Letters of Credit: 2020 Cases

This survey concentrates on the most significant letter of credit (“LC”)¹ issues addressed in cases decided in the United States in the year 2020.²

PRE-HONOR CASES— DISHONOR, FRAUD, AND REPUDIATION
Pre-honor cases are those in which a dispute arises before a demand for payment under an LC has been honored. These actions typically involve a beneficiary or other presenter claiming wrongful dishonor by the issuer or the applicant claiming fraud by the beneficiary and they focus on: (i) whether the issuer gave timely and sufficient notice of dishonor,³ (ii) whether the discrepancies stated in the 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.

DISCREPANCY DEFENSES, NONDOCUMENTARY CONDITIONS, AND PRECLUSION
Wrongful dishonor disputes based on facial compliance or preclusion issues 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, including the role of incorporated international LC rules, and also to the continuing elaboration of standard LC practice in published materials applying the concepts of preclusion and strict compliance to independent undertakings issued subject to UCP600, ISP98, and other ICC rules.

Natixis Funding Corp. v. GenOn Mid-Atlantic, LLC⁶ affirmed multiple summary judgment decisions in favor of multiple beneficiaries whose presentations under substantially similar LCs were refused on the sole ground that insufficient funds were available to meet the amounts drawn. Overdrawing a credit is a recognized type of discrepancy justifying dishonor and not requiring the issuer to pay some lesser amount that is available. On appeal, the issuer did not argue that each drawing, including as to the amounts drawn under each LC, did not facially comply with the letters of credit. It argued instead that there was a mistake in drafting a “contemplated” aggregate $130 million draw cap which could be remedied by rescinding or reforming the LC. The appellate court concluded that there was no mutual mistake or fraudulent taking advantage of a unilateral mistake.⁷

MAM Apparel & Textile Ltd. v. NCL Worldwide Logistics USA, Inc. provides a textbook case of the issuing bank’s dishonor of drawing documents for their failure to comply with the requirements for them specified in two UCP600 letters of credit.⁸ The Bangladesh beneficiary provided an air waybill instead of ocean bill of lading and failed to present a signed telefax and an authenticated SWIFT message stating that the shipment had been inspected and was authorized. The beneficiary also argued that the issuer was precluded from dishonoring its presentation under UCP600 Art. 16 and that notice of dishonor should have been communicated by telecommunication rather than by a SWIFT message. The court examined the issuing bank’s notice of dishonor via SWIFT message and found that it named the discrepancies as required by UCP600 Art. 16(c).⁹ Counting the business days from the day of presentation to the day of the SWIFT messages notifying of dishonor, the court also found that notices of dishonor were given within five business days by telecommunication through SWIFT as required by the UCP Art. 16(d).¹⁰ The court labeled beneficiary’s argument that SWIFT messages were not telecommunications as nonsensical.¹¹

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An undertaking that meets the U.C.C. section 5-102(a)(10) definition of letter of credit is not subject to suretyship defenses. In Skanska USA Civil Southeast Inc. v. UP Community Fund, LLC,¹² the court correctly rejected the nonbank issuer’s argument that its undertaking should be analyzed under suretyship law based on the inclusion of a nondocumentary condition. While U.C.C. section 5- 108(g) requires nondocumentary LC conditions to be disregarded,¹³ the court specifically rejected the issuer’s argument that a statement in the draw certificate that the beneficiary was entitled to draw pursuant to a specified subcontract removed the undertaking from U.C.C. Article 5 and converted the undertaking to a suretyship arrangement.¹⁴ The reference to an underlying agreement did not require the issuer to review a document not presented to it or determine events outside the documentary presentation.¹⁵ The court denied the issuer’s motion to dismiss¹⁶ and allowed the case to continue to address defenses based on untimely presen-tation,¹⁷ as well as presentation of a copy rather than the original LC.¹⁸

Jr. Food Stores, Inc. v. Hartland Construction Group, LLC¹⁹ held that the LC issuer was not bound by the underlying construction contract’s arbitration requirement because the issuer did not agree to arbitrate and the LC at issue required actions concerning it to be brought in Kentucky courts. The AIA contract which contained an arbitration provision was referenced in but not explicitly incorporated into the LC. The court unfortunately commented that the issuer could be subject to arbitration, but for the Kentucky court jurisdiction clause set forth in the LC.²⁰ At the request of the plaintiff-beneficiary to enter a stay in favor of mediation and arbitration, the court stayed the plaintiff’s claim against the issuer to allow for arbitration over the construction contract between the beneficiary and the applicant.²¹ The court’s comment and stay are unfortunate. As explained in the Skanska case discussed above, recitation of an underlying agreement does not turn an LC into a suretyship arrangement.²² While U.C.C. Article 5 allows for targeted application of suretyship law in certain post-honor disputes, it does not do so in the enforcement of an issuer’s undertaking where the “independence principle” fully applies.

