Letters of Credit

This survey concentrates on the most significant letter of credit (“LC”) issues addressed in cases decided primarily in the United States in the year 2023, comments on the 2022 UCC Amendments affecting Article 5, and notes developments in electronic and digital documents in LC transactions.

The discussion of this survey can be broken down into five sections: (1) new developments—2022 UCC Amendments and electronic/digital documents modernizing and making LC practices more efficient; (2) threshold issues addressed by courts, such as whether an undertaking is an LC, whether U.C.C. Article 5 applies, and questions of jurisdiction, sovereign immunity, governing law, venue, and duty to post an LC; (3) pre-honor LC cases that can include issuer dishonor due to noncompliance of documents presented, proper and timely notice of dishonor, draws made after expiration, fraud justifying dishonor or injunction against honor, sanctions and regulatory orders preventing honor, force majeure affecting the issuing bank, assertion of set-off rights by the issuing bank, improper assignment or transfer by the beneficiary, statute of limitations bar, and other causes claimed to justify or require dishonor, usually in the context of claims of injunction, wrongful dishonor, or breach of contract of the LC brought by the beneficiary; (4) post-honor cases of reimbursement claims, claims of wrongful honor, and disputes between the beneficiary and the applicant based on breach of the underlying contract supported by the LC, breach of warranty under U.C.C. section 5-110, subrogation under U.C.C. section 5-117, and other legal theories; and (5) LC cases worthy of note, including liability of the advising and confirming banks based on representations made to their customers, supersedeas LCs, LCs in bankruptcy, and injunctive or declaratory relief requiring LCs to be posted.

2022 UCC Amendments and Electronic LC Documents

Subject to their enactment in the various states, last year’s survey explained how the 2022 UCC Amendments when adopted by the various states affect LC transactions. Besides clarifying that choice of law for separate branches of banks that issue LCs is the location of the branch from which the LC was issued when no choice of law is specified in the LC, U.C.C. section 5-116(e) and the Official Comments to that section under the 2022 UCC Amendments now expressly include the ISP, URDG, UCP, and eUCP as rules that supplement and modify the U.C.C. Article 5 LC rules. The 2022 UCC Amendments also revise section 5-104 of the U.C.C. to expand the formal requirements for LCs to comport with modern technology. Instead of requiring an authentication of an LC only by written signature, agreement of the parties, or standard bank practice, section 5-104 now provides that an LC or its “confirmation, advice, transfer, amendment, or cancellation may be issued in any form that is a ‘signed record,’” which can include use of digital technology to authenticate documents used in LC transactions.

The 2022 UCC Amendments modernize authentication to support electronic and digitized LC transactions. That modernization corresponds with laws, conventions, and private rules to support the use of electronicized and/or digitized bills of lading (“eB/Ls”) and other documents for use in international trade, as well as acceptance by some banks of email presentations of documents on their SBLCs. Besides revisions to U.C.C., Articles 1, 5, and 7 and revised definitions in Article 1 of the U.C.C., which provide for paperless documents of title and establish parameters for electronic documents of title or eB/Ls, international efforts are underway to recognize electronic and digitized bills of lading and other documents used in international trade. These include the ICC’s eUCP, the UNCITRAL Model Law on Electronic Transferable Records (MLETR), the ICC’s Uniform Rules for Digital Trade Transactions, England’s Electronic Trade Documents Act 2023, and the BOLERO platform, as well as several other digital or electronic trade platforms, rules, and conventions.

The salient features of rules that promote eB/Ls can include a reliable registry (central or shipper/carrier controlled), data integrity, identifying the party in control, exclusive control, convertibility of bills of lading and/or other documents from paper to electronic and vice versa, and transferability. International acceptance through domestic laws and adoption of conventions for uniform rules for eB/Ls and other electronic documents are now of central focus. The U.C.C. as revised under the 2022 UCC Amendments recognizes and allows for electronic records to be used as documents in LC transactions through revisions of pertinent sections of Articles 1, 5, and 7 of the U.C.C. as well as Article 5’s recognition that international rules, conventions, or practices are permitted to apply to an LC transaction.

