Letter of Credit Not 3213 instrument for the Payment of Money Only

On October 6, 2020, Justice Ostrager of the New York County Commercial Division issued a decision in Castleton Commodities Merchant Trading, L.P. v. Soleil Chartered Bank, 2020 NY Slip Op. 33290(U), holding that a letter of credit was not an instrument for the payment of money only for purposes of CPLR 3213, explaining:

The final and most significant issue is whether the LC qualifies as an instrument for the payment of money only eligible for an expedited judgment in Castleton’s favor pursuant to CPLR 3213. The answer is no. As Judge Judith Kaye explained in Weissman v Sinorm Deli, 88 NY2d 437, 444 (1996), a document comes within CPLR 3213 only if a prima facie case would be made out by the instrument and a failure to make the payments called for by its terms. The instrument does not qualify if outside proof is needed, other than simple proof of nonpayment or a similar de minimis deviation from the face of the document.

The LC itself presents three alternative scenarios that would allow Castleton to draw down on the LC. Castleton relies on 2A, which provides for payment upon presentation of the following document:

DEMAND SIGNED BY AN AUTHORIZED REPRESENTATIVE OF THE BENEFICIARY STATING THAT… THE APPLICANT IS CURRENTLY IN DEFAULT AT THE TIME OF THIS DRAWING AND HAS NOT PERFORMED IN ACCORDANCE WITH THE TERMS OF THE AGREEMENT. THE APPLICANT HAS NOT RECTIFIED THE DEFAULT AS OF THIS PRESENTATION, WHEREFORE, THE BENEFICIARY HEREBY DEMANDS PAYMENT OF THE ABOVE REFERENCED AMOUNT UNDER LETTER OF CREDIT NO. SCB1905738CHS WHICH THE BENEFICIARY IS ENTITLED TO DRAW IN ACCORDANCE WITH THE AGREEMENT.

Castleton contends it is entitled to draw down on the May 31, 2019 LC in full based on KAMCA’s default under the parties’ Agreement in April and May of 2019, before the LC was even issued. It also relies on the February 10, 2020 Notice of Default it issued to KAMCA, which describes the alleged defaults and demands payment based on a spreadsheet of charges and payments but makes no reference to the LC. Lastly, Castleton provides its April 21, 2020 Demand Letter to Soleil seeking to draw down on the LC based on KAMCA’s alleged default, without making any reference to the Notice of Default or the particular section of the LC on which Castleton was relying.

By letter dated April 24, 2020, Soleil declined Castleton’s demand, stating that: “We have evaluated your claim and as per Standby Letter of Credit your claim is being declined as the presentation is not for lift of products and not in compliance with our other terms and conditions governing the issuance.” In their opposition papers, defendants assert defenses based on the reasoning in Soleil’s declination letter, as well as a dispute about charges and payments. Castleton in response provides a revised spreadsheet and argues that the defenses lack merit and are irrelevant.

The Court need not reach those defenses because the Court finds the LC does not qualify as an instrument for the payment of money only pursuant to CPLR 3213. As the Court of Appeals stated in Weissman, supra: The instrument does not qualify if outside proof is needed, other than simple proof of nonpayment or a similar de minimis deviation from the face of the document. Here, the LC itself states that payment is triggered only upon a default by nonparty KAMCA in that KAMCA has not performed its obligations under the Agreement, meaning the Master Fuel Oil Supply and Financing Agreement, dated February 13, 2019, between Castleton and KAMCA. As indicated earlier, no copy of the Agreement has been provided to the Court, but the papers suggest that performance under the Agreement included obligations beyond the payment of a set amount on a particular date specified on the face of a document. Indeed, in Kopko’s moving affidavit, Castleton confirms the interrelationship between the Agreement and the LC, explaining that the Agreement contemplated the issuance of the LC, but no further details are provided about the interrelationship between the two documents or the precise showing Castleton was required to make to draw down on the LC in full.

(Internal quotations and citations omitted).

Cases in the Commercial Division of the New York courts usually involve a motion to dismiss at the outset and then a motion for summary judgment at the close of discovery, so such motions are a big part of our practice. The decision above is about a special procedure in New York for quickly resolving claims relating to unpaid notes or similar documents allowing the plaintiff to move for summary judgment at the beginning of an action. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions about seeking or opposing a motion for pre-trial dismissal or judgment of a commercial lawsuit.