FRAUD DEFENSES AND INJUNCTIONS
U.C.C. section 5-109 applies to an apparently complying presentation that is subject 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.²³ 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 injunctive relief to prevent honor when a drawing is about to occur or be honored. U.C.C. section 5-109 dictates how U.S. courts should balance an LC’s independence from the underlying transaction with fraud deterrence.

Few U.S. cases enjoin beneficiaries from presenting and issuers from honoring complying draws on LCs based on claims of forged or materially fraudulent presentations, a tribute to the specificity with which the LC fraud exception is addressed in section 5-109 and to the imposition of fees and costs on an applicant or issuer that unsuccessfully invokes the LC fraud exception.²⁴

In addition to providing for substantive fraud/forgery requirements, U.C.C. section 5-109(b) provides that the same limitations on obtaining an interim or permanent injunction against honor apply to the granting of “similar relief against the issuer or other persons.”²⁵ Official Comment 5 to U.C.C. section 5-109 underscores its application to injunction against presentation, inter-pleader, declaratory judgment, and attachment actions.26

In EL Ad US Holding Group, Inc. v. American International Group, Inc.,²⁷ the court denied injunctive relief to prevent the insurance company beneficiaries from drawing on a $5,000,000 LC posted as security for the applicant’s indemnity liability for claims and premiums. The court quoted and reviewed the requirements of U.C.C. section 5-109(b) and determined that the dispute was not fraud but a contractual dispute involving the calculation of premiums based on payroll and claims losses.²⁸ The court noted that there was no showing of active intentional fraud in the transaction and that to hold otherwise would turn disputes about performance or breach into claims of fraud.²⁹ The court also denied relief on the ground that the plaintiff could not show irreparable injury.³⁰

In contrast to the El Ad case above, the court in GP3 II, L.L.C. v. Bank of the West³¹ issued a temporary restraining order (”TRO”) under U.C.C. section 5109(b) against the issuing bank from honoring and the beneficiary from drawing on a standby LC securing the nearly $20 million price for piping to be supplied for a New Mexico water project. The court reviewed the requirements of U.C.C. section 5-109(b) and found, based on the evidence, that the contracted for pipe for which the beneficiary was drawing on the LC was not in the possession of the beneficiary and probably did not exist.³² The court also found that Bank of the West, as purchaser of the underlying invoice on the contract and assignee of proceeds from the beneficiary, was not protected from the applicant’s fraud defense to the draw; the beneficiary did not qualify as one of the four types of protected parties under U.C.C. section 5-109(a)(1).³³ Finding probable success on the merits that the draw would facilitate a material fraud and conditioned on the applicant posting of a $21 million bond, the temporary restraining order was granted.³⁴

In determining whether an injunction or attachment should prevent the beneficiary from drawing on or obtaining the proceeds of, and the issuer from honoring, a draw on an LC, some courts do not apply the criteria set forth in U.C.C. section 5-109 to determine whether an injunction should issue; rather they apply the general equitable principles for injunctive relief.³⁵

REPUDIATION DUE TO ISSUER INSOLVENCY
In Granite Re, Inc. v. National Credit Union Administration Board,³⁶ Granite Re issued $4 million worth of performance and payment bonds on construction contracts for its insured. Granite Re’s bond exposure was secured by a clean LC³⁷ issued by a national credit union. The credit union became insolvent and the NCUA as receiver repudiated the LC on the ground that under 12 U.S.C. § 1787, the credit union’s receiver may reject any contract and not be liable for doing so except for “actual direct compensatory damages determined as of the date of the appointment of the conservator.”³⁸ The NCUA interpreted this provision to allow only claims where presentation under the LC has been made but not honored when the conservator is appointed. The beneficiary insurance company challenged that interpretation. The court thus addressed a potential conflict on the amount of damages that can be claimed for LC repudiation due to receiver insolvency under federal law applicable to an insolvent LC issuer versus damages allowed under the U.C.C. for an LC issuer’s repudiation of its LC undertaking.³⁹ The federal district court upheld the receiver’s position.⁴⁰ The U.S. Court of Appeals for the Eighth Circuit reversed and remanded, holding that “the beneficiary of a valid letter of credit may realize actual direct compensatory damages prior to the date of the conservatorship as a result of its reliance on that letter of credit.”⁴¹ The court noted that the repudiated LC was a standby LC that secured Granite Re’s surety bond obligations that were outstanding when the conservator was appointed.⁴²

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 impaired or enhanced rights against each other based on honor of the LC.

ISSUER RECOVERIES
There were no significant cases reported in 2020 on issuer post-honor reimbursement or other issuer rights and remedies against applicants (or on applicant post-honor rights and remedies against issuers).

