## Facts

- 3M Company was a subcontractor on an electronic toll-collection project for a Turkish government agency, Posta Telgraf Teskilati Genel Mudurlugu (PTT).
- The service agreement for the project required 3M to provide a $1 million letter of credit as a performance guarantee in favor of the prime contractor, Vendeka Bilgi Teknolojileri Ticaret Ltd. (Vendeka).
- At 3M’s request, HSBC Bank USA, N.A. issued a $1 million standby letter of credit (the HSBC standby) in favor of Turkiye Cumhuriyeti Ziraat Bankasi (Ziraat Bank), governed by New York law and subject to ISP98.
- The HSBC standby was part of a back-to-back structure: Ziraat would issue a counter-standby to Aktif Yatirim Bankasi (Aktif), and Aktif would issue a local standby/guarantee in favor of PTT for $1 million, tied to Vendeka’s performance.
- The original HSBC standby required Ziraat to certify not only that it had received a demand from Aktif, but also that the demand was made due to the performance guarantee referenced in the service agreement.
- At Ziraat’s request, and with 3M’s approval, HSBC amended the standby to remove the reference to the service agreement; after the amendment, Ziraat could draw by certifying that Aktif had demanded payment under Ziraat’s counter-standby.
- PTT later terminated Vendeka and replaced it with another contractor that posted its own performance security, but PTT still made a demand under the existing local standby issued by Aktif.
- Following PTT’s demand, Aktif demanded payment from Ziraat under the counter-standby, and Ziraat presented a demand to HSBC under the amended HSBC standby.
- 3M sued HSBC in the Southern District of New York and sought a preliminary injunction under N.Y. U.C.C. § 5-109 to prevent HSBC from honoring Ziraat’s draw, arguing that the demand was fraudulent. The court initially entered a temporary restraining order pending the injunction decision.

## Issues

1. Whether 3M demonstrated “forged or materially fraudulent” documents, or that honor would facilitate “material fraud,” as required to enjoin payment under N.Y. U.C.C. § 5-109.
2. Whether 3M showed a likelihood of success on the merits (or sufficiently serious questions and a balance of hardships in its favor) to justify a preliminary injunction against honor of the amended standby.
3. Whether 3M established irreparable harm absent an injunction, given that payment would be a monetary loss.
4. Whether the balance of hardships and the public interest in the reliability of letters of credit supported denying injunctive relief.

## Decision

- The court denied 3M’s motion for a preliminary injunction.
- The court vacated the previously issued temporary restraining order.
- The court found that 3M did not make the required showing of material fraud under N.Y. U.C.C. § 5-109.
- The court concluded that 3M failed to show irreparable harm warranting extraordinary equitable relief.

## Legal Principles

- A letter of credit is independent from the underlying contract disputes; an issuer generally must honor a facially complying presentation regardless of performance disagreements in the underlying transaction.
- N.Y. U.C.C. § 5-109 permits a court to enjoin honor only in narrow circumstances, requiring a strong showing that a required document is forged or materially fraudulent, or that honoring the presentation would facilitate material fraud by the beneficiary.
- “Material fraud” demands more than contested allegations of breach or sharp practice in a commercial dispute; the applicant must show fraud of a type that makes honor plainly improper.
- When an applicant approves an amendment that removes a substantive draw condition, a draw that meets the amended documentary requirements is less susceptible to a fraud-based injunction.
- Economic loss from payment under a standby letter of credit is ordinarily not irreparable harm because it can be addressed through money damages or later recourse against responsible parties.
- Courts weigh the public interest in preserving the certainty and prompt-pay function of letters of credit, which would be weakened if injunctions issued based on ordinary contract disputes.

## Conclusion

The court refused to stop HSBC from honoring Ziraat Bank’s demand because the amended standby allowed Ziraat to draw upon certifying Aktif’s demand, and 3M’s objections centered on disputed project and guarantee issues rather than a clear showing of material fraud within N.Y. U.C.C. § 5-109; the claimed injury was primarily monetary and did not justify injunctive relief.


3M Co. v. HSBC Bank USA, N.A., 95 U.C.C. Rep. Serv. 2d (Callaghan) 896, 2018 WL 1989563 (2018)