Southern Energy Homes, Inc. v. AmSouth Bank of Alabama

• Decision Date: 30 January 1998
• Citation: Southern Energy Homes, Inc. v. AmSouth Bank of Alabama, 709 So.2d 1180 (Ala. 1998)
• Parties: 35 UCC Rep.Serv.2d 250 SOUTHERN ENERGY HOMES, INC. v. AmSOUTH BANK OF ALABAMA, et al. 1961561.
• Court: Alabama Supreme Court

Page 1180

709 So.2d 1180

35 UCC Rep.Serv.2d 250

SOUTHERN ENERGY HOMES, INC. v.AmSOUTH BANK OF ALABAMA, et al.

1961561.

Supreme Court of Alabama.

Jan. 30, 1998.

Braxton Schell, Jr., and Peter H. Burke of Cooper, Mitch, Crawford, Kuykendall & Whatley, Birmingham, for appellant.

C. Ellis Brazeal III and Edward J. Ashton of Walston, Wells, Anderson & Bains, L.L.P., Birmingham, for appellee AmSouth Bank.

Roderick C. Dennehy, Jr., of Kilpatrick Stockton, L.L.P., Atlanta, GA; and Lee R. Benton of Schoel, Ogle, Benton & Centeno, Birmingham, for appellee Gesellschaft fur Bauen und Wohnen Hannover.

HOUSTON, Justice.

This appeal arises from the trial court's dissolution of a temporary restraining order (TRO) and its denial of a motion by Southern Energy Homes, Inc.("Southern Energy"), for a preliminary injunction.Southern Energy sought to enjoin AmSouth Bank of Alabama ("AmSouth") from honoring or paying under a standby letter of credit issued by AmSouth.AmSouth issued the letter of credit at Southern Energy's request to secure a bank guarantee in favor of Deutsche Bank, which in turn, issued a performance guarantee in favor of Gesellschaft fur Bauen und Wohnen Hannover("GBH"), based on a construction contract between Southern Energy and GBH.Southern Energy filed a complaint requesting the Jefferson County Circuit Court to issue a TRO against GBH, AmSouth, and Deutsche Bank.

The trial court initially granted a TRO enjoining AmSouth from honoring any draws on the letter of credit.The trial court modified the TRO to also enjoin GBH and Deutsche Bank from attempting to draw upon the bank guarantee or otherwise collect on the letter of credit.AmSouth, however, moved to modify or dissolve the TRO in order to provide certain protections for its international banking business--in an effort to protect itself from irreparable harm and future liability to Southern Energy, GBH, and Deutsche Bank.AmSouth argued that it is not the proper party to be enjoined in this matter, because, it says, unlike traditional letters of credit payable upon presentation of certain documents, the terms of the letter of credit in this case provided for payment upon Deutsche Bank's automatic debit of AmSouth's account.AmSouth asserted that because Deutsche Bank has not been served and has not appeared in this case, it may still seek payment on the letter of credit.Subsequently, the trial court modified the TRO to exclude AmSouth from the original order, so as to provide that AmSouth may honor any demand for payment or pay any debit made by Deutsche Bank on the letter of credit, without violating the TRO.AmSouth asks this Court for the same protections provided for in the trial court's order.This protection is essential, AmSouth asserts, to facilitate an "active foreign banking business."

In June 1995, Southern Energy and GBH entered into a construction contract for the second of two housing projects known as "socialized housing" to be built in Hannover, Germany.In the event of any dispute arising thereunder, the contract provided for German law to govern and provided that the appropriate venue would be Hannover, Germany.The socialized housing contract called for a bank guarantee issued by a European Bank as security for Southern Energy's performance of the contract.¹GBH wired to Southern Energy 555,117 deutsche marks, representing the first 30% due on the contract, less the 15% value added tax.Deutsche Bank issued the performance guarantee to GBH on the condition that the guarantee would be secured by a standby letter of credit.To facilitate the performance guarantee in favor of GBH, AmSouth issued a letter of credit to Deutsche Bank, for an amount not to exceed 1,276,770 deutsche marks, that related to Southern Energy's performance under the socialized housing contract.The letter of credit served as Deutsche Bank's security for issuing the performance guarantee.The letter of credit authorized Deutsche Bank to draw upon the letter of credit from AmSouth's account upon notification that Deutsche Bank was required by GBH to disburse any amount under the performance guarantee.

