The "Bright Star" Fades: The NC Business Court on Letters of Credit

 I've resolved this year to blog about every numbered decision of the Business Court, as opposed to past years, where my lack of enthusiasm about the more boring decisions has left me writing about less than 100% of the Court's decisions.

My resolve was tested with Judge Murphy's decision last week in Speedway Motorsports Int'l , Ltd. v. Bronwen Energy Trading, Ltd., 2014 NCBC 5, but I have bitten the bullet and I have laboriously produced this post [an enhanced version of this opinion is available to lexis.com subscribers].

What's the new Speedway decision about?  A complicated international dispute over oil contracts, letters of credit, a guarantee of letters of credit, and claims for fraud, conversion, negligent misrepresentation, and unfair and deceptive practices.

You might remember the Bronwen case. It's been pending in the Business Court since 2008 and has been up and back from the Court of Appeals over that 5+ years. I wrote about the Court of Appeals decision affirming  the Business Court in 2011 (and reversing it in another decision issued at the same time). In the affirming decision, the COA held that the "one bright star" in letter of credit transactions was that "every letter of credit involves separate and distinct contracts."

The effect of that ruling was that the COA affirmed the dismissal of claims against Defendant BNP-Suisse, which had issued a demand guarantee to BNP-France on a letter of credit issued by France. The Suisse guarantee was secured by $12 million which Plaintiff had on deposit with Suisse. When Plaintiff sued over the draw on its letter of credit with Suisse, France argued that the case was governed by a choice of forum provision in the Suisse guarantee calling for resolution in Switzerland.

The COA held that Plaintiff, which was not a party to the guarantee given by Suisse in connection with the letter of credit transaction,  was barred by the "independence rule"  from availing itself of the choice of forum provision because the contracts surrounding a letter of credit transaction must be "separate and distinct."

So in last week's ruling, France sought to push the COA ruling in support of a new motion for judgment on the pleadings. France argued that Plaintiff couldn't make any claims at all against it based on its draw on the guarantee because the guarantee was "separate and distinct" from the obligations between Suisse and the Plaintiff.

That seems to fit with the independence principle, doesn't it?  Not the way Judge Murphy saw it. France might have prevailed if the claims against it were based in contract. But they were tort-based claims, for fraud, negligent misrepresentation, conversion, unfair and deceptive practices, and for an accounting.

Judge Murphy therefore denied the Rule 12(c) claim, holding that:

The Court of Appeals’ description of the “independence principle” was grounded in principles of contract. See Speedway I, 209 N.C. App. at 564, 706 S.E.2d at 263 [enhanced version]; see also Speedway II, 209 N.C. App. at 485, 707 S.E.2d at 392 [enhanced version]. Specifically, the Court of Appeals was concerned with maintaining the separateness of the multiple contracts that are characteristic of letter of credit transactions. See id. However, nothing in the Speedway opinions shields a defendant from purely tort-based claims like those alleged by Plaintiff. See id. Furthermore, France cites no authority that forecloses non-contract, purely tort-based claims by application of the independence principle. The import of the independence principle is that France is not bound by and cannot seek the benefits of the contracts that Plaintiff made with others.

Op. ¶28 (emphasis added).

Read this article in its entirety on North Carolina Business Litigation Report, a blog for lawyers focusing on issues of North Carolina business law and the day-to-day practice of business litigation in North Carolina courts.

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