Threshold Issues

LCs vs. Guaranty Payment Bonds. Foreign banks frequently issue independent or demand bank guarantees governed by the URDG or without reference to a set of practice rules. As an historical matter, banks in the United States have not issued independent bank guarantees, but instead issue SBLCs. U.S. banks, however, are allowed to issue independent bank guarantees, subject to an acceptable practice regime and compliance with bank regulatory guidelines and conditions.

To compete with LC-issuing banks, non-bank institutions, particularly insurance or surety companies, have issued so-called guarantee or payment bonds, which in many respects are marketed and drafted to act like letters of credit so that they can be drawn on a simple demand or statement of default of the underlying obligation they secure. They sometimes have the advantage that the issuer does not require cash or other collateral to secure them, depending on the credit strength of the applicant, an evaluation of risk of the obligations guaranteed, and the ability of the applicant to perform.

Guarantee or payment bonds are used in highly structured transactions like project finance and by major power and oil companies for security for obligations owed to them for their connections, improvements, services, and commodities. Concerns expressed about guaranty bonds include that, notwithstanding their wording, they do not have a legal regime like Article 5 of the U.C.C. or practice rules, supporting caselaw, and issuer reputation for honoring conforming draws without investigating the underlying transaction or finding other nondocumentary defenses to payment. Issuing banks and their personnel are inculcated with the independence doctrine to pay, based on presentation of conforming documents, as a fundamental principle of LC bankers, LC caselaw, and under Article 5 of the U.C.C., the UCP, and the ISP. Because payment or guarantee bonds are issued by sureties or insurance companies, the concern is that suretyship defenses and proof of default and other claim validation defenses or issues will be raised by the insurer when a claim is made on their guaranty bond.

One example of the difference between guarantee bonds and SBLCs is illustrated by the case of B.S. Ingersoll, LLC v. Great American Insurance Co. In that case, Great American issued a $550,000 lease bond in substitution of an LC to secure rent, then denied coverage after the lessee defaulted and became bankrupt. Great American argued that insufficient proof was furnished to it that the lease actually commenced and also sought to dismiss the suit filed against it on the lease bond because the lessor failed to file it within three months after the bond expired, a limitations period contained or referenced in the lease bond. The court denied Great American’s motion to dismiss the suit against the lessor because the lessor pled sufficient facts to show that Great American waived the three-month limitation period; after the three-month period had run, the insurer was still demanding proof from the lessor of the applicability of the bond.

LCs vs. Documentary Collections. Documentary collections under the ICC’s Uniform Rules for Collections, Publication No. 522, is an alternative to LCs that does not operate to impose liability on the collecting bank to accept and pay documents presented for collection. In Generation Next Fashions Ltd. v. JPMorgan Chase Bank, N.A., documents from the Bangladeshi seller for shipments of garments were sent under the URC522 to J.P. Morgan as collecting bank to “Deliver Documents against Acceptance.” Once JPMorgan as collecting bank accepted the instructions, a contract was formed under the URC and “it was obligated to ‘act in good faith and exercise reasonable care’ to carry them out.” JPMorgan delivered the documents upon receipt of acceptances, but the deferred undertakings were not paid at maturity. After signing acceptances, JP Morgan released documents and the buyer obtained possession of the garment shipments, defaulted on payment at maturity of the acceptances, then demanded an 8 percent discount. The seller furnished to JPMorgan (via submission through S.W.I.F.T. to seller’s remitting bank) an agreement signed by buyer’s broker characterizing itself as the seller’s broker, extending maturities further for payment. The seller characterized the agreement as bogus. The parties continued to argue over payment, the buyer never paid, and the seller eventually sued J.P. Morgan as collecting bank for “breach of contract, breach of fiduciary duty, conversion, negligence, tortious interference with contract, bailment, [and] . . . fraud and civil conspiracy.” All counts were dismissed. The court stated that under the URC, JPMorgan as collecting bank was required to follow the instructions it received to “deliver documents against acceptance” and when the buyer accepted the goods and incurred its deferred payment undertaking, JPMorgan as collecting bank was required to deliver documents. Since it did so, it was not obligated to collect payment, the breach of contract count under the URC and the U.C.C. failed, and the other causes were dismissed because, as pled, they were not separately cognizable causes of action.