The contract between Southern Energy and GBH called for construction of the socialized housing project in accordance with the plans and specifications of GBH's architect.However, GBH changed the design specifications, which increased the overall cost of the project.In January 1996, Southern Energy informed GBH that it would be unable to perform the contract at the agreed price without suffering a substantial financial loss.In February 1996, GBH responded by letter, stating that it would hold Southern Energy in default if Southern Energy failed to complete the project at the agreed time; GBH further stated that, in case of default, GBH reserved the right to make a claim for damages under German law.²Nevertheless, GBH extended the deadline for performance from March 1, 1996, to March 15, 1996.GBH began rebidding the socialized housing project to other contractors.Southern Energy submitted another quote on the project, but GBH rejected its offer and awarded the contract to another builder.Southern Energy claims that GBH hired contractors who utilize a different, more expensive means of construction, instead of the prefabricated housing that Southern Energy manufactures.Meanwhile, the date of performance had passed on the initial contract.In June 1996, GBH requested that the advanced installment money on the contract, DM 555,117.39 be refunded.Southern Energy complied and transferred the money to GBH's account.Southern Energy asserts that because all of GBH's advanced moneys had been returned, GBH no longer had any basis in fact to demand payment on the bank guarantee, and that Deutsche Bank had no legitimate basis to demand payment on the letter of credit.

Discussions then began between Southern Energy and GBH regarding whether Southern Energy had breached the contract; whether GBH had suffered any damage; and to what extent GBH may have been damaged as a result of the alleged breach.The negotiations continued for about a year, but failed.In March 1997, the parties agreed to open a new letter of credit upon the expiration of the first one in order to secure any damages awards or settlement payments.Without reaching an agreement, however, GBH warned that it would draw on the existing letter of credit.Thereafter, GBH, quoting the terms of the letter of credit itself, decided to "exercise its rights under the performance guarantee" by asserting its right to damages without "prior prosecution" against Southern Energy.The next day, Deutsche Bank presented a draft for payment.After AmSouth informed Southern Energy that it would honor the draft, but before payment had been made, the Jefferson County Circuit Court granted Southern Energy's request for a TRO.As previously noted, the trial court later dissolved the TRO and this appeal followed.

Southern Energy argues that GBH attempted to circumvent the dispute resolution process agreed upon and to collect damages by demanding payment under the performance guarantee.Southern Energy's counsel summed up its complaint against GBH in a letter dated March 26, 1997, as follows:

"Southern Energy has just informed me of GBH's attempt to draw on the outstanding letter of credit.We have agreed that [SEH] is to provide a new letter of credit to take effect on March 31, 1997, when the existing L/C expires, and GBH has agreed to accept that.

"The problem is that the underlying obligation to be secured has materially changed.The present letter of credit exists to cover defaults caused by inadequate construction.GBH agrees that SEH completed Duplex H satisfactorily.As to Socialized Housing, GBH chose another contractor.What GBH is seeking is an L/C to cover SEH's liability, if it is found liable, and SEH is willing to post an L/C covering that.

"SEH considers GBH's attempt to draw on the existing letter of credit to be fraudulent for two reasons: one, SEH did not default on construction and, two, SEH and GBH agreed not to force any issue on the existing L/C, but instead to post a new L/C on March 31.§ 5-114 of the Uniform Commercial Code subjects GBH to Alabama jurisdiction of this issue.Please desist and please call me ..., or else SEH will be forced to seek relief in Court."

Therefore, Southern Energy concludes, because all down payment moneys have been returned to GBH, any attempt to make a demand on the bank guarantee is fraudulent, thereby making Deutsche Bank's imminent demand on the letter of credit fraudulent as well.Southern Energy asserts that GBH's actions fall within the fraud exception of the Uniform Commercial Code("UCC").The letter of credit in this case is subject to the Uniform Customs and Practice for Documentary Credits ("UCP"), which has no fraud exception.However, based on the reasoning of Itek Corp. v. First National Bank of Boston, 730 F.2d 19(1st Cir.1984), Southern Energy nonetheless asserts that the fraud exception still applies.

GBH argues that the underlying contract between Southern Energy and GBH should not interfere with the purpose and function of the "international letter of credit" issued by AmSouth to Deutsche Bank.AmSouth's obligation to pay under the terms of the letter of credit, GBH argues, is independent of the contractual obligations of Southern Energy; and, GBH argues that, except in extremely rare circumstances, payment on the letter of credit should not be enjoined by any court.GBH argues further that Southern Energy (1) failed to demonstrate a likelihood of success on the merits and (2) failed to demonstrate irreparable injury; i.e., that Southern Energy failed to show that any fraud existed in the credit transaction that could preclude payment under the letter of credit.GBH also asserts that it was not a party to the letter of credit transaction; the contract required only that Southern Energy provide a performance guarantee from a...