Is a Beneficiary of a Letter of Credit Bound by an Injunction Barring Payment In Absence of Notice?
 
July 27, 2004
 
Michael Weissman - Chicago

In Shaanxi Jinshan Electronics Corporation v. FleetBoston Financial Corporation, 61 Mass. App. 41, 807 N.E. 2d 180 (2004) Shaanxi sued Fleet for wrongful dishonor of a standby letter of credit of which Shaanxi was the beneficiary.

TCI Corporation (TCI) applied for and obtained a standby letter of credit from Bay Bank (Fleet’s predecessor) in February 1996 naming Shaanxi as beneficiary. The letter of credit expired October 31, 1996.

In October 1996, Shaanxi attempted a draw under the letter of credit. But on October 11, 1996 the issuer (Bay Bank) refused to honor the draw because of purported discrepancies. On October 15, 1996 TCI obtained an ex parte temporary restraining order returnable October 23, 1996 barring Shaanxi from drawing against, and preventing Bay Bank from paying under, the letter of credit. On October 21, 1996, service of the summons, complaint and TRO were made on the Secretary of the Commonwealth of Massachusetts as agent for Shaanxi and on October 24, 1996, the Secretary forwarded the court papers to Shaanxi.

In the meantime, on October 18, 1996, Shaanxi made a second presentation and draw upon Bay Bank. The documents were received by Bay Bank on October 24, 1996. This was prior to Shaanxi receiving notice of the TRO. On October 28, 1996, Bay Bank refused to honor the second draw on the grounds that a TRO had been issued.

On October 28, 1996, five days after the expiration of the TRO, a preliminary injunction was issued. TCI sent a copy to Bay Bank on November 13, 1996 characterizing it as a permanent injunction.

On November 19, 1996 Bay Bank sent Shaanxi a telex stating that it could not make payment because a permanent injunction prevented payment. Another telex was sent by Bay Bank on February 3, 1997 reporting that it had no notice that the injunction had been dissolved. Two days later, on February 5, 1997, Bay Bank sent Shaanxi another telex stating it could not honor draws on the letter of credit until the injunction was vacated.

On February 26, 1997, the litigation was dismissed and the preliminary injunction was, therefore, dissolved. For three years nothing transpired. But on February 28, 2000, Shaanxi once again sought payment from the bank and was refused. The issue before the court was whether the bank had wrongfully dishonored Shaanxi’s second draw. The court held that it had.

To begin, the court said the second draw dated October 18, 1996 was not affected by the October 15, 1996 TRO because Shaanxi did not receive notice of the TRO until October 24, 1996.

The court said that when Bay Bank received the second draw it had two choices: honor the draw or state why it would not do so. Bay Bank chose the latter using the TRO as its rationale.

But, said the court, “when the injunction was dissolved by virtue of the dismissal of TCI’s complaint, no impediment to payment remained. This was true notwithstanding that the letter of credit had expired … [citation omitted]. While the injunction may have postponed the bank’s obligation to make payment, it did not extinguish the obligation, and failure to make payment upon dissolution of the injunction was a wrongful dishonor.”

What’s the point?

This case demonstrates that: (1) the issuer of a letter of credit faced with a restraining order ought to assure itself that the beneficiary has received a duplicate copy of the order; and (2) a beneficiary whose draw is wrongfully dishonored will be entitled to payment notwithstanding the expiration of the letter of credit.

For more information e-mail Michael L. Weissman at michael.weissman@hklaw.com or call toll free, 1-888-688-8500.