Jurisdiction. Two recent cases from the Southern District of New York addressed whether the U.S. banking system was used for payments on LCs or against documents sufficient to confer jurisdiction on U.S. courts over the issuer: Foley v. Union de Banques Arabes et Francaises and Select Harvest USA LLC, v. Indian Overseas Bank. In Banques Arabes the court ruled that Union de Banques Arabes et Francaises’ (“UBAF's”) repeated use of New York's banking system, as an instrument for accomplishing the alleged sanctioned conduct for which the plaintiffs sought redress, established minimum contacts under the purposeful availment test for finding jurisdiction. In Select Harvest, the court questioned New York jurisdiction over Indian Overseas Bank (IOB) because IOB’s correspondent account in New York had not been used for shipments not paid by IOB which were the subject of the lawsuit, and payments for related shipments were made to a Wells Fargo branch in Philadelphia, Pennsylvania rather than New York.

Choice of Law. In EFLO Energy v. Devon Energy Corporation, Devon Energy was sued by EFLO for breach of warranty under section 5-110(a)(1) and (2) of the Oklahoma U.C.C. for drawing on a Credit Suisse, A.G. LC for $4,380,000 payable in Canadian dollars, allegedly in violation of the parties’ underlying agreement between the Canadian parent of Devon Energy and the plaintiff. The LC was subject to the ISP but neither it nor the underlying agreement which it supported contained a choice of law provision, although a closing agreement chose Alberta law to apply. The LC erroneously named the U.S. entity, Devon Energy Corporation, as the beneficiary under the LC rather than its Canadian parent. Because the U.S. entity was named as the defendant and was not a party to the closing agreement, even though that agreement was mentioned in the LC, the court did not apply the closing agreement’s choice of law provision. Instead, the court looked to U.C.C. section 5-116(b) and applied Oklahoma law to govern the cause of action. While one may agree with the court’s choice of Oklahoma law to govern the Article 5 cause of action between the applicant and beneficiary for breach of warranty, the court did not explain how that law should be chosen by the provisions of section 5-116(b) in an underlying suit between the applicant and the beneficiary, neither of which are an “issuer, nominated person, or adviser” of the LC in question. The issuer, Credit Suisse, A.G., not a party to the suit, presumably did not issue the LC from Oklahoma.

Sovereign Immunity. A New York federal court explained the basics of sovereign immunity of a foreign LC issuer under 28 U.S.C. §1605(a)(2) in a wrongful dishonor suit brought by the U.S. beneficiary in Lavi v. Bank Negara Indonesia, an Indonesian-government-owned issuing bank. The court enumerated the following factors to determine Bank Negara Indonesia’s sovereign immunity: (1) “A bank that is owned by a foreign government is considered a ‘foreign state’ for the purposes of the Foreign Sovereign Immunity Act (‘FSIA’)”; (2) “[t]he FSIA ‘provides the sole basis for obtaining jurisdiction over a foreign sovereign in the United States’”; (3) a “’foreign state is presumptively immune from the jurisdiction of United States courts . . . unless a specified exception [in the FSIA] applies ”; (4) an exception to the FSIA “is the commercial-activity exception”; (5) under this exception “a foreign state is not immune from jurisdiction [in cases] where . . . ‘the action is based [a] upon a commercial activity carried on in the United States by the foreign state; or [b] upon an act performed in the United States in connection with a commercial activity of the foreign state elsewhere; or [c] upon an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere and that act causes a direct effect in the United States.’”

The pro se plaintiff’s complaint against Bank Negara alleged wrongful dishonor of documents presented under the bank’s $411,600 letter of credit for goods his company shipped to Jakarta. The plaintiff traveled to Jakarta after his company’s LC was not paid and was allegedly told that JP Morgan Chase Bank, as confirming bank, was advised that the documents were discrepant and the goods were shipped late. Lavi’s complaint was dismissed, among other reasons, because under the FSIA the court did not have subject matter jurisdiction of the case—the issuing bank was a government-owned bank and the LC was payable from Indonesia and not payable to any account in the United States. Bank Negra Indonesia was therefore immune from suit in the United States because there was no direct commercial activity in the United States from the transaction.

