S. cases involving applicant injunction ac-
tions or issuer defenses based on claims of forged or materially fraudulent pre-
sentation, a tribute to the specificity with which the LC fraud exception is ad-
dressed in section 5-109 and to the imposition of fees and costs on an
applicant or issuer that unsuccessfully invokes the LC fraud exception.35
In Arrowhead General Insurance Agency, Inc. v. Lincoln General Insurance Co.,36
the plaintiff-applicant obtained a preliminary injunction against drawing by the
defendant-beneficiary under a standby LC supporting contingent financial obli-
gations. The beneficiary had threatened to draw the full amount following the
issuer’s sending of a non-extension notice. The applicant’s liquidator argued
that all underlying disputes had been resolved in its favor by completed arbitra-
tion and that pending litigation between the parties would confirm that. The fed-
eral district court in Pennsylvania applied Pennsylvania case law on LC fraud,37
and it granted preliminary injunctive relief conditioned on the applicant’s post-
ing of security in an amount equal to the LC amount.38
There are two English Court of Appeal decisions in January 2017 involving
large cross-border project standbys that are of worldwide interest. National Infra-
structure Development Co. v. Banco Santander S.A.39 upheld the enforcement of a
standby LC issued subject to ISP98 and governed by English law. After quoting

34. U.C.C. § 5-109 (2011).

35. Id. § 5-111(e) (“Reasonable attorney’s fees and other expenses of litigation must be awarded to
the prevailing party in an action in which a remedy is sought under this article.”).
36. No. 1:16-CV-1138, 2016 WL 3522961 (M.D. Pa. June 28, 2016).
37. Id. at *4. U.C.C. section 5-109 on LC fraud was not mentioned, although Official Comment 1
to that section approvingly cites the two Pennsylvania law cases cited in Arrowhead. U.C.C. § 5-109
cmt. 1 (2011) (citing Intraworld Indus. v. Girard Trust Bank, 336 A.2d 316 (Pa. 1975); Roman Ce-
ramics Corp. v. People’s Nat‘l Bank, 714 F.2d 1207 (3d Cir. 1983)).
38. Arrowhead Gen. Ins. Agency, 2016 WL 3522961, at *6–7. The scope of the security is unclear,
as is the effect of substituting that security for preference-proof LC support. (Another approach is to
allow LC honor and order attachment of the LC proceeds under U.C.C. section 5-109 to the extent of
honestly claimed contingent obligations supported by the LC.)
39. [2017] EWCA (Civ) 27 (Eng.), http://www.bailii.org/ew/cases/EWCA/Civ/2017/27.html, dis-
missing appeal from [2016] EWHC (Comm) 2990 (Eng.), http://www.cms-lawnow.com/~/media/
nidco%20v%20santander.pdf (ordering summary judgment without stay in favor of the beneficiary).
A similar result was obtained in a parallel case enforcing ISP98 standby LCs supporting obligations
on the same project and also the subject of a Brazilian court injunction. See Nat’l Infrastructure Dev.
Co. v BNP Paribas, [2016] EWHC (Comm) 2508 (Eng.), http://www.bailii.org/ew/cases/EWHC/
Comm/2016/2508.html.

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 Letters of Credit 1125

from ISP98 Rule 1.06 on the independence of an ISP98 standby,40 the court re-
jected two extraordinary defenses asserted by the issuer—that the drawing was
fraudulent and that honor had been enjoined by a court in Brazil. The court ac-
cepted that the beneficiary honestly believed that the amount demanded was
“due and owing” (as stated in the beneficiary’s demand) and gave no effect to
the Brazilian injunction in light of the choice of English law in the standby
and the importance of timely and certain honor of standby LCs, citing the
Power Curber case as precedent.41
Petrosaudi Oil Services (Venezuela) Ltd v. Novo Banco S.A.42 involved a standby
LC requiring presentation of an unpaid invoice and a beneficiary certification
“that the applicant is obligated to the beneficiary . . . to pay the amount de-
manded under the drilling contract [between them]”43 under circumstances
where the law applicable to their contract prohibited payment of invoices
until certain additional procedures were observed. The appellate court over-
turned the trial court’s conclusion that the presentation was fraudulent because
certification was false and known by the beneficiary to be false.44 The approach
taken by the appellate court is meticulous and instructive to drafters and inter-
preters of standby LCs, particularly of common forms of beneficiary statements
justifying a demand for payment, whether of overdue payment obligations or of
cash collateral to cover contingent obligations (and the range of possibilities in
between).45

