Hook Point, LLC v. Branch Banking & Trust Co.

• Decision Date: 24 May 2012
• Docket Number: No. 27115.,27115.
• Court: South Carolina Supreme Court
• Parties: HOOK POINT, LLC, Respondent, v. BRANCH BANKING AND TRUST COMPANY, First Reliance Bank, and Allan Risinger, Defendants, Of Whom Branch Banking and Trust Company is, Appellant.

397 S.C. 507

725 S.E.2d 681

77 UCC Rep.Serv.2d 338

HOOK POINT, LLC, Respondent,

v. BRANCH BANKING AND TRUST COMPANY, First Reliance Bank, and Allan Risinger, Defendants,Of Whom Branch Banking and Trust Company is, Appellant.

No. 27115.

Supreme Court of South Carolina.

Heard March 21, 2012.

Decided April 11, 2012.

Rehearing Denied May 24, 2012.

Frank R. Ellerbe, III, and Wilson W. McDonald, both of Robinson, McFadden & Moore, of Columbia, for Appellant.

Frederick A. Gertz, of Gertz & Moore, of Columbia, Thornwell F. Sowell and David C. Dick, both of Sowell, Gray, Stepp & Laffitte, of Columbia, for Respondent.

Justice PLEICONES.

Respondent Hook Point, LLC (Hook Point) was granted a preliminary injunction preventing Appellant Branch Banking and Trust Company (BB & T) from drawing on, and defendant First Reliance Bank (First Reliance) from honoring, a $1.5 million letter of credit. BB & T appeals. We reverse.

FACTS

In late 2007, Hook Point sought a loan from BB & T for the purpose of developing a subdivision on property Hook Point owned on Lake Murray called Panama Pointe. BB & T issued a commitment letter to Hook Point in September 2007 indicating that it would loan the company $5.1 million and establish a $2 million line of credit to enable Hook Point to develop the subdivision. Security for the loan included a first mortgage on the Panama Pointe property, personal guarantees of Hook Point's four principals, and a $1.5 million standby letter of credit issued by First Reliance in favor of BB & T.

Hook Point applied to and obtained a letter of credit (LC) from First Reliance that named BB & T as beneficiary.¹ The LC was secured by a cash deposit at First Reliance of approximately $310,000, several real properties owned by a Hook Point affiliate, and personal guarantees of the Hook Point principals. Under the terms of the LC, BB & T was permitted to make draws upon presentation of a draft accompanied by

1) The original letter of credit. 2) A notarized, sworn statement by the Beneficiary, or an officer thereof, that: a) The Borrower has failed to perform its obligations to the Beneficiary under the Loan Agreement and Promissory Note dated November 16, 2007, executed by and between [Hook Point and BB & T] b) The amount of the draft does not exceed the amount due to the Beneficiary under the obligations; and; [sic] c) The signer has the authority to act for the Beneficiary with regard to the Letter of Credit.

The loan from BB & T to Hook Point was finalized in a loan agreement on the same day the LC was issued. Hook Point proceeded to complete infrastructure work in the development and began construction on the first home before determining that market conditions had become unfavorable to the project as originally contemplated. Hook Point defaulted on the Loan Agreement and related notes and loan documents by, among other things, failing to pay property taxes, to make interest payments due under the notes, or to pay the principal due under one note. BB & T gave Hook Point notice of default in September 2010 and accelerated the loans under the terms of the Loan Agreement on December 21, 2010. On the same day, BB & T tendered a demand letter to First Reliance, seeking to draw the full amount of the LC.

On December 23, Hook Point filed suit alleging several causes of action against BB & T, including for fraudulent misrepresentation by which BB & T induced Hook Point to enter the loan agreement. Hook Point admitted to being $70,000 in arrears on interest but argued that the terms of the agreement did not permit BB & T to draw the full amount of the LC if that exceeded the amount of interest due. It also sought an ex parte temporary restraining order preventing First Reliance from honoring a draft on the LC by BB & T, which the court granted. After a hearing, the court also granted a preliminary injunction against drafts on or honor of the LC beyond amounts of accrued interest, requiring extension of the LC for one year, and requiring Hook Point to post a $50,000 bond with the court. This appeal followed, and the case was transferred to this Court pursuant to Rule 204(b), SCACR.

ISSUE

Did the circuit court err when it granted a preliminary injunction?

STANDARD OF REVIEW

The grant of an injunction is reviewed for abuse of discretion. Strategic Resources Co. v. BCS Life Ins. Co., 367 S.C. 540, 544, 627 S.E.2d 687, 689 (2006). “An abuse of discretion occurs when the decision of the trial court is unsupported by the evidence or controlled by an error of law.” Peek v. Spartanburg Reg'l Healthcare Sys., 367 S.C. 450, 454, 626 S.E.2d 34, 36 (Ct.App.2005).