APPLICANT/BENEFICIARY RECOVERIES
Post-honor disputes between applicants and beneficiaries are typically based on the underlying agreements between them but are sometimes importantly supplemented by U.C.C. Article 5.⁴³

In ADA-ES, Inc. v. Big Rivers Electric Corp.,⁴⁴ the court concluded that defendant-beneficiary Big Rivers invalidly tested the emissions reduction system delivered to its plant by plaintiff-applicant ADA and inexcusably withheld from ADA the final contract payment of $563,382, with the legal effect of excusing ADA from further contract performance.⁴⁵ On that basis the court decided in favor of ADA on the parties’ competing motions for summary judgment on their competing breach of contract claims, adding that: “Big Rivers cannot recover attorneys’ fees because it lacked a contractual right to withhold contract payments or draw on the letter of credit.”⁴⁶ This November 23, 2020 decision does not address ADA’s breach-of-contract remedies as applied to Big Rivers’ withholding the final $563,382 contract payment or drawing $807,651 under the LC provided by ADA. It expressly leaves for trial ADA’s claims that Big Rivers’ LC drawing breached the U.C.C. section 5-110(a) warranties.⁴⁷

In a prior opinion, the court rejected ADA’s claim of breach of the U.C.C. section 5-110(a)(2) warranty that was narrowly based on Big Rivers’ failure to conduct a pre-drawing “root cause investigation,” because the court found no such requirement in the underlying agreement.⁴⁸ This prior opinion notes that the underlying agreement required ADA to provide an LC “to be held as security for performance.”⁴⁹ The court’s November 23, 2020, summary judgment decision, summarized in the preceding paragraph, concludes that Big Rivers, not ADA, failed to perform their agreement, which leaves little room now to conclude that Big Rivers’ drawing did not violate their agreement within the meaning of the U.C.C. section 5-110(a)(2) warranty.⁵⁰ There should also be little difference between the remedies available for a drawing that breaches their agreement governed by Kentucky contract law or that violates their agreement as provided in Colorado’s U.C.C. section 5- 110(a)(2). Both focus on the parties’ intent to provide LC support for ADA’s performance obligations, and both lead to the application of analogous, if not identical, remedy considerations.⁵¹

The court’s November 23, 2020, summary judgment decision notes that factual questions still precluded summary judgment on ADA’s claims that Big Rivers committed common law fraud and breached the “no fraud” warranty of U.C.C. section 5-110(a)(1).⁵² There being no dispute that the LC was governed by Colorado’s Article 5, the court applied the U.C.C. section 5-109 test for standby LC fraud (“no colorable right to draw”) to the subsection (a)(1) claim but not to the common law claim.⁵³

Hopefully, Colorado law would reject ADA’s claim of fraudulent drawing if it did not meet the U.C.C. Article 5 fraud test. Whether a drawing under an Article 5 LC is fraudulent or not should be determined by application of U.C.C. section 5-109(a). Whether an LC-supported contract has been violated should be determined by application of contract law.

In Solferini, as Trustee of Corradi S.P.A. v. Corradi USA, Inc.,⁵⁴ the defendant U.S. subsidiary of a now bankrupt Italian corporation benefited from an LC drawing by its U.S. bank that applied the LC proceeds to reduce its outstanding loans. The trustee of the bankrupt parent sued the subsidiary to recover the benefit conferred by the parent as the applicant for the LC, either the $800,000 drawn or the $115,666.76 the Italian bank issuer recovered in the parent’s bankruptcy.⁵⁵ Presumably, the Italian bank undertaking qualified as an LC supporting the subsidiary’s bank loan repayment obligations to the LC beneficiary, and the parent-subsidiary relationship qualified as one of suretyship. U.C.C. Article 5 does not appear to govern any obligations of the defendant to its majority owner or to the plaintiff, whereas suretyship law does appear applicable to them.

The plaintiff invoked U.C.C. section 5-117, which provides for post-honor subrogation (a) by an (unreimbursed) issuer and (b) by an applicant that reimburses an issuer.⁵⁶ The opinion focuses on whether the Italian bank issuer or its applicant paid the drawing under the LC. LC law is very clear that LC banks obligate themselves to pay, and effect payment of, complying drawings with their own funds. The court rightly rejected arguments that the $800,000 drawing was honored by payment of the applicant’s funds or that the parent-applicant could otherwise be treated as an LC issuer for purposes of U.C.C. section 5-117(a).⁵⁷ Resort to subrogation under U.C.C. section 5-117(b) to recover
$115,666.76 was rejected as having been raised too late.⁵⁸

In EFLO Energy v. Devon Energy Corp.,⁵⁹ EFLO caused its bank to issue an LC to Devon Energy in exchange for oil and gas properties. Devon Energy drew under the LC four days prior to the date it represented to EFLO it would do so unless the LC was extended by that date, which led to EFLO’s claim of fraud. The court held that EFLO could plausibly recover damages for expenditures it incurred in trying to obtain an extension or replacement LC in the four days before Devon said it would draw under the LC.⁶⁰ However, the court felt it unlikely that the plaintiff could recover the entire amount paid under the LC as a remedy even though it allowed the case to proceed.⁶¹

OTHER LETTER OF CREDIT CASES OF INTEREST

LANDLORD TENANT LETTERS OF CREDIT

LCs are frequently posted as security for tenant lease obligations. Besides the Backal case, which involved tenant attempts to avoid lease obligations based on the surrender of the leased premises due to COVID-19 and the governor’s order banning large gatherings frustrating the use of the leased premises,⁶² there were several other cases decided in 2020 that involved LCs in lease transactions. In all cases reported, the landlord was able to apply the letter of credit proceeds to its damages without prejudice to its other rights under the lease.

