Ace American Insurance Company v. Bank of the Ozarks
1:11-cv-03146
S.D.N.Y.Aug 3, 2012Background
- ACE sued Bank of the Ozarks in SDNY for breach of a standby letter of credit and for a declaratory judgment after a March 16, 2011 draw of $100,000 was refused.
- The Letter of Credit was issued June 1, 2008, for $1,376,998, governed by UCP, and payable on sight drafts drawn to ACE.
- AFS filed a Chapter 11 bankruptcy May 5, 2009; prior related litigation in which Judge Kaplan dismissed parts of ACE's earlier claims as moot, but the L/C remained in effect.
- ACE's 2011 complaint repeats the breach and declaratory judgment claims and seeks a ruling that Bank must honor each ACE sight draft within seven days if documentary compliance is met.
- Defendant Bank moved to dismiss under Rule 12(b)(6) or, in the alternative, to transfer to the Eastern District of Arkansas; the court denied both reliefs and treated the motion as a dismissal rather than summary judgment, denying transfer.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Automatic stay precludes drawing on the L/C | ACE argues stay may not bar payment on an independent obligation | Bank argues stay precludes honoring draws tied to prepetition claims | Stay does not preclude payment; independence principle applies |
| ACE entitled to breach claim despite stay | Bank's stay does not affect independent L/C obligation | Automatic stay bars actions against debtor/bankruptcy estate | Breach claim survives; L/C obligation independent of underlying dispute |
| Declaratory judgment appropriate | Second suit raises same issues; declaratory relief clarifies rights | May be moot if L/C terminates; redundancy or lack of utility | Declaratory judgment appropriate; serves to clarify rights |
| Transfer to Eastern District of Arkansas appropriate | ACE is not resident in Arkansas; transfer would be inconvenient | Action could have been brought in ED Ark; convenience and justice favor transfer | Transfer denied; factors neutral or against transfer |
Key Cases Cited
- Alaska Textile Co. v. Chase Manhattan Bank, N.A., 982 F.2d 813 (2d Cir. 1992) (independence of letter of credit obligations; payment not conditioned on underlying contract)
- Beyene v. Irving Trust Co., 762 F.2d 4 (2d Cir. 1985) (bank's obligation to honor drafts is absolute absent fraud)
- 3Com Corp. v. Banco do Brasil, S.A., 171 F.3d 739 (2d Cir. 1999) (independence principle; issuer's duty to pay is separate from underlying contract)
- First Commercial Bank v. Gotham Originals, 64 N.Y.2d 287 (1985) (term independence of issuer's obligation; payment on proper drafts regardless of underlying dispute)
- Voest-Alpine Int'l Corp. v. Chase Manhattan Bank, N.A., 707 F.2d 680 (2d Cir. 1983) (independence principle; bank's obligation to pay is independent of debtor's conduct)