Case Studies

Epstein Becker Green Obtains Dismissal of Letter of Credit Action

On July 2, 2009, Epstein Becker Green obtained a dismissal of a suit for $6 million against its client, China Construction Bank Corporation ("CCBC"), one of the largest banks in the People's Republic of China, arising from a letter of credit issued by CCBC. The suit, which was brought in New York Supreme Court, raised novel issues relating to the liabilities of parties to relatively rare "transfer" of letter of credit transactions.

A letter of credit (or "L/C") is used as a financing tool in international trade when an exporter does not want to rely on the creditworthiness of an importer. The L/C is a promise by the importer's bank (the "issuer") that it will pay the exporter of merchandise (the "beneficiary") the price of the merchandise on the receipt of export documents of title showing merely that the goods have been shipped, whether or not the underlying sales actually transaction is performed. Sometimes the exporter's bank will, with the issuer's express permission, "transfer" the L/C to "secondary beneficiaries," who are usually the exporter's subcontractors, to pay them for their part of the manufacture of the merchandise. The issuer will ultimately be responsible for the entire L/C payment if all parties to the transaction follow the international rules governing L/C transactions.

The transaction here involved a shipload of iron ore to be exported from Venezuela to China and a L/C that CCBC had designed as "transferable." The beneficiary of CCBC's L/C directed its New York bank ("Bank M") to transfer $6 million of the $12 million L/C to the steamship owner to pay for the shipping costs. In order to be paid the $6 million, all the steamship owner had to do was fax a "certificate of readiness" to Bank M stating that the vessel had arrived in port to pick up the ore. The owner did just that.

Unfortunately, the exporter seems to have gone out of business and breached the sales contract; there was no ore to be loaded. Nevertheless, under L/C law, because the "certificate of readiness" was all Bank M had specified was needed to obtain payment, Bank M had to pay $6 million unless there were flaws in the documents presented to it. Bank M refused to pay on the transferred L/C. The steamship owner sued CCBC and Bank M for failing to honor the L/C, asserting that because Bank M was CCBC's agent when it transferred the L/C and the owner had established the requirement of the certificate of readiness and presented a proper certificate, CCBC was therefore liable for $6 million.

In a lengthy opinion that explained, in detail for the first time in New York, the rights and obligations of the diverse various parties to "transferred" letters of credit, the court accepted EBG's arguments and granted CCBC's motion for summary judgment dismissing the steamship owner's claim against CCBC, while holding Bank M liable for $6 million. Applying the L/C rules of the International Chamber of Commerce, the court held that Bank M, as the transferring bank, could not bind CCBC by the transfer even though CCBC's L/C expressly permitted transfers. This is because the terms of the transferred L/C varied from the original L/C and Bank M exceeded its authority in transferring the L/C so as to require a certificate of readiness. AP Marine Ltd. v. China Construction Bank Corp., N.Y. Co. Index No 602-517/08.

Kenneth J. Kelly, Victoria Sloan and Jian Hang represented CCBC in the litigation.

Epstein Becker Green Achieves Twin Victories in Investment Banking Bonus Arbitrations

Epstein Becker Green obtained awards dismissing the claims of nine investment bankers in two arbitrations for bonuses totaling more than $10 million in January and April 2013. Our client, an investment banking firm, had decided as a result of the 2008 crash to award "provisional" bonuses in December 2008 that were subject to adjustment, depending on the firm's then-undetermined audited year-end financial results. Because the firm lost several billion dollars and had to borrow TARP-like funds from the government to maintain its capital requirements, the directors reduced the provisional awards by 90 percent across the board.

The bankers commenced two arbitrations before FINRA for the unpaid balances, claiming breaches of contract and detrimental reliance, on the basis that their particular business units did not contribute to the firm's loss. The firm defended by arguing that, because the bonuses were discretionary, it could properly place decisive weight on its overall performance. Further, the firm argued that the bankers' reliance argument was undermined by layoffs and hiring freezes globally in the financial services industry—a fact confirmed in the bankers' internal emails.

The two panels independently awarded "zero" to the two groups of bankers and dismissed all of the claims. Kenneth J. Kelly and Diana C. Gomprecht led the Epstein Becker Green defense team in both cases.