In two cases the obligors on leases unsuccessfully argued that draws on LCs supporting leases ended their liability under their leases.⁶³ In a third,⁶⁴ the court refused to count the landlord’s $1.3 million draw on an LC posted to support the lease as a reduction of the amount necessary for the tenant to post to stay execution of the court’s judgment of unpaid holdover rent. In another,⁶⁵ the lessee requested the court to require the landlord to submit documentation to the issuing bank to reduce the tenant’s security deposit LC for each elapsed year of the lease. Because the lease did not require reduction of the LC, the court did not order it.⁶⁶

LETTER OF CREDIT SCAMS
A number of cases every year are reported involving and describing LC scams of a criminal nature. 2020 was no exception.

Booth Creek Management Corp. v. New Executive Group Ltd.⁶⁷ involved an investment in two fake 750 million letters based on phony SWIFT transcripts and fake LCs. In United States v. Taylor,⁶⁸ the court described the LC fraud scheme for potentially tens of millions of dollars involving “generation of false letterhead, contracts, SWIFT verbiage, fake financial documents, a website containing false information, a variety of email accounts, [and] more than one fake identity.”⁶⁹ In United States v. Smith,⁷⁰ the defendant was convicted for conspiracy to defraud a bank by participating in a scheme to convert $3.9 million of check kiting losses into a loan backed by a forged LC. Adolas, LLC v. Alexander Andrews & Associates, LLC⁷¹ involved a $2 million advance fee scam paid by plaintiff into a law firm escrow account that was quickly emptied and not used to procure an $18 million LC for a never-materialized purchase of sugar in Brazil for sale and delivery to Djibouti, Africa.

JURISDICTION AND APPEAL COSTS
In an unusual case, a Moroccan bank as potential issuer of an LC found itself in a West Virginia court under that state’s long-arm statute based on allegations that it had sufficient contacts with the state by virtue of promises and negotiations to issue an LC to support coal purchases by a Moroccan company.⁷² In Atchley v. AstraZeneca UK Ltd., foreign banks were not subject to suit in New York courts under the Antiterrorism Act simply because they made LC fee payments into the Trade Bank of Iraq’s correspondent New York bank account.⁷³

Courts have held that Rule 39 of the Federal Rules of Appellate Procedure does not provide for costs paid for LCs used to secure an appeal or supersedeas bond where the costs paid for the LC were in addition to the cost of the premiums paid for the supersedeas bond.⁷⁴

LETTERS OF CREDIT IN BANKRUPTCY
Four cases or orders reported in 2020 demonstrate how a bankrupt debtor’s outstanding standby LCs are transferred or replaced pursuant to a section 363 sale of the debtor’s assets, contracts, and permits to another company—two correctly and two incorrectly.⁷⁵

In the Kimmel’s Coal case, the issuing bank’s two LCs secured coal mining reclamation obligations under permits on land not owned but mined by the debtors. The section 363 sale order did not obligate the purchaser to replace or assume liability for the debtor’s outstanding LCs or to take over the debtor’s coal mining on the properties to which the LCs related unless the mining permits and leases for them were transferred to the buyer, which they were not. However, the sale order provided that transfer of all of the debtor’s assets would be free and clear of all liens and mortgages, including the issuing bank’s liens.⁷⁶

In RTW Retailwinds, outstanding LCs to insurance companies totaling $6.1 million which secured the debtor’s workmen’s compensation and other obligations were listed on a schedule mistakenly showing them to be replaced by the purchaser of the debtor’s assets, even though the purchaser did not assume the contracts or obligations which the LCs supported.⁷⁷

In Duro Dyne National, the sale order determined specifically which LCs on lease obligations were to be replaced or cash collateralized by the purchaser and which ones were not and provided that for the LCs assumed by the purchaser, the purchaser also assumed the indemnity obligations with respect to them.⁷⁸

In Lucky Brand the sale order was specific as to which LCs would be cash collateralized or replaced by the buyer, and for avoidance of doubt, the buyer was to have no liability to replace, settle, or collateralize any standby LC (i) to the extent the inventory relating to it had been included in the calculation of the debtor’s inventory being purchased or (ii) that related to a debtor’s lease unless and until the lease had been actually assumed by the buyer.⁷⁹

