The U.S. Court of Appeals for the Eight Circuit recently held that the failure to present the issuer of a letter of credit with draw request before the appointment of a conservator does not necessarily preclude recovery of damages by the beneficiary.
In so ruling, the Eighth Circuit reasoned that a contrary holding would require "letter of credit beneficiaries to be prescient of an impending conservatorship in order to recover damages."
A copy of the opinion is available at: Link to Opinion
At the request of a contractor, a credit union issued a letter of credit in the amount of $385,000 to an insurance company that provides contractor surety bonds. The insurance company issue several payment and performance bonds to contractor with the overall liability on the bonds exceeding four million dollars.
The letter of credit issued on July 8, 2015, provided: "We [credit union] warrant to you [insurance company] that all drafts under this CLEAN IRREVOCABLE LETTER OF CREDIT will be duly honored upon presentation of your draft on us . . . on or before the expiration date, or on or before any automatically extended date . . . ." It then states that the letter of credit expires July 7, 2016 "but will be automatically extended for additional and consecutive one year terms" unless the credit union notified the insurance company of its intent to not renew at least thirty days before the original or any subsequent expiration date.
On May 25, 2017, the credit union notified the insurance company the letter of credit would mature July 6 and would not be renewed.
On June 23, 2017, the National Credit Union Administration Board (NCUAB) appointed itself conservator of credit union pursuant to 12 U.S.C. 1786(h).
On July 3, 2017, the insurance company timely presented the credit union with a request for payment in the amount of $385,000, but the credit union never issued the funds. Instead, on July 6, the credit union informed the insurance company it would not be issuing the requested funds, and notified the insurance company that on June 23 the NCUAB had appointed itself conservator of the credit union.
On July 20, the NCUAB sent the insurance company a letter explaining its broad authority as conservator under 12 U.S.C. 1787(b)(2) and (c), including the authority to repudiate contracts. The letter also explained how the NCUAB believed the continuation of the letter of credit would burden the credit union and hinder the orderly administration of its affairs. The NCUAB then concluded by repudiating the letter of credit, which it had determined was necessary to the conservation of the credit union's assets.
In response, the insurance company demanded the NCUAB pay it $385,000 in damages for repudiating the letter of credit. The NCUAB acknowledged 12 U.S.C. § 1787(c)(3) provides Insurance company a limited remedy for damages, but also noted that § 1787(c)(3)(A) limits a conservator's liability for repudiation damages to "actual direct compensatory damages determined as of the date of the appointment of the conservator," and because the insurance company had not presented the credit union with a draft as of the date the NCUAB appointed itself conservator on June 23, 2017, the insurance company had no claim for damages.
The insurance company filed a complaint in federal court seeking $385,000 in damages for wrongful repudiation and wrongful dishonor of a letter of credit under North Dakota's Uniform Commercial Code.
The NCUAB moved to dismiss the insurance company's complaint, asserting that the insurance company was entitled to no damages under § 1787(c)(3). The NCUAB also argued § 1787(c)(3) preempts North Dakota's Uniform Commercial Code to the extent that the state statute provides insurance company damages where the federal statute does not.
The trial court granted the NCUAB's motion and dismissed the insurance company's complaint. The trial court agreed with the NCUAB that § 1787(c)(3) preempted the North Dakota Uniform Commercial Code. It also agreed that the insurance company was not entitled to damages under § 1787(c)(3) because at the time of the NCUAB's appointment as conservator for the credit union (June 23, 2017),the insurance company had not yet made a draw request on the letter of credit.
The insurance company appealed.
On appeal, the insurance company presented three main arguments. First, the insurance company argued the NCUAB had no authority to repudiate the letter of credit under 12 U.S.C. § 1787(c)(1) because a letter of credit is not a "contract." See 12 U.S.C. § 1787(c)(1) (authorizing the conservator to repudiate "any contract").
The Eighth Circuit disagreed, noting when Congress enacted § 1787, common law defined the word "contract" as "a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty." Restatement (Second) of Contracts § 1 (Am. Law Inst. 1981). Here, the credit union promised to pay insurance company $385,000 upon receipt of insurance company's proper draft, and North Dakota's Uniform Commercial Code provides a remedy for the breach of that specific promise. Thus, the Eight Circuit held that this fits the common law definition of a contract, and therefore that the NCUAB could repudiate the letter of credit.
Next, insurance company argued that if the letter of credit is a contract, then it is entitled to damages for the NCUAB's repudiation under § 1787(c)(3).
The Eighth Circuit agreed, rejecting the trial court's adoption of the District of New Hampshire's rationale that "no damages would be due as long as the triggering event" -- the presentation of a sight draft -- "had not occurred prior to the date of the appointment of the conservator." See Credit Life Ins. Co. v. FDIC, 870 F. Supp. 417, 425-26 (D.N.H. 1993). The Eighth Circuit reasoned that this argument which "requires letter-of-credit beneficiaries to be prescient of an impending conservatorship in order to recover damages."
Instead, the Court held that the failure to present the issuer of a letter of credit with a draw request before appointment of a conservator does not necessarily preclude recovery of damages under § 1787(c)(3).
Lastly, Insurance company argued that § 1787(c) does not preempt the letter of credit provisions of North Dakota's Uniform Commercial Code because the two laws are not in conflict. However, the Eighth Circuit concluded the issue of preemption was premature until it is clear that the insurance company's recovery under the letter of credit provisions of North Dakota's Uniform Commercial Code exceeds the limits of § 1787(c)(3).
Accordingly, the Eighth Circuit reversed the judgment of the trial court and remanded.
Ralph T. Wutscher
Maurice Wutscher LLP
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