POST-HONOR CASES
Disputes that arise after the issuer honors an LC typically focus on: (i) whether
the issuer is entitled to reimbursement, indemnification, subrogation, or other
recovery from the applicant or, in some cases, from the beneficiary or other pre-
senter, or (ii) whether the applicant or beneficiary may have impaired or en-
hanced rights against each other based on honor of the LC.

ISSUER RECOVERIES
In Republic Steel v. ProTrade Steel Co.,46 the court dismissed the applicant’s
complaint against the issuer for wrongful honor and conversion under a
UCP600 standby LC requiring presentation of a copy of any unpaid commercial
invoice with beneficiary’s statement that it was ten days past due. The presented

40. Nat’l Infrastructure Dev. Co., [2017] EWCA (Civ) 27, at para. 10. (The affirmed trial court de-
cision quoted ISP98 Rules 1.06, 1.07, and 2.01.)
41. Id. at para. 13 (quoting drawing notice); id. at paras. 45–46 (citing Power Curber Int’l Ltd. v.
Nat’l Bank of Kuwait S.A.K., [1981] 1 WLR 1233 (Eng.)). The equivalent U.S. precedent is Banco
Nacional de México, S.A. v. Societe Generale, 820 N.Y.S.2d 588 (App. Div. 2006).
42. [2017] EWCA (Civ) 9 (Eng.), http://www.bailii.org/ew/cases/EWCA/Civ/2017/9.html.
43. Id. at para. 8.
44. Id. at paras. 80–91.
45. See ISP98 Forms, particularly the form of demand and related endnotes 25–29 in ISP98 Form
1 (Model Standby Incorporating Annexed Form of Payment Demand with Statement).
46. No. 5:16CV660, 2016 WL 2944237 (N.D. Ohio May 20, 2016).

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1126 The Business Lawyer; Vol. 72, Fall 2017

invoice included order numbers, etc., and the description “Market Loss incurred
on order cancellation by Republic.”47 (The case apparently started with previously
dismissed claims against the issuer for pre-honor declaratory and injunctive relief.)
The court was persuaded that the presented invoice was a “commercial invoice”
and that HSBC was not obligated to determine whether the beneficiary could
properly invoice for market loss.48 The court also dismissed the applicant’s con-
version claim as subsumed in the failed wrongful honor claim.49
State of Oklahoma ex rel. Doak v. Pride National Insurance Co.50 addresses the
status of cash collateral securing the LC reimbursement obligations of an appli-
cant, in this case an insolvent insurance company. The applicant’s deposit ac-
count had been pledged to the bank when it gave value by issuing its LC. The
LC was honored. The issuer was prevented from reimbursing itself by the stay
and turnover order obtained by the state insurance commissioner in the trial
court. The appellate court ruled that the trial court abused its discretion in de-
nying the issuer’s motion for relief from the stay and in ordering the issuer to
relinquish its perfected security interest; the case was remanded to lift the stay
and allow the issuer to access the cash collateral.51

APPLICANT/BENEFICIARY RECOVERIES
Post-honor disputes between applicants and beneficiaries are typically based on
the underlying agreements between them but are sometimes importantly supple-
mented by U.C.C. Article 5.52 (U.C.C. Article 5 does not provide beneficiary v.
applicant rights and remedies arising out of unissued or dishonored LCs.53) Several