In the Sears bankruptcy, the court subtracted $395 million equal to Sears’ outstanding LCs securing Sears’ obligations for workmen’s compensation, leases, and a letter of credit facility from the value of the second lien collateral because Sears’ LC reimbursement obligations were owed to the first lien collateral holders and secured by first lien collateral.⁸⁰

In another bankruptcy case a settlement was reached between the debtor and a related employee retirement plan over how the drawdown on a $22 million LC and escrow fund was to be divided between the debtor and the retirement plan.⁸¹ The court noted that one of the factors for approval of the settlement is recognition that only the retirement plan trustee had drawing rights on the LC so that the settlement avoided costly litigation and efforts by the debtor to claw back funds drawn on the LC.⁸²

OTHER DEVELOPMENTS
UCP600 and other certain ICC rules (not including ISP98) limit a bank’s responsibility for the consequences arising out of the interruption of its business by causes beyond its control. Concerns about COVID-19 prompted the ICC Banking Commission to provide guidance.⁸³ There have been few, if any, reported bank defenses of LC dishonor based on a COVID-19 related force majeure excuse, whether found in an ICC rule or applicable law.

*©2021. Published in THE BUSINESS LAWYER, by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.

Endnotes:

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, “UCP” refers to the Uniform Customs and Practice for Documentary Credits, 2007 revision (ICC Pub. No. 600), and “ISP” refers to the International Standby Practices (ICC Pub. No. 590). “ISP 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 ISP Forms 1 and 2 are reprinted in LC RULES & LAWS: CRITICAL TEXTS FOR INDEPENDENT UNDERTAKINGS (James E. Byrne ed., 7th ed. 2018) [hereinafter LC RULES & LAWS].

2. This survey also includes a few non-case developments of interest in the LC field. LC cases decided shortly before or after 2020 may be covered in a prior or subsequent year’s The Business Lawyer survey. The 2020 Marquette Transportation case decided shortly after 2019 year-end was discussed in last year’s U.C.C. Letters of Credit Survey and will not be covered here. See James G. Barnes, Letters of Credit, 75 BUS. LAW. 2679, 2681 (2020) (discussing Marquette Transp. Fin., LLC v. Soleil Chartered Bank, No. 18 Civ. 9879 (LGS), 2020 WL 122975 (S.D.N.Y. 2020) (wrongful dishonor claim upheld)).

3. See U.C.C. § 5-108(b)–(d) (2011).

4. See id. § 5-108(a).

5. See id. § 5-109(a).

6. 121 N.Y.S.3d 34 (App. Div. 2020), appeal denied, 128 N.Y.S.3d 470 (2020).

7. Id. at 36; see also James G. Barnes, Letters of Credit, 75 BUS. LAW. 2679, 2680, 2683 (2020) (citing Dickerson OL2 LLC v. Natixis, N.Y. Branch, No. 652399/2018, 2019 WL 2299900 (N.Y. Sup. Ct. May 30, 2019), aff’d, 181 A.D.3d 481 (N.Y. App. Div. 2020); Natixis Funding Corp. v. GenOn Mid-Atl., LLC, No. 650817/2018, 2019 WL 2319171 (N.Y. Sup. Ct. May 28, 2019), aff’d, 181 A.D.3d 481 (N.Y. App. Div. 2020) (discussing separately the facial compliance and fraud issues argued and decided earlier in the New York County Commercial Division)).

8. No. 19-CV-3750 (NGG) (RML), 2020 WL 4336362 (E.D.N.Y. July 28, 2020).

9. Id. at *4. The court also took judicial notice that the SWIFT messages of dishonor contained a “77B-/NOTIFY/” code indicating to SWIFT users “that the documents [were being] held until the issuing bank receives a waiver from the applicant and agrees to accept it or receives further instructions from the presenter,” thus meeting the notice requirements of UCP arts. 16(c) and 16(d) and avoiding the beneficiary’s preclusion arguments. Id. (citing STANDARDS: CATEGORY 7 DOCUMENTARY CREDITS AND GUARANTEES 172, https://www.swift.com/swift-resource/164981/ download).

10. Id. at *5.

11. Id. at *4.

12. No. 3:20CV393, 2020 WL 6572641 (W.D.N.C. Nov. 9, 2020).

13. Id. at *3–4. Whether an undertaking is an LC and enforceable as an “independent” undertaking is determined by U.C.C. Article 5, a result that is reinforced by common law suretyship principles. See RESTATEMENT (THIRD) OF SURETYSHIP & GUARANTY § 4(2) (1996) (“The Restatement of this subject does not apply to obligations governed by the law of letters of credit.”).

14. Skanska USA, 2020 WL 6572641, at *3–4.

15. See U.C.C. § 5-108(g) cmt. 9 (2011), quoted at length in Skanska USA, 2020 WL 6572641, at *3.

16. Skanska USA, 2020 WL 6572641, at *4.

17. U.C.C. section 5-108 addresses timely presentation. ISP, which may be applied to any standby LC that fails to incorporate any practice rules (see ISP Rule 1.01(a) and U.C.C. section 5-108), addresses timely presentation in ISP Rule 3.

