2011 Commercial Law Developments
VIII. Letters of Credit, Investment Securities, and Documents of Title
A. Letters of Credit
- CRM Collateral II, Inc. v. Tri-County Metropolitan Transportation District, 715 F.Supp.2d 1143 (D.Or. 2010) -- Account party was a surety whose obligations were discharged by an amendment of the underlying transaction to which the surety had not consented. While beneficiary's draw on the letter of credit did not violate warranties made to the issuer and beneficiary as to the absence of material fraud under U.C.C. § 5-109 , it did violate the warranty under U.C.C. § 5-110 that the draw request did not violate any agreement. While the court had refused to enjoin the beneficiary's draw on the letter of credit in an earlier proceeding, that did not prevent the beneficiary from seeking repayment of the funds after the draw.
- Speedway Motorsports Intern. Ltd. v. Bronwen Energy Trading, Ltd. , 706 S.E.2d 262 (N.C. Ct. App. 2011) – Because contracts related to a letter of credit transaction are deemed to be independent, forum-selection clause in agreement between applicant an issuer was inapplicable to action between issuer and confirming bank.
B. Investment Securities
- Chase Investment Services Corp. v. Law Offices of Jon Divens , 748 F.Supp.2d 1145 (C.D. Cal. 2010) – There were competing claims to securities (CMOs) held in a brokerage account and the securities intermediary filed an interpleader action. Divens had opened the account ( i.e. was the entitlement holder). Divens argued that as the entitlement holder it had the right to receive and retain the interest paid on the CMOs and that Divens took its interest in the CMOs free of the other parties' claims under U.C.C. § 8-502. Since Divens was acting as an agent/trustee for other parties, the fact that it was the entitlement holder did not insulate it from its obligations to turn payments on the CMOs over to the beneficial owners. The court analyzed the U.C.C. § 8-502 arguments and found that (i) the beneficial owners had an adverse claim ( i.e. a property interest, not a breach of contract claim) of which Divens had notice and (ii) Divens had not given value. Accordingly, Divens did not qualify for the free of claims protection in U.C.C. § 8-502.
Comment : The court does a nice analysis of what giving value means and concludes that even if Divens had provided services to the beneficial owners, that was not a bargained for value in exchange for a transfer of an interest in the securities for purposes of U.C.C. § 8-502.
- Guthartz v. Park Centre West Corp. , 409 Fed. App. 248 (11 th Cir. 2010) (unpublished opinion) – Even if stock powers for shares of ownership in three companies could have conveyed ownership of uncertificated share under Article 8 of the UCC, the mother that signed them held the shares as a tenant by the entireties and could not unilaterally convey the shares.
- Jeng-Cheng Ho v. Shih-Ming Hsieh , 105 Cal. Rep. 3d 17 (Cal. App. Ct. 2010); 71 U.C.C. Rep. Serv. 2d 761– Creditor can only levy against security certificate by taking possession of certificate or putting the certificate in possession of court.
- In re Estate of Charles Galen Rider, 2011 S.C.App. LEXIS 164 (S.C. Ct. App. 2011) (Entitlement orders with respect to securities account given, but not executed, prior to entitlement holder's death, could not be executed under 8-102(a)(8). The principles in 8-107(a) and (e) that an entitlement order is “effective” if made by an “appropriate person”, that “effectiveness” is determined as of the date the entitlement order is made and that later circumstances do not cause the entitlement order to become ineffective cannot overcome general agency concepts that would terminate an agent's ability to act after a person's death).
- In re Estate of Charles Galen Rider , 2011 S.C.App. LEXIS 164 (S.C. Ct. App. 2011) – Entitlement orders with respect to securities account given, but not executed, prior to entitlement holder's death, could not be executed under UCC § 8-102(a)(8). The principles in UCC § 8-107(a) and (e) that an entitlement order is “effective” if made by an “appropriate person”, that “effectiveness” is determined as of the date the entitlement order is made and that later circumstances do not cause the entitlement order to become ineffective did not overcome general agency concepts that would terminate an agent's ability to act after a person's death.
- Smith v. Powder Mountain, LLC , 2011 U.S. Dist. LEXIS 64650 (S.D. Fl. 2011) – An “agreement” is required for control over a securities account pursuant to UCC§ 8-106(d)(2). While that agreement may be less than a formal written contract, there must be evidence of some meeting of the minds. Evidence of a general willingness of the securities intermediary to acquiesce in the secured party's orders, or evidence of past acquiescence, is insufficient for control.
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