47. Id. at *3.

48. Id. at *3–4. If the parties intended this standby to support payment of the purchase price for
goods sold and delivered, as is usually but not invariably the case with “commercial standbys,” then
the applicant would have a U.C.C. section 5-110(a)(2) warranty claim against the beneficiary, which
would focus on their intention regarding the scope of standby LC support rather than the scope of the
term “commercial invoice” in an LC.
49. Id. at *4. As to the effect of U.C.C. section 5-108 on rights and remedies available for wrongful
honor, see Barnes & Byrne, supra note 7, at 1304–05.
50. 386 P.3d 1058 (Okla. Civ. App. 2016).
51. Id. at 1062. The court noted that LC honor is from the assets of the issuer rather than the ap-
plicant. Id. at 1061 (citing Kellogg v. Blue Quail Energy, Inc. (In re Compton Corp.), 831 F.2d 586,
589 (5th Cir. 1987)).
52. See U.C.C. §§ 5-110, 5-117 (2011) (providing applicants with post-honor warranty and sub-
rogation rights). Insolvency laws also may affect the application of LC proceeds.
53. Cases involving alleged agreements between beneficiaries and applicants to cause an LC to be
issued or amended (or cancelled), like cases involving enforcement of obligations underlying a dishon-
ored LC, depend on the law governing the underlying obligation, such as U.C.C. section 2-325 (ad-
dressing LC payment terms in contracts for the sale of goods). See, e.g., In re Arbitration Between
Kailuan (H.K.) Int’l, Co. v. Sino Minerals, Ltd., No. 16 Civ. 2160 (PKC), 2016 WL 7187631 (S.D.N.Y.
Dec. 9, 2016) (dismissing petition to vacate arbitral award, noting that presentation of discrepant doc-
uments under LC did not materially affect seller’s breach of contract claim against buyer); Nat’l Union
Fire Insur. Co. v. Monarch Payroll, Inc., No. 15-cv-3642 (PKC), 2016 WL 634083 (S.D.N.Y. Feb. 17,
2016) (granting summary judgment on claim for breach of contract based on failure to cause a replace-
ment LC to be issued against return of cash collateral from drawing under prior LC following non-
extension notice and dismissing fraud and conversion claims as duplicative of the contract claim).

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 Letters of Credit 1127

2016 cases involved judicial interpretation of the underlying agreement between

the beneficiary and applicant regarding application of LC proceeds. None were
based on U.C.C. sections 5-110 or 5-117.
International Cards Co. v. MasterCard International Inc.54 involves a dispute
over the defendant-beneficiary’s obtaining honor of an LC by presenting a state-
ment demanding payment of the full amount of the LC “representing funds . . .
due and payable.” The court denied motions for summary judgment on claims of
breach of the underlying contract and conversion of (LC) collateral, given the
lack of information affecting the existence and amount of contingent obligations
supported by the LC and, post-honor, by the LC proceeds.55 The applicant’s
claims might qualify as a U.C.C. section 5-110(a)(2) breach of warranty to the
extent the drawing itself violated underlying obligations. To the extent that
some but not all of the amount drawn may not be required to satisfy contingent
obligations supported by the LC, the rights and remedies of the applicant (and
beneficiary) with respect to any excess will not depend on U.C.C. Article 5.
In Koenig & Strey GMAC Real Estate v. Renaissant 1000 South Michigan I, LP,56 a
bank lender exercised its discretion under its agreement with its borrower when
applying LC proceeds to the borrower’s obligations to the bank. The court cor-
rectly concluded that the LC supported the obligations of the named applicant-
borrower to the named beneficiary-bank lender, and not to the individual plain-
tiff guarantors who were claiming that the LC proceeds should have been ap-
plied to reduce their obligations under a separate guarantee of the loans.57
In re Stone & Webster, Inc.58 holds that a surety’s claims in a debtor’s bank-
ruptcy are not reduced by a prepetition drawing under an LC supporting the
debtor’s obligations to the surety unless the surety receives a double recovery.59
In re Circuit City Stores, Inc.60 holds that the Bankruptcy Court has subject
matter jurisdiction to determine the trustee’s right to recover “excess” LC pro-
ceeds held in a workers’ compensation fund as security to the extent there are
any excess LC proceeds.61

54. No. 13 Civ. 2576 (LGS), 2016 WL 3039891 (S.D.N.Y. May 26, 2016).
55. Id. at *3–5.
56. 68 N.E.3d 881 (Ill. App. Ct. 2016).
57. Id. at 887–88.
58. 547 B.R. 588 (Bankr. D. Del. 2016).
59. Id. at 607.
60. No. 08-35653-KRH, 2016 WL 1714515 (Bankr. E.D. Va. Apr. 26, 2016).
61. Id. at *4.

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 This content downloaded from
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