18. See ISP 98 Form 1—Model Standby Incorporating Annexed Form of Payment Demand with Statement, endnote 9 (Presentation of Standby) (addressing presentation of a standby copy, rather than an original) (available at https:// iiblp.org/wp-content/uploads/2014/12/ISP98-Form-1-10-May-2012.doc).

19. No. 1:19-CV-00076-GNS, 2020 WL 1442889 (W.D. Ky. Mar. 24, 2020).

20. Id. at *3.

21. Id. at *4.

22. People’s Bank as issuer later settled with the beneficiary. See Jr. Food Stores, Inc. v. Hartland Constr. Grp., LLC, No. 1:19-CV-00076-GNS-HBB, 2021 WL 1062546 (Mar. 18, 2021).

23. See U.C.C. § 5-109 (2011).

24. 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.”). The Alabama, Connecticut, New Jersey, and Texas versions of this subsection make the award of attorney’s fees discretionary. 2020 ALA. CODE § 7-5-111(e) (2021); 2020 CONN. GEN. STAT. ANN. tit. 42 § 42a-5-111(e) (2021); N.J. STAT. ANN. § 12A:5-111(e) (2021); TEX. BUS. & COM. CODE ANN. § 5.111 (2020). New York omits the award from the statute altogether. See N.Y. U.C.C. LAW § 5-111(e) (2021).

25. U.C.C. § 5-109(b) (2011).

26. Id. cmt. 5.

27. No. 158426/2020, 2020 WL 6746629 (N.Y. Sup. Ct. Nov. 17, 2020).

28. Id. at *2, *6.

29. Id. at *6.

30. Id. The plaintiff also claimed that the beneficiaries were bound by an agreement to arbitrate before drawing, an issue the court did not reach because the plaintiff had not requested arbitration.

31. 467 F. Supp. 3d 765 (W.D. Mo. 2020).

32. Id. at 769–72. Evidence of fraud included: (i) experts identifying pictures of the piping to be shipped showing it was clearly not the piping contracted for; (ii) use of reverse Google and/or Bing searches to demonstrate that the photographs of the piping to be shipped were taken from other manufacturers’ websites; (iii) redaction of the factory purchase order to a third-party supplier deleting the name and contact information of the manufacturer so it could not be checked; (iv) the beneficiary-supplier’s purchase order placed with the manufacturer was for thirty-seven miles of specially manufactured pipe consisting of 4,995 40’ pieces 36” in diameter and was dated only eight days before the pipe was to be delivered, which plaintiff’s expert testified would take a year to produce; (v) a bogus invoice; and (vi) a denial by GP3’s officer that it signed the invoice for the drawing. Id. at 768–72.

33. Id. at 772–73. Honor is required notwithstanding fraud if the person presenting the demand (not the case here) is a confirmer, a negotiating bank that paid value in good faith, a holder in due course, or a good-faith assignee for value of the issuer’s deferred obligation. U.C.C. § 5-109(a)(1)(i)–(iv) (2011).

34. Id. at 773–74. The LC was open for only fifteen days for drawing. The court noted that the TRO bond would avoid irreparable harm to the beneficiary. Id. at 772. Even though the TRO was issued in June of 2020, ten months later as of the date of writing this survey (April 2021), no further orders nor an appeal has been entered in the case.

35. See, e.g., Emergency Med. Servs. Auth. v. Am. Med. Response Ambulance Serv., Inc., No. 20-cv-455-GKF-CDL, 2020 WL 8513148 (N.D. Okla. Dec. 4, 2020) (TRO denied under general standards for preliminary injunctions in federal court without citing section 5-109(b)(3) requiring such standards to be applied, but later court’s opinion allows count for wrongful draw to proceed, 2021 WL 1298927, at *5); Backal Hospitality Grp. LLC v. 627 W. 42nd Retail LLC, No. 154141/ 2020, 2020 WL 4464323 (N.Y. Sup. Ct. Aug. 3, 2020) (preliminary injunction denied without mention or discussion of section 5-109 to prevent draw on LC posted for lease security; leased premises were surrendered after rendered unusable due to COVID-19 and governor’s order prohibiting large gatherings).

36. 956 F.3d 1041 (8th Cir. 2020).

37. Clean LCs, sometimes referred to as suicide letters of credit, are standby LCs that require presentation of only a draft or demand for payment, and no other documents. See U.C.C. § 5-109 cmt. 3 (2011). The court in Granite Re characterized them “as security devices which assure virtually unrestricted access to payment on demand.” Granite Re, 956 F.3d at 1047.