Writ of Attachment vs. LC. In Rreef America REIT II Corp. YYYY, v. Samsara Inc., a $11,384,368.00 LC posted by Samsara, an industrial tenant, as security under its lease did not defeat a prejudgment issuance of writ of attachment in favor of plaintiff landlord in its unlawful detainer action against Samsara for $3,796,175.51 for rent, charges, attorneys’ fees, and costs. The court held that, even though California’s writ of attachment statute for commercial landlords reduce the amount claimed for distraint of rent based on a security interest in the tenant’s property, it did not do so for letters of credit posted by the tenant, the proceeds which did not constitute property of the tenant.

Duty to Post an LC. In Skyview Finance Co., LLC, v. Kearsage Trading, LLC, Skyview Finance purchased forward contracts for solar renewable energy certificates (SRECs) from Kearsage Trading Co., an independent producer of renewable energy that generated SRECs. As a tradeable environmental commodity, SRECs fluctuate in value. The contracts between the parties included provisions requiring adequate assurances of financial performance. Kearsage demanded a $2.1 million LC from Skyview for the full notional amount of the SRECs under contract at a time when the “out of the money” position of Skyview was only $142,000. The court noted that “within the SREC trade industry, a commercially reasonable demand for adequate assurance should not be higher than the risk that a party faces if the counterparty fails to perform, namely, the cost of cover in the open market.” The court determined that Skyview was not obligated to post an LC for the full notional amount of the SRECs but only for its out-of-the-money position. Kearsage’s demand for Skyview to post LCs in the full notional amount of the SRECs and terminating the contracts when Skyview resisted, constituted an anticipatory repudiation of them and entitled Skyview to damages for loss of its position in the SRECs.

FDIC’s Right to Post LC. Can the FDIC use an LC to remove a lien on real estate of an insolvent bank in order to sell the real estate? The question was answered in the affirmative in Wall Guy, Inc. v. FDIC. Under its receivership powers, the FDIC could remove a lien or mortgage on the failed bank’s property in exchange for a letter of credit.

Pre-Honor Cases

Injunctions Against Draw and Honor. Notwithstanding a facially compliant presentation, U.C.C. section 5-109 allows the issuer to dishonor or the applicant to enjoin a drawing under an LC if it can show that “a required document is forged or materially fraudulent [or that] honor . . . would facilitate a material fraud by the beneficiary.” Issuers are not legally obligated to raise a fraud defense on their own and are reluctant and frequently not in a position of knowledge of the underlying facts, motives, and actions of the parties to be able to do so. Accordingly, most LC fraud claims decided by courts are filed by applicants in emergency injunctive actions.

Few U.S. cases enjoin beneficiaries from presenting and issuers from honoring complying drawings under LCs based on claims of forged or materially fraudulent presentations because applicants must meet all section 5-109 conditions to obtaining injunctive relief for fraud and the non-prevailing party must pay its own, the issuer’s, and beneficiary’s attorneys’ fees. The four cases discussed below illustrate the difficulties applicants have in enjoining draws on LCs issued to support complex construction projects.

In Sterling & Wilson Solar Solutions, Inc. v. JPMorgan Chase Bank, Sterling and Wilson entered into engineering, procurement, and construction contracts (EPCs) for construction of two solar plants in the State of Washington with affiliated project owners. Sterling’s performance under the EPCs was supported by a $22,700,000 JPMorgan Chase Bank LC and a $24,340,000 Bank of America LC to the owners. The project owners presented draws for the full amount of each letter of credit, Sterling sought to enjoin each draw, and the court denied Sterling’s request for injunctive relief alleging that the plants were substantially completed, operating and generating revenue, and Sterling was owed many millions of dollars, so that to allow the draws would amount to a fraud on it. The project owners responded with affidavits and over thirty letters sent to Sterling during the course of the EPC contracts detailing delays, missed milestones, defects, mechanics liens filed by unpaid subcontractors of Sterling, loss of revenues, and other material breaches. The court denied injunctive relief and ordered the issuing banks to pay the LCs.