DISCUSSION

BB & T contends that the circuit court erred when it granted the preliminary injunction. We agree.

“A preliminary injunction should issue only if necessary to preserve the status quo ante, and only upon a showing by the moving party that without such relief it will suffer irreparable harm, that it has a likelihood of success on the merits, and that there is no adequate remedy at law.” Poynter Investments, Inc. v. Century Builders of Piedmont, Inc., 387 S.C. 583, 586–87, 694 S.E.2d 15, 17 (2010).

On the second element, likelihood of success on the merits, BB & T argues that the grounds for refusing to honor a letter of credit are exceedingly narrow and that Hook Point has failed to show it is likely to succeed on the merits under that standard. Thus, BB & T argues that the circuit court erred when it found that Hook Point had sufficiently established this element. We agree.

A letter of credit is a financial instrument designed to reduce the need for counterparties in a transaction to trust one another by adding an intermediary bank to the transaction. This intermediary bank extends credit to one party (typically the buyer in a sales transaction ²) so that the other need not do so. In a sales transaction, the letter of credit typically requires a seller to represent that he has shipped goods under a sales contract and to document this representation with a bill of lading in order to draw on the LC provided by the buyer. This arrangement entails risk to the buyer, who is vulnerable to loss should the seller present fraudulent documents or deliberately ship nonconforming goods. Nevertheless,the usefulness of a letter of credit depends on its being the virtual equivalent of cash. The judicial doctrine that has developed around letters of credit reflects courts' understanding of this background and the importance to commerce of respecting the terms of this financial instrument so that it remains available as a reliable means of shifting financial risk.

Specifically, this understanding is embodied in the independence principle, under which courts recognize that the obligations created in the letter of credit are independent of the obligations of the underlying contract. See, e.g., Intraworld Industries, Inc. v. Girard Trust Bank, 461 Pa. 343, 357, 336 A.2d 316, 323 (Pa.1975) (“The primary purpose of a letter of credit is to provide assurance to the seller of goods ... of prompt payment upon presentation of documents. A seller who would otherwise have only the solvency and good faith of his buyer as assurance of payment may, with a letter of credit, rely on the full responsibility of a bank. Promptness is assured by the engagement of the bank to honor drafts upon the presentation of documents. The great utility of letters of credit flows from the independence of the issuer-bank's engagement from the underlying contract between beneficiary and customer. Long-standing case law has established that, unless otherwise agreed, the issuer deals only in documents. If the documents presented conform to the requirements of the credit, the issuer may and must honor demands for payment, regardless of whether the goods conform to the underlying contract between beneficiary and customer.”); Itek Corp. v. First Nat'l Bank of Boston, 730 F.2d 19 (1st Cir.1984) (Breyer, J.) (“Parties to a contract may use a letter of credit in order to make certain that contractualdisputes wend their way towards resolution with money in the beneficiary's pocket rather than in the pocket of the contracting party. Thus, courts typically have asserted that such letters of credit are ‘independent’ of the underlying contract.... And they have recognized that examining the rights and wrongs of a contract dispute to determine whether a letter of credit should be paid risks depriving its beneficiary of the very advantage for which he bargained, namely that the dispute would be resolved while he is in possession of the money.” (citations omitted)); Roger J. Johns and Mark S. Blodgett, Fairness at the Expense of Commercial Certainty: The International Emergence of Unconscionability and Illegality As Exceptions to the Independence Principle of Letters of Credit and Bank Guarantees, 31 N. Ill. U.L.Rev. 297, 309 (2011) (“[T]he common concern among all stakeholders is that as the ease with which letters of credit ... can be enjoined increases their commercial utility decreases.”).

Nevertheless, courts have carved out a very narrow exception to the independence principle. Aside from permitting the intermediary bank to refuse to honor forged documents presented in order to draw on the letter of credit, courts enjoin the payment of LCs for “fraud in the transaction” when “the beneficiary's conduct has so vitiated the entire transaction that the legitimate purposes of the independence of the issuer's obligation would no longer be served.” Itek, 730 F.2d at 25 (internal quotation marks and citations omitted).

Put simply, the cases in which the “fraud in the transaction” exception has been applied are those in which the underlying transaction or the demand for payment is clearly a sham, and it is apparent that rigid adherence to the independence principle would facilitate what amounts to a scheme to defraud. In the case that established the fraud in the transaction exception, the beneficiary made an actual...