38. Granite Re, 956 F.3d at 1044 (quoting 12 U.S.C. § 1787(c)(3)(A)).

39. See U.C.C. § 5-111(a) (2011) (excusing the beneficiary of a repudiated LC from presenting any document, and effectively accelerating the beneficiary’s remedies and easing the evidentiary requirements to recover from the issuer).

40. Granite Re, 956 F.3d at 1044.

41. Id. at 1047.

42. Id.; see also James G. Barnes, Letters of Credit, 75 BUS. LAW. 2679, 2684 (2020) (citing Lexon Ins. Co. v. FDIC, No. 18- 4245, 2019 WL 4690412 (E.D. La. Sept. 26, 2019) (discussing similar issues decided, without the benefit of the Granite Re decision). An appeal is pending before the Fifth Circuit. In Lexon Insurance Co. v. FDIC, No. 18-4245, 2020 WL 972708 (E.D. La. Feb. 28, 2020), the court held that the FDIC was not liable to Lexon for allowing automatic extension of the standby LC after having ordered the failed bank issuer not to extend any further credit.

43. See U.C.C. §§ 5-110, 5-117 (2011) (providing applicants with post-honor warranty and subrogation rights). Insolvency laws also may affect the application of LC proceeds.

44. No. 4:18-CV-00016-JHM, 2020 WL 6877739 (W.D. Ky. Nov. 23, 2020). This ongoing litigation started with ADA’s filing a complaint for breach of Colorado’s U.C.C. section 5-110(a) warranties, as well as for breach of the parties’ underlying agreement governed by Kentucky law. See James G. Barnes, Letters of Credit, 74 BUS. LAW. 1267, 1275 (2019) (citing ADA-ES, Inc. v. Big Rivers Elec. Corp., No. 17-cv-1001-WJM-MEH, 2018 WL 828015 (D. Colo. Feb. 12, 2018) (discussing the Colorado court’s decision to transfer the case to Kentucky)).

45. ADA-ES, Inc., 2020 WL 6877739, at *9.

46. Id. at *13.

47. Id.

48. ADA-ES, Inc. v. Big Rivers Elec. Corp., 465 F. Supp. 3d 703, 715–16 (W.D. Ky. 2020) (ruling on defendant’s motion for partial summary judgment).

49. Id. at 715. The issued LC required that Big Rivers submit a signed written statement addressed to the Bank stating: “ADA-ES, Inc. has been notified in writing of our intent to draw under this letter of credit because of ADA-ES, Inc.’s failure to meet the faithful performance of the Contract . . . and having been provided reasonable opportunity to cure, ADA-ES, Inc. has failed to fulfill its obligations under that certain Contract. A true and correct copy of said notification is attached hereto.” ADA-ES, Inc. v. Big Rivers Elec. Corp., No. 4:18-CV-00016-JHM, 2020 WL 3065102, at *7 (W.D. Ky. June 9, 2020) (ruling on plaintiff’s motion to amend).

50. ADA-ES, Inc., 2020 WL 6877739, at *9; see also U.C.C. § 5-110 cmt. 2 (2011) (“It [the subsection (a)(2) warranty] is a warranty that the beneficiary has performed all the acts expressly and implicitly necessary under any underlying agreement to entitle the beneficiary to honor.”).

51. See id. § 5-110 cmt. 3 (“The applicant’s damages for breach of the warranty in subsection (a)(2) are limited to the damages it could recover for breach of the contract for sale.”). During the revision of Article 5 in the 1990s, many wanted no warranty, just official comments limiting the application of the LC independence principle in post-honor disputes between applicants and beneficiaries. Section 5-110 was drafted to give standing to applicants (and unreimbursed issuers with post-honor subrogation rights) who were not themselves parties to the agreement intended to be supported by the LC. See id. § 5-110 cmt. 2 (“. . . primary application. . . where the applicant is not a party to an underlying contract with the beneficiary”); see generally James G. Barnes & James E. Byrne, Revision of U.C.C. Article 5, 50 BUS. LAW. 1 449, 1455–57, 1457 n.53 (1995).

52. ADA-ES, Inc., 2020 WL 6877739, at *13.

53. Id. at *10–11.

54. No. 4:18-CV-00293, 2020 WL 1511315 (E.D. Tex. Mar. 30, 2020).

55. Id. at *2–6.

56. See U.C.C. § 5-117 (2011).

57. Solferini, 2020 WL 1511315, at *6.

58. Id.

59. No. CIV-19-544-J, 2020 WL 4925741 (W.D. Okla. Mar. 9, 2020).

60. Id. at *3.

61. Id.

62. See infra note 36.

63. 228E58STR LLC v. Koleksiyon Mobilya San A.S., No. 19 Civ. 7795 (NRB), 2020 WL 4260959, at *1 n.5, *8–9 (S.D.N.Y. July 23, 2020) (defendant guarantor of the lease unsuccessfully argued its guaranty was a “good guy” guaranty, pursuant to which defendant’s liability is limited to the amounts owed by tenant to the landlord through the surrender date, which its “clean, automatically self-renewing, non-expiring, irrevocable and freely transferable letter of credit” secured); Thor 680 Madison Ave. LLC v. Qatar Luxury Grp. S.P.C., No. 17 Civ. 8528 (PGG), 2020 WL 2748496 (S.D.N.Y. May 27, 2020) (lessee unsuccessfully argued that the landlord’s drawing $12 million under a letter of credit posted by an affiliate guarantor constituted an election of alternative remedies under the lease).