In Strabag SPA v. Credit Agricole CIB the plaintiff Strabag was engaged by Alto Maipo SPA to design, engineer, and construct water tunnels for a large hydroelectric facility near Santiago, Chile. After their construction, Strabag was to test the tunnels for water flow, but could not due to weather conditions depriving the tunnels of sufficient water and a collapse of the tunnel walls. The lower court granted an injunction against drawing and honoring the LC securing the Strabag’s performance obligations. The appellate court reversed because it determined that there was at least a colorable basis justifying the draw under Alto Maipo’s interpretation of an amended agreement to extend testing. The court noted that the SBLC was a “clean LC” in which normally the court does not review the underlying transaction and when material fraud is alleged to enjoin a draw, it is regarded as a narrow exception.

In AECOM Technical Services, Inc. v. Credit Agricole CIB, AECOM and its affiliates were engaged to design and construct part of a $900 million light rail system for Bogota, Columbia. Bank guarantees for advance payment, performance, and service quality were issued locally by Itau Corpbanca Columbia S.A. (Itau) in favor of Columbian agencies and backed by LCs issued by Credit Agricole. The project encountered delays and difficulties which AECOM claimed were not of its doing. The Columbian beneficiary agency drew $4.7 million on the bank guarantees for liquidated damages and Itau sought to draw on the Credit Agricole letters of credit. AECOM sought to enjoin the draws.

The court set forth the difficult showing of fraud AECOM had to make to enjoin an LC draw and stated that a difference of opinion or breach of contract rather than fraud is insufficient to justify enjoining a draw on an LC supporting performance of the contract in question. The court rejected all eight grounds raised by AECOM to show that it was not at fault for delays in the underlying contract, found that the issues raised by Aecon were contractual and did not rise to the level of fraud, and that the Columbian entity beneficiaries had colorable bases to draw on the guarantees backed by the counter-guarantee LCs.

One of the obstacles to an applicant obtaining an injunction against a draw on an LC is that it must show it will suffer irreparable harm if the injunction is not granted. In Experior Global Warehousing, LLC v. BTC III Hamilton DC, LLC, Experior posted a $1,500,000 LC to secure a lease of commercial warehouse space, discovered seepage, 100 percent humidity, mold danger, and damage to its stored products. It moved out of the warehouse and filed a multicount complaint against the landlord, which included a request for a temporary restraining order against a draw on the LC posted to secure the lease. The court disposed of the injunction claim based on the failure of Experior to show irreparable injury or harm which cannot be redressed by a legal remedy—monetary damages.

Sanctions. A significant foreign case determined that English and Irish airline leasing companies had the right to draw on UniCredit Bank confirmations of LCs issued by Sberbank to secure leases of aircraft to Russian aircraft companies: Celestial Aviation Services Ltd. v. UniCredit Bank A.G. (London Branch). Before the invasion of Ukraine, the claimants, aircraft leasing companies, entered into a number of aircraft leases with Russian aviation companies. Each aircraft lease was secured by UCP English law–governed SBLCs issued by Sberbank and confirmed by UniCredit Bank, London Branch, usually many years before 2022. On February 24, 2022, Russia invaded Ukraine and the Russian aircraft companies defaulted. On March 1, 2022, the EU and UK imposed Russian sanctions prohibiting transfer of restricted goods and technology and financial assistance concerning such goods and technology. The United States followed shortly afterward. Aircraft are prohibited goods and technology items covered by the Ukraine sanctions. The aircraft leases were terminated, but the Russians refused to return or allow the lessor access to the leased aircraft. The aircraft owners attempted to draw on UniCredit’s confirmations of the Sberbank LCs securing $131 million of leases, which UniCredit initially refused, then honored after obtaining licenses from the EU and German central bank to pay on its confirmations. The suit continued on the owners’ liability for significant attorneys’ fees and costs.

