SOUTHTRUST BANK v. Webb-Stiles Co., Inc.

• Decision Date: 16 December 2005
• Docket Number: 1040827.
• Citation: 931 So.2d 706
• Parties: SOUTHTRUST BANK OF ALABAMA, N.A. v. WEBB-STILES COMPANY, INC.
• Court: Alabama Supreme Court

931 So.2d 706

SOUTHTRUST BANK OF ALABAMA, N.A. v. WEBB-STILES COMPANY, INC.

1040827.

Supreme Court of Alabama.

October 21, 2005.

Rehearing Denied December 16, 2005.

Scott Burnett Smith of Bradley Arant Rose & White, LLP, Huntsville; and Stewart M. Cox of Bradley Arant Rose & White, LLP, Birmingham, for appellant.

Ralph K. Strawn, Jr., of Henslee, Robertson, Strawn & Knowles, L.L.C., Gadsden, for appellee.

NABERS, Chief Justice.

SouthTrust Bank of Alabama, N.A. ("SouthTrust"), appeals from an order of the Etowah Circuit Court granting a preliminary injunction preventing SouthTrust from honoring a letter of credit. See Ala. R.App. P. 4(a)(1). Because the trial court exceeded its discretion in granting the injunction, we reverse and remand with instructions to dissolve the injunction.

I. Facts

In 1995, the Airport Authority of India ("AAI") retained Transact International, Inc. ("Transact"), a Connecticut corporation, to build a cargo-handling facility at the Indira Gandhi International Airport in New Delhi, India. The contract between AAI and Transact ("the contract") included forum-selection and choice-of-law provisions requiring that any disputes related to the contract be resolved in New Delhi and according to Indian law. Webb-Stiles Company, Inc. ("Webb-Stiles"), a manufacturer of conveyor systems with a place of business in Gadsden, Alabama, was one of Transact's subcontractors on the airport project.

In connection with the contract, AAI and Transact joined with SouthTrust and the State Bank of India ("SBI") in a so-called four-way security arrangement.¹ First, SBI agreed to guarantee Transact's performance to AAI. In return, SBI required that Transact obtain an irrevocable standby letter of credit in favor of SBI.² Webb-Stiles helped Transact obtain the letter of credit from SouthTrust.

On November 13, 1996, SouthTrust issued its letter of credit no. SB9937 ("the letter of credit") in the amount of $175,661. Transact signed the letter of credit as applicant, and Webb-Stiles signed as surety for Transact's obligation to reimburse SouthTrust for any payment made under the letter of credit.³ Although the letter of credit was originally to expire on September 30, 1998, the parties extended it to January 31, 2005.

Between 1999 and 2004, AAI and Transact became involved in a dispute over whether Transact had satisfied its obligations under the contract.⁴ By late 2004, the parties were still unable to resolve their differences, and AAI decided to look to its performance guarantee from SBI. On December 10, 2004, SBI notified SouthTrust that AAI had made a demand for the full amount of the performance guarantee ($175,661). In turn, SBI immediately made a demand on the letter of credit in the same amount.

Under its terms the letter of credit is payable by SouthTrust upon SouthTrust's receipt of a proper demand from SBI. It is undisputed that SBI's demand conformed to the requirements of the letter of credit.

Webb-Stiles sued to enjoin SouthTrust from honoring the letter of credit, claiming that AAI had fraudulently misrepresented its right to make demand against the SBI performance guarantee. After hearing testimony, the trial court found that AAI's cost to remedy any remaining deficiencies under the contract would not exceed $10,000 and that AAI itself owed Transact $158,000. As a result, the court found AAI's claim that Transact was materially in default under the contract to be fraudulent.

As a prerequisite to issuing an injunction, the trial court had to determine whether Webb-Stiles had an adequate remedy at law. It did so on the basis of a written statement that AAI submitted to the court, asserting that the contract required Webb-Stiles to pursue any claim against AAI in an Indian court and under Indian law.⁵ In its statement, AAI also asserted that Indian law would deny Webb-Stiles a remedy.

The trial court accepted AAI's statement as true and concluded that Webb-Stiles had no adequate remedy at law. It granted Webb-Stiles a preliminary injunction against SouthTrust, preventing payment on the letter of credit. This appeal followed.

II. Standard of Review

The decision to grant or to deny a preliminary injunction is within the trial court's sound discretion. In reviewing an order granting a preliminary injunction, the Court determines whether the trial court exceeded that discretion. E.g., Johnson v. Willis, 893 So.2d 1138, 1140 (Ala.2004).