64. BP 510 Madison LLC v. Prosiris Capital Mgmt. LLC, 120 N.Y.S.3d 718 (Civ. Ct. 2020).

65. Dietzek v. Voorhees White Horse, LP, No. A-5113-18T3, 2020 WL 3579668 (N.J. Super. Ct. App. Div. July 1, 2020).

66. Id. at *3; cf. Holland as Trustee of UMWA 1992 Benefit Plan v. Arch Coal, Inc., 947 F.3d 812 (D.C. Cir. 2020) (a nonlease case of similar effect where the trustee of a coal mining employee retirement plan was not required to use proceeds of a letter of credit posted solely for retirees to reduce defendant’s liability for posting additional security).

67. No. 14-19-00715-CV, 2020 WL 4760163 (Tex. App. Aug. 18, 2020).

68. No. 17-cr-00191-JST-1, 2020 WL 2078301 (N.D. Cal. Apr. 29, 2020).

69. Id. at *1.

70. No. 1:16-cr-10089-STA-jay, 2020 WL 6568865 (W.D. Tenn. Nov. 9, 2020).

71. No. 19-cv-00881-MEH, 2020 WL 1274494 (D. Colo. Mar. 17, 2020).

72. United Coals, Inc. v. Attijariwafa Bank, No. 1:19-cv-95, 2020 WL 1866426 (N.D. W. Va. Apr. 14, 2020). 73. 474 F. Supp. 3d 194 (D.D.C. 2020).

74. See, e.g., Ericsson Inc. v. TCL Commc’n Tech. Holdings, Ltd., No. 2:15-cv-00011-RSP, 2020 WL 3469220 (E.D. Tex. June 23, 2020).

75. In re Kimmel’s Coal & Packaging, Inc., Nos. 18-bk-01609 HWV), 18-bk-02506 (HWV), 18-bk-02507 (HWV), 18-bk- 02509 (HWV) & 18-bk-02510 (HWV) (jointly administered under No. 18-1609), 2020 WL 5576960 (Bankr. M.D. Pa. June 1, 2020); In re Duro Dyne Nat’l Corp., No. 3:19-cv-15433-MAS, 2020 WL 6270691 (D.N.J. Oct. 23, 2020); In re Lucky Brand Dungarees, LLC, No. 20-11768 (CSS), 2020 WL 4698654 (Bankr. D. Del. Aug. 12, 2020); In re RTW Retail-winds, Inc., No. 20-18445 (JKS), 2020 WL 7330061 (Bankr. D.N.J. Dec. 8, 2020).

76. In re Kimmel’s Coal, 2020 WL 5576960, at *5 n.13. The bank did receive the net cash proceeds from the sale of the assets of the debtors, but their amount was apparently not enough to cover the bank’s outstanding loans let alone the bank’s unreplaced outstanding letter of credit obligations. The court did reserve for a later hearing the right of the issuing bank to argue and prove that its letters of credit were used by the purchaser during a transition period for which the bank should be compensated. Id. at *13.

77. RTW Retailwinds, 2020 WL 7330061.

78. Duro Dyne, 2020 WL 6270691, at *47–48 (quoting Article 8.03 of the Duro Dyne Prenego-tiated Reorganization Plan set out in the court’s order approving it).

79. Lucky Brand, 2020 WL 4698654, at *70 (quoting Article 5.9 of the Lucky Brand court order approving the sale of debtor’s assets).

80. In re Sears Holdings Corp., 621 B.R. 563, 574 (S.D.N.Y. 2020).

81. In re Murray Energy Holdings Co., 615 B.R. 461 (S.D. Ohio 2020).

82. Id. at 473.

83. See Int’l Chamber of Commerce, Guidance Paper on the Impact of COVID-19 on Trade Finance Transactions Issued Subject to ICC Rules (Apr. 7, 2020), https://iccwbo.org/publication/guidance-paper-on-the-impact-of-covid-19-on- trade-finance-transactions-issued-subject-to-icc-rules/. For analysis of that guidance, see David Meynell, Addressing the Implications of COVID-19 on Transactions Subject to ICC Rules, DOCUMENTARY CREDIT WORLD, Apr. 2020, at 17; Pavel Andrle, Perspectives on the ICC Guidance Paper on COVID-19’s Impact on Trade Finance Transactions Subject to ICC Rules Regarding Force Majeure, DOCUMENTARY CREDIT WORLD, Jan. 2021, at 29.