Important Holdings for Letter of Credit Users and Issuers From Recent New York Cases Involving Natixis Funding Corp. and Natixis, New York Branch

By: Michael Evan Avidon, Megan H. Daneshrad, Mark N. Parry, and David Rabinowitz

Documentary Credit World, November/December Issue

New York state courts recently handed down important decisions reinforcing the independence of letters of credit (“LCs”) and preventing an LC issuer and its affiliate from avoiding or modifying irrevocable LC obligations.  Natixis Funding Corp. et ano v. Genon Mid-Atlantic, LLC and related actions, N.Y. County Index Nos. 650817/2018 etc., 2019 WL 2319171, 2019 N.Y. Slip Op. 31511(U) (Sup. Ct. N.Y. Co. 2019), aff’d, 181 A.D.3d 481, 121 N.Y.S.3d 34 (App. Div. 1st Dep’t 2020), app. den., 35 N.Y.3d 912 (2020).  Our firm represented the successful LC beneficiaries in these cases.


The cases arose out of the financing for two power plants in Maryland.  Eleven different units in the plants were leased by 11 different lessors to a single plant operator.  The leases provided for rent payments that increased or decreased periodically, depending upon the particular unit and rent period.  Each lease required qualified credit support, which could be provided in the form of a standby LC meeting certain criteria.

After an initial set of 11 LCs had been provided to 11 beneficiaries, the tenant arranged with Natixis for 11 replacement LCs.  The tenant agreed to pay Natixis Funding Corp. (“Natixis Funding”) $130 million plus a fee.  In exchange, Natixis Funding agreed to (i) cause Natixis, New York Branch (“Natixis NY”) to issue the 11 replacement LCs and (ii) reimburse Natixis NY for any draws on the new LCs. 

After Natixis NY issued the 11 LCs, they were drawn on in two waves of draws totaling $166 million.  Natixis NY paid the first wave of $125 million but refused to pay the second, claiming that the contract between the tenant and Natixis Funding only required Natixis NY to issue LCs totaling $130 million.

The Litigation

Natixis Funding and Natixis NY filed a complaint in New York state court seeking a declaration (and associated relief) that Natixis NY did not have to pay more than $130 million in the aggregate on the 11 LCs, that the second wave drawings were rightfully dishonored, and also seeking return of money already paid.  Natixis NY claimed that it had erroneously drafted the LCs so that they could be drawn on in the total amount of $286 million when the total should have been $130 million, that the drafting error was known to the beneficiaries, that the beneficiaries’ draws in excess of $130 million were fraudulent because the beneficiaries knew and acknowledged that the total available was only $130 million, yet drew for more, and that the beneficiaries would be unjustly enriched by further LC payments.  In addition, Natixis NY claimed that the second wave of drawings was fraudulent because they supposedly contained implied misrepresentations.

The defendants moved to dismiss the Natixis Complaint.  In addition, four of the unpaid beneficiaries filed their own actions for summary judgment in lieu of complaint (an expedited New York State legal procedure) claiming wrongful dishonor of their drawings on the Natixis NY LCs. 

On dispositive motions by the beneficiaries, the trial court dismissed Natixis’ lawsuit and granted summary judgment to the four beneficiaries that sued for wrongful dishonor. 

The trial court addressed Natixis’ claims and defenses as follows:

  • Mistake.  The court rejected Natixis’ claim that it had made a unilateral mistake in drafting the 11 LCs by failing to include an aggregate $130 million cap across the 11 LCs, holding that each beneficiary was entitled to enforce its individual LC as written.  The court held that an LC cannot be reformed or rescinded based on an issuer’s unilateral drafting mistake.  The alleged mistake here was not evident from the face of the 11 LCs and the court held that the contract under which Natixis Funding received $130 million in exchange for having Natixis NY issue the LCs was irrelevant to the LCs due to the independence principle.
  • Fraud.  The court held that the beneficiaries’ second wave drawing statements were truthful, not fraudulent.  Natixis’ fraud claim was that the beneficiaries’ drawing statements falsely implied that the LCs they were drawing on were “qualified credit support” within the meaning of the power plant lease documentation.  Those drawing statements stated that no qualified credit support had been provided to replace the Natixis NY LCs.  The court determined that the drawings made no express or implied representation that the Natixis NY LCs were “qualified credit support,” but only that the Natixis NY LCs had not been replaced by qualified credit support.  The lower court also rejected claims that a restructuring arrangement between the lessors and the plant operator constituted replacement qualified credit support and that the beneficiaries knew the LCs were supposed to be capped at $130 million in the aggregate.
  • Unjust Enrichment.  The court rejected Natixis Funding’s unjust enrichment and money had and received claims because Natixis Funding had made no payment to the beneficiaries.  The payments had been made by the LC issuing bank, Natixis NY.  And because Natixis NY had been reimbursed by Natixis Funding, Natixis NY had no damages and, hence, no claim.
  • Quasi-Contract.  Lastly, as to the quasi-contract claims, the court applied the rule that there can be no claim of quasi–contract where there is an express contract, namely the LCs covering the subject matter.

After these rulings, two remaining unpaid beneficiaries filed suit for wrongful dishonor, bringing the number of cases to seven.

The Natixis entities appealed the five decided cases – Natixis’ own case and four beneficiaries’ cases for summary judgment in lieu of complaint.  On March 12, 2020, the New York Appellate Division, First Department, unanimously affirmed all five decisions in favor of the beneficiaries, our clients.  After the Natixis entities unsuccessfully sought leave to appeal to New York’s highest court, Natixis NY paid the dishonored drawings. 


The upshot is that the New York courts made Natixis NY honor its LCs as written.
The courts’ rulings reinforce the independence of LCs from other contracts and relationships and also reinforce the right to rely on LCs as written, bolstering the status of the letter of credit under New York law as an enforceable, independent, documentary payment mechanism.
As for the Natixis entities, if they really made an error here, it may have been in capping the right to reimbursement from the plant operator at an amount less than the aggregate amount of the LCs.  Or Natixis may have gambled that any LC drawings would not exceed the amount that it had received up front from the plant operator (plus any earnings thereon) and simply lost that gamble.
Two important takeaways for an LC issuer are:

  1. Make sure to understand the terms of each LC before issuing it; and
  2. Make sure the reimbursement agreement entitles the issuer to be fully reimbursed for honoring each complying drawing.

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