The court determined that payment by UniCredit, a German bank, under its confirmation to an Irish company, would not “in any way” enable or facilitate the supply of aircraft to a Russian company and thereby violate the sanctions regulations. The court noted that excusing payment would be a windfall to UniCredit as confirming bank and penalize the leasing companies without any consequence felt in Russia and would not be in keeping with the purposes of the U.S., U.K., and EU sanctions, regulations, and laws. The judge cited the autonomy or independence principle of LCs to support his decision—the obligation of a German bank to an Irish company is independent of the underlying transaction; UniCredit was not dealing with Sberbank’s property when it satisfied its own independent LC payment obligation.

Suits Determining Right to Draw—Insurer’s Bad Faith. Although the often-cited phrase to support the use of letters of credit is “draw now, litigate later,” sometimes the beneficiary may want to seek a judicial determination of its right to draw before doing so, to avoid adverse consequences if the draw turns out to be wrongful. In one such case, an insurer seeking to avoid a claim of bad faith by its insured filed an action to determine its right to draw on an LC backing its insured’s indemnity obligations. In Liberty Mutual Fire Insurance Co. v. The Shaw Group, Inc., the insured applicant argued and failed on its claims that the insurer acted in bad faith by threatening to draw on the applicant’s $1,250,000 LC issued to Liberty Insurance to secure insured claims obligations. Liberty sought—and in a later opinion was granted—summary judgment on its right to draw on the LC issued to it and procured by the insured.

Wrongful Dishonor. Wrongful dishonor disputes based on compliance of documents with the terms of the LC continue to be resolved mostly outside the courts. This is attributable to the clarity with which U.C.C. Article 5 recognizes standard LC practice in examining presentations and giving notice of dishonor under the UCP and ISP rules incorporated by reference into an LC and in ICC, BAFT and IIBLP publications, and programs providing guidance on international standard LC banking practices.

Lost Original. The rules dealing with lost originals include the strict-compliance rule of U.C.C. section 5-108(a) and, depending on which regime the LC incorporates, ISP98 Rules 3.12 and 4.15 or UCP600 Articles 2 and 17. Options that beneficiaries should consider when dealing with “presentation LCs” include: (1) refuse to accept presentation LCs; (2) provide in the LC a mechanism for its replacement (e.g., issuance of a duplicate original) if the original cannot be produced; or (3) take steps to safeguard the original.

In ProQuip Limited v. Northmark Bank, the court determined under U.C.C. section 5-108's "strict compliance" standard and Article 17a of the UCP600 that the LC issuing bank was not liable for wrongful dishonor of the beneficiary’s draw because the letter of credit required presentment of “the original of and all amendments, if any, to this Letter of Credit,” and the beneficiary presented the original letter of credit but only a photocopy of the LC’s sole amendment. Summary judgment by the lower court in favor of the beneficiary was reversed and instead entered in favor of the issuing bank.

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 presenter, or (ii) whether the applicant or beneficiary may have rights or claims against the other based on honor of the LC.

Lease Cases. Many lease wrongful draw cases resulted from mandated Covid-19 shutdowns or restrictions on use of the leased premises. Almost unanimously, New York courts upheld the landlord’s right to draw under an LC supporting its lease—a testament to the reliability of LCs and the careful drafting of leases. 2023 was no exception. In Majestic Rayon Corp. v. Soho Office Suites, LLC, notwithstanding tenant’s claim of frustration of commercial purpose due to the pandemic, the court upheld the landlord’s draw of $450,000 under the tenant’s LC posted as security because the tenant was in breach of the lease and the landlord had the right to terminate it.

Disputes Between Applicant and Beneficiary. Disputes between the applicant and the beneficiary arising out of a draw on an LC that has been honored include several different theories of recovery, including breach of warranty under section 5-110 of the U.C.C., breach of an underlying contract between the applicant and beneficiary, unjust enrichment, penalty or excessive draws, and fraud.

