3M Co. v. HSBC Bank USA, N.A., No. 16 Civ. 5984 (S.D.N.Y. Apr. 25, 2018) [click for opinion]
In 2012, 3M began working in a subcontracting role for a subdivision of the Turkish government (Posta Telgraf Teskilati Genel Mudurlugu, ("PTT"). The purpose of the project was to develop an Electronic Toll Collection System in Turkey. PTT contracted primarily with a private Turkish company, Vendeka Bilgi Teknolojileri Ticaret Ltd. ("Vendeka"), to install certain component parts. Vendeka contracted with a third party, Federal Signal Technologies Group ("Federal"), to provide computer hardware and software for the project. PTT later removed Vendeka as the primary contractor and replaced it with Tetra HGS Elektronic Sistemleri A.S. ("Tetra"); Federal later assigned its project responsibilities to 3M.
Under the terms of the agreement, 3M was obligated to post a $1 million letter of credit in favor of Vendeka as a performance guarantee for its work on the toll project; Vendeka was likewise required to post a performance guarantee in favor of PTT. Vendeka was entitled to draw on the letter of credit only if PTT declared in writing that Vendeka was in default under any letter of credit, performance bond, or other performance guarantee. The parties secured the letter of credit using a three-bank structure: HSBC Bank USA issued a letter of credit in favor of Ziraat Bank, which issued a local guarantee to Aktif Yatirim Bankasi ("Atkif"), which issued a local guarantee to PTT.
On July 18, 2016, PTT made a demand on the letter of credit posted by Aktif Bank as a performance guarantee for Vendeka. At that time, Vendeka had not performed for a period of nine months, as it had been replaced as the primary contractor with Tetra. PTT's demand on the Aktif Bank letter of credit triggered demands on the two other letters of credit with Ziraat Bank and HSBC Bank.
Aktif Bank satisfied PTT's demand for payment on the Aktif Bank letter of credit; PTT deposited the $1 million it obtained from Aktif Bank into an account at Ziraat Bank. At that time, Ziraat Bank transferred the $1 million to an account controlled by Vendeka. However, by the time of PTT's demand and the subsequent payment by Atkif, Vendeka had become insolvent. Vendeka's creditors froze Vendeka's bank accounts and claimed its assets, including the $1 million at issue.
Plaintiff 3M sought a preliminary injunction enjoining HSBC from making payment on the letter of credit issued in favor of Ziraat Bank, alleging that it was entitled to injunctive relief because Ziraat Bank's attempt to draw on the letter of credit was fraudulent. The district court denied 3M's motion, holding that although 3M had adequately demonstrated that it would suffer irreparable harm if the motion were denied, it had not shown a likelihood of success on its claims of fraud.
The court explained that to succeed on an application for preliminary injunction, a plaintiff must demonstrate that it is likely to suffer irreparable injury in the absence of an injunction. Because monetary injury can be estimated and compensated, it does not typically constitute "irreparable harm." However, harm may be irreparable where a plaintiff seeks to compensate monetary injuries from an insolvent defendant. Because the $1 million at issue had already been claimed by Vendeka's creditors, the court found irreparable harm because it was unlikely that 3M could recover the $1 million from Vendeka, in the event the funds were released by HSBC.
The court also found that it was unlikely that 3M could recover the $1 million from PTT or Ziraat Bank. Both entities were instrumentalities of the Turkish government, and recovery from them would likely be barred by the Foreign Sovereign Immunities Act. The court also agreed with 3M's argument that political uncertainty following the failed coup attempt in Turkey in July 2016 limited the availability of judicial relief in Turkey, thus also constituting "irreparable harm."
However, to succeed in a motion for preliminary injunction, a party must also demonstrate a likelihood of success on the merits. When the beneficiary of a letter of credit makes a demand conforming to the terms of the credit letter, a bank may refuse to issue payment only upon a showing of fraud (for example, if a material document is forged). According to 3M, PTT fraudulently drew on Aktif Bank's letter of credit long after Vendeka had ceased working on the toll project. However, the court found that because there were other equally plausible reasons for PTT's demand on the letter of credit, the draw was not plainly fraudulent. Thus, 3M could not adequately demonstrate a likelihood of success on the merits, and the court denied its request for an injunction.