## Facts

- ADM Rice, Inc. agreed to sell approximately 120,000 metric tons of rice to the Grain Board of Iraq for about $69 million.
- The sales arrangement required ADM Rice to provide a 10% performance bond ($6.9 million) tied to the rice’s quality.
- Trade Bank of Iraq (TBI) issued the performance bond, and JP Morgan Chase Bank, N.A. issued a $6.9 million standby letter of credit naming TBI as beneficiary.
- The standby letter of credit incorporated the performance bond’s terms, including a condition that any draw “must be accompanied by” a laboratory report from SGS, an international inspection company, documenting nonconforming quality.
- SGS inspected the rice before shipment, during transit, and upon arrival in Iraq; the available SGS reports stated the rice was in good condition and met specifications.
- Before discharge was completed, Chase received a demand from TBI seeking the full $6.9 million and stating TBI had received a claim based on an SGS laboratory report allegedly showing quality problems.
- ADM disputed the demand, asserted no adverse SGS report existed, and contacted SGS offices that confirmed no negative laboratory report for the shipment.
- ADM and ADM Rice sued to prevent payment and obtained temporary restraining relief while the court considered a preliminary injunction.

## Issues

1. Whether the fraud exception to the independence principle permitted enjoining an issuer from honoring an otherwise facially compliant standby letter-of-credit demand allegedly premised on a fabricated or non-existent SGS laboratory report.
2. Whether a draw request satisfied the letter of credit’s documentary conditions when the required SGS laboratory report was allegedly not genuine or did not exist.
3. Whether the movants satisfied the requirements for a preliminary injunction (likelihood of success or serious questions, irreparable harm, balance of hardships, and public interest) in the letter-of-credit context.

## Decision

- The court granted a preliminary injunction barring Chase from honoring TBI’s draw under the standby letter of credit pending further proceedings.
- The court found ADM made a strong showing that the draw was fraudulent because it relied on an SGS laboratory report that appeared not to exist and was contradicted by SGS’s actual inspection reports.
- The court concluded equitable factors supported maintaining the status quo given the asserted fraud and the difficulty of later recovery in an international transaction.

## Legal Principles

- Standby letters of credit are generally independent of the underlying transaction; an issuer typically honors a demand if the presented documents appear to comply on their face.
- Courts may enjoin honor under a fraud exception when the beneficiary’s demand involves material fraud that undermines the transaction, including reliance on fabricated or non-existent documents required by the credit.
- Where a letter of credit expressly requires a specific third-party document as a condition to drawing, a demand premised on a fictitious or materially misrepresented version of that document may justify injunctive relief.
- In the letter-of-credit setting, preliminary injunctive relief may be warranted when there is a strong showing of fraud, a risk of irreparable harm from payment, and a balance of hardships and public interest favoring prevention of fraudulent draws.

## Conclusion

The court enjoined payment on a standby letter of credit because the beneficiary’s draw appeared to depend on an SGS laboratory report that did not exist, bringing the dispute within the fraud exception and satisfying the standards for preliminary injunctive relief.


Archer Daniels Midland Co. v. JP Morgan Chase Bank, N.A., 2011 WL 855936 (S.D.N.Y. 2011)