In the Eflo case discussed above under the heading Choice of Law, the plaintiff brought actions against Devon Energy for fraud, unjust enrichment, and breach of warranty under section 5-110, arguing that the LC erroneously named beneficiary that drew on the LC at issue in that case had no right to do so because it was not a party to the agreements that provided for the LC to pay for environmental cleanup damages and that it therefore had suffered no damages. Because the applicant failed to seek to amend the LC to name the Canadian parent company as beneficiary, the parent company and the named beneficiary, Devon Energy, entered into an agency agreement for Devon Energy to act for the parent company, draw on the LC when directed by the parent company, and pass through draw proceeds on the LC to the parent company. The court upheld this arrangement and affirmed the trial court’s rulings against the plaintiffs on all theories of recovery.

LC Cases of Note

Conversion of LC Proceeds. Iberdrola Energy Projects v. MUFG Union Bank, N.A. affirmed Iberdrola’s claim for conversion of the proceeds of a $140,000,000 performance letter of credit that plaintiff’s bank had issued to Footprint Power Salem Harbor Development L.P., which then assigned the LC proceeds to the defendant lending banks as partial collateral to secure $730,000,000 in financing. The assignment of LC proceeds was contemplated by the EPC contract for construction of the Salem Harbor Generating Plant. Iberdrola alleged that the owner and banks conspired to obtain the LC proceeds as “a windfall” and then converted them, despite knowing that Iberdrola was claiming hundreds of millions of dollars for unpaid work. According to Iberdrola’s briefs, an arbitral panel determined that Footprint owed Iberdrola $236,000,000, which included the full amount of the LC proceeds. Citing North American Airlines, Inc. v Wilmington Trust Co., the court rejected the defendant’s argument that LC proceeds were never in the control of the plaintiff to support a conversion claim. The court did not discuss well-known LC and bankruptcy law principles that an applicant does not have an interest in LC proceeds because they are regarded as funds of the issuing bank and not the applicant.

Actions Based on LC Bank Representations. The cases of Arif Kahn Global, Inc. v. State Bank of India and ERA Capital LP v. Soleil Chartered Bank, discussed below, illustrate the importance of LC banks and their personnel being well trained, using caution and refraining from making even oral representations or commitments which can be used as a basis for suit against the bank.

In State Bank of India, plaintiff, a trading company, alleged breach of contract, promissory estoppel, negligent misrepresentation, and fraud against State Bank of India for committing but failing to confirm transferable LCs issued by Indian Overseas Bank (HK branch) securing the purchase of several hundred thousand tons of sugar grown in Brazil. Without the confirmation, the transactions failed and the plaintiff claimed that it lost large sums of money. The appellate court examined each of the allegations of the third amended complaint and exhibits as to what the plaintiff claimed that State Bank of India personnel stated or represented, and found them lacking sufficient definiteness or making an unequivocal commitment to confirm transferable LCs procured by the plaintiff from IOB. As a result, the trial court’s dismissal of plaintiff’s complaint was affirmed.

Last year’s survey discussed ERA Capital v. Soliel Chartered Bank, in which Regions Bank as advising bank was unable to dismiss suit against it for allegedly advising ERA Capital that Soleil Chartered Bank, a bank chartered in the island country of Comoros off the coast of East Africa and owned by a Lichtenstein Trust, was a good bank to issue an LC to ERA Capital. The LC was subsequently dishonored. That ruling was affirmed on appeal. The ruling does not increase the liability of advising banks under Article 5 of the U.C.C. to advise accurately the terms of an LC without assuming liability for its payment, but that case as well as the State Bank of India case do show the need for LC bank personnel to be well-trained in what they should not say or represent to their customers about the creditworthiness of the issuing bank.

Sanctions. Foley v. Union de Banques Arabes et Francaises, also discussed above, shows how LCs have been used to evade U.S. trade sanctions. The court described two types of LC trade transactions used to evade sanctions: back-to-back LCs and trade finance LC transactions. “In the back-to-back [LC] transactions, a sanctioned . . . entity was the beneficiary of an export [LC] or the applicant for an import [LC], none of which, on their face, involved” clearing in U.S. Dollars (USD), but “an intermediary non-sanctioned entity entered into or received one or more corresponding [USD LC] to purchase or sell the same goods. . . . In the trade finance transactions, [the defendant bank] either issued a USD-denominated [LC] on behalf of a sanctioned party, or then provided a confirmed USD-denominated [LC] issued by a sanctioned bank and paid on the letter of credit through a U.S. cleared transaction.”