As enacted in Alabama, the Uniform Commercial Code grants a trial court the power to enjoin payment of a letter of credit to prevent fraud:

"If an applicant claims that a required document is forged or materially fraudulent or that honor of the presentation would facilitate a material fraud by the beneficiary on the issuer or applicant, a court of competent jurisdiction may temporarily or permanently enjoin the issuer from honoring a presentation...."

§ 7-5-109(b), Ala.Code 1975. Before enjoining payment, however, the court must find that "all of the conditions to entitle a person to injunctive relief under the law of this state have been met." § 7-5-109(b)(3), Ala.Code 1975.

A preliminary injunction may issue only when the party seeking the injunction demonstrates

"`(1) that without the injunction the party would suffer irreparable injury; (2) that the party has no adequate remedy at law; (3) that the party has at least a reasonable chance of success on the ultimate merits; and (4) that the hardship imposed on the party opposing the preliminary injunction by the injunction would not unreasonably outweigh the benefit accruing to the party seeking the injunction.'"

Ormco Corp. v. Johns, 869 So.2d 1109, 1113 (Ala.2003)(quoting Perley v. Tapscan, Inc., 646 So.2d 585, 587 (Ala.1994)). This Court has stated that "irreparable injury is injury that cannot be adequately compensated for by damages at law." Benetton Servs. Corp. v. Benedot, Inc., 551 So.2d 295, 299 (Ala.1989). A plaintiff that can recover damages has an adequate remedy at law and is not entitled to an injunction. Id. The party seeking an injunction has the burden of demonstrating that it lacks an adequate remedy. Ormco Corp., 869 So.2d at 1113.

III. Analysis

In this case, Webb-Stiles has failed to satisfy its burden of proving the second element necessary for a preliminary injunction to issue — that it lacks an adequate remedy at law. See Part III.B., infra. The trial court therefore exceeded its discretion in granting the injunction.

Although Webb-Stiles's failure to prove this element is sufficient to decide the case, the Court further recognizes the importance of narrow application of the fraud exception of § 7-5-109(b). The Court will therefore briefly review Alabama's approach to the issuance of injunctions in letter-of-credit cases.

A. The commercial importance of letters of credit allows courts to enjoin payment only in extraordinary circumstances.

In Southern Energy Homes, Inc. v. AmSouth Bank of Alabama, 709 So.2d 1180 (Ala.1998), a case that was factually similar to this case, this Court thoroughly analyzed an effort to enjoin payment of a letter of credit issued by an Alabama bank in connection with a foreign construction contract. In that case, Gesellschaft fur Bauen and Wohnen Hannover ("GBH"), a German corporation, had entered into a construction contract with Southern Energy. The contract provided that German law would govern any disputes arising under the contract and that Hannover would be the appropriate venue for any litigation. Deutsche Bank issued a performance guarantee in favor of GBH as security for Southern Energy's performance of the contract, conditioned on the issuance of a standby letter of credit. AmSouth then issued a letter of credit to Deutsche Bank. The terms of the letter of credit authorized Deutsche Bank to draw upon the credit upon notification that Deutsche Bank was required by GBH to disburse any amount under the performance guarantee.

Southern Energy and GBH became involved in a contract dispute, and GBH eventually decided to exercise its rights under the performance guarantee. The next day, Deutsche Bank presented AmSouth with a demand for payment. AmSouth informed Southern Energy that it would honor the demand, and Southern Energy sought to enjoin payment. Like Transact in this case, Southern Energy denied that it had materially breached the contract and characterized GBH's demand for payment on the letter of credit as fraudulent.

In response, GBH argued that AmSouth's obligation to pay under the terms of the letter of credit was independent of Southern Energy's contractual obligations and that, except in extremely rare circumstances, courts should not enjoin payment on a letter of credit. GBH also argued that Southern Energy failed to demonstrate irreparable injury.

In Southern Energy, this Court clearly set forth the principles governing international letters of credit:

"Parties that enter into a credit arrangement do so to avail themselves of the benefits of that arrangement. Shifting litigation costs is one of the functions of a standby credit. In this situation, the parties negotiate their relationship while bearing in mind that litigation may occur. This cost-shifting function gives one party the benefit of the money in hand pending the outcome of any litigation. It is important to understand the functions of letters of credit in order to fully understand the consequences the fraud exception has on this commercial device. A demand for payment made upon a standby credit usually indicates that something has gone wrong in the contract. Indeed, this is the nature of the standby letter of credit. In contrast to the commercial credit, nonperformance that triggers payment in a standby credit situation usually indicates some form of financial weakness by the applicant. For this reason, parties choose this security arrangement over another so that they may have the benefit of prompt payment before any litigation occurs. We recognize that, as

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