## Facts

- Todd Meagher sold his ownership interest in Credit.com to Adam Levin.
- As part of the purchase price, Levin executed a $331,000 promissory note in Meagher’s favor.
- To secure payment on the note, the parties used a standby letter of credit issued by Wachovia Bank, naming Meagher as beneficiary.
- The letter of credit required Meagher, to draw, to present a draft and a sworn certificate stating that Levin had defaulted on the promissory note.
- Levin also agreed to remove Meagher’s exposure on a separate Wells Fargo line of credit that Meagher had guaranteed by either paying off and terminating the line or obtaining Meagher’s release by April 21, 2003.
- The Wells Fargo line of credit was paid off on April 17, 2003, but Wells Fargo did not promptly update its computer system to reflect the payoff.
- On April 22, 2003, a Wells Fargo employee told Meagher the line of credit still showed a balance; Meagher sent Levin a notice of default.
- Later on April 22, Levin responded with a written statement from the Wells Fargo employee who received the payoff, confirming the line of credit had been paid.
- On April 23, 2003, Meagher nevertheless presented documents to Wachovia to draw on the letter of credit based on an asserted default.
- Meagher also spoke with another Wells Fargo employee, who stated the account still showed a balance and that Meagher remained listed as guarantor until the payment posted.
- Meagher refused to withdraw the draw request, and Levin sued Meagher seeking an injunction to prevent Meagher from drawing on the letter of credit.
- The trial court entered a preliminary injunction against Meagher, and Meagher appealed.

## Issues

1. Did the trial court abuse its discretion by issuing a preliminary injunction barring Meagher from drawing on the standby letter of credit based on a showing of probable material fraud under UCC § 5-109?
2. Did the evidence support the trial court’s findings on (a) Levin’s likelihood of success on the merits and (b) the balance of interim harms if the draw were allowed to proceed?
3. Was the preliminary injunction improper in scope (overbroad) in light of the limited, document-driven nature of letter-of-credit transactions?

## Decision

- The Court of Appeal affirmed the preliminary injunction.
- The court held the trial court acted within its discretion in concluding Levin made a sufficient showing—at the preliminary stage—of likely success on a claim that Meagher’s draw request and required certification could constitute material fraud.
- The court also agreed the trial court could reasonably find the interim harms favored restraining the draw to preserve the status quo while the dispute over default and fraud was litigated.
- The court rejected Meagher’s arguments that the injunction was improper given the independence of the letter of credit, and it addressed scope concerns in the context of ensuring injunctive relief remains focused on preventing a fraudulent draw.

## Legal Principles

- A standby letter of credit is generally independent from the underlying contract, and banks honor presentations that comply on their face with the credit’s documentary conditions.
- Under UCC § 5-109, a court may enjoin honor of a letter of credit (or restrain a beneficiary’s draw) when the applicant shows probable “material fraud” by the beneficiary.
- In reviewing a preliminary injunction, an appellate court applies a deferential abuse-of-discretion standard and examines whether the trial court had a reasonable basis for its findings on likelihood of success and the balance of interim harms.
- In the letter-of-credit setting, the balance of harms may favor restraint where a wrongful draw would be difficult to remedy after payment, while the beneficiary can be protected by later proceedings if it ultimately proves entitlement to payment.
- Injunctive relief should be framed to address the alleged fraudulent draw and preserve the parties’ positions pending final resolution.

## Conclusion

Levin v. Meagher affirmed a preliminary injunction preventing a beneficiary from drawing on a standby letter of credit where the applicant showed that the underlying “default” basis was likely unsupported and that the beneficiary’s demanded certification could amount to material fraud under UCC § 5-109, with interim harms weighing in favor of keeping the draw from going forward until the merits were decided.


Levin v. Meagher, 2004 WL 1664864 (2004)