LCs in Bankruptcy. If a bankrupt company has letters of credit outstanding secured by its assets, and those assets become the subject of sale under section 363 of the Bankruptcy Code, the sale agreement and the order confirming it should provide for collateral protections to the issuing bank because such sales usually involve the sale of the bankrupt applicant’s assets free and clear of liens and security interests. Protections for the issuing bank should potentially include the LCs being canceled and replaced upon the sale or their remaining sufficiently collateralized by the proceeds of the sale or by new collateral, such as cash collateral, furnished by the purchaser or from the proceeds of the sale.

In re Kimmel’s Coal & Packaging, Inc. shows the importance of the issuing bank and its counsel paying careful attention to the wording of section 363 sale orders of their bankrupt applicant’s assets, which secure reimbursement to the issuing bank for LCs issued on behalf of the applicant. In Kimmel’s Coal, reclamation obligations on coal mining land leased to the bankrupt applicant Kimmel’s Coal were secured by letters of credit issued by Fulton Bank. In a section 363 sale of the debtor’s assets to another company, the sale agreement contemplated that the buyer would seek permits under Pennsylvania’s mining permit laws for transferring the coal mining rights to the leased land, subject to reclamation obligations secured by Fulton Bank’s LCs, and the buyer would replace those LCs with its own upon obtaining transfer of the permits. The assets of the debtor applicant were sold free and clear of liens and security interests of the bank, but the permits could not be transferred. The buyer refused to assume reclamation responsibility on land for which it did not obtain the right to mine and refused to replace or secure the reclamation LCs in question. The asset sale documents did not expressly contemplate what happens in that situation. After at least five decisions, the bankruptcy court determined that the LC-issuing bank had an opportunity to object or propose changes to the way the sale order read but did not do so, in effect consenting to its terms. As a result, the bankruptcy judge concluded that the purchaser had no obligation to replace or collateralize the bank’s LCs. The bankruptcy judge’s decision was appealed and the district court vacated and remanded it to the bankruptcy court for further findings on the intent of the parties under the asset sale agreement. Whatever the ultimate outcome of the remand, the issuing bank could have avoided the litigation over the loss of its LC collateral by more protective and clearer drafting of the section 363 sale order and agreement.

Supersedeas LCs. If drafted properly and its operation understood by the parties and the court, an LC can be used in lieu of a supersedeas bond to act as security for a judgment pending appeal to stay its execution. Doing so makes sense for the judgment debtor. It may save surety bond premiums when the judgment debtor posts a supersedeas LC directly to the plaintiff as beneficiary who obtained judgment against the applicant. In some cases, the judgment debtor has an already existing or readily available LC credit facility. For the judgment creditor, allowing an LC to be posted as collateral can have advantages of instant liquidity if the judgment is affirmed and, in some cases, avoids the automatic stay if the judgment debtor files for bankruptcy after the judgment is affirmed.

In 2023, a number of supersedeas LC cases were decided, some on the basis of court rules or case law allowing LCs to be posted as supersedeas, some by agreement of the parties, and some on the basis of the way the LC was drafted. Two cases were decided on whether additional time for a temporary stay of execution under Federal Rule of Civil Procedure 62 should be granted to allow the defendant time to put in place a letter of credit instead of a bond to stay execution pending appeal.

In Havana Docks Corp. v. Carnival Corp., four large cruise line companies were subject to separate judgments of almost $110,000,000 against each. They moved for waiver of an appeal bond on the ground that each had the present financial ability and assets in the billions of dollars to readily pay the judgments so that bond should be waived. The court noted its flexibility under Federal Rule of Civil Procedure 62 for alternatives to appeal bonds, but denied the cruise line defendants’ requests to waive them because they failed to present a plan or mechanism to maintain sufficient assets to satisfy the final judgments against them throughout the pendency of the appeals. In doing so, the court cited Financial Information Technologies, LLC v. iControl Systems., USA, LLC, which approved a letter of credit as alternate security to stay execution of a large judgment pending appeal.