## Facts

- TAM and 777 Leasing entered a sale-leaseback agreement for an inventory of aircraft spare parts.
- To finance 777 Leasing’s purchase, TC Skyward extended financing and received a lien on the inventory; TAM executed a notice acknowledging those liens.
- TAM was required to cause Deutsche Bank AG, New York Branch (DBNY) to issue an irrevocable standby letter of credit (LOC) naming TC Skyward as beneficiary and TAM as applicant.
- The LOC required DBNY to honor a draw upon TC Skyward’s submission of specified documents that conformed to the LOC’s terms.
- TAM filed for bankruptcy; the financing documents treated a bankruptcy petition as an event of default that made certain amounts due and payable to TC Skyward.
- TC Skyward submitted a draw request and supporting documents, asserting strict compliance with the LOC and that amounts were due.
- TAM objected, arguing no payment was due and that the bankruptcy-default provision was an unenforceable ipso facto clause.
- DBNY refused to honor the draw, and TC Skyward sued for breach of contract/wrongful dishonor.

## Issues

1. Whether DBNY could lawfully dishonor a facially compliant LOC presentation based on an asserted fraud defense tied to TAM’s objections to payment and bankruptcy-law arguments.
2. Whether the independence principle required DBNY to honor the draw based solely on documentary compliance, notwithstanding the underlying dispute between TAM and TC Skyward.
3. Whether a contested legal position about enforceability of a bankruptcy-default clause can constitute “material fraud” sufficient to trigger the UCC Article 5 fraud exception.

## Decision

- The court converted DBNY’s Rule 12(b)(6) motion into a motion for summary judgment.
- DBNY’s converted motion for summary judgment was denied.
- TC Skyward’s cross-motion for summary judgment was granted.
- The court held that DBNY wrongfully dishonored the LOC because TC Skyward made a conforming presentation and DBNY failed to establish a valid fraud defense.

## Legal Principles

- Letters of credit are independent of the underlying transaction; an issuing bank’s honor obligation generally turns on facial documentary compliance, not the merits of the underlying dispute.
- Strict compliance governs: if the required documents conform on their face to the LOC’s terms, the bank must honor absent a recognized exception.
- The UCC Article 5 fraud exception is narrow and requires material fraud of the type reflected in the documents themselves (e.g., forged or materially false documents), not a good-faith dispute over underlying contractual or bankruptcy issues.
- An issuing bank bears the risk of wrongful dishonor when it refuses payment based on underlying objections that do not establish material documentary fraud.

## Conclusion

The court concluded that TC Skyward’s documents complied with the standby letter of credit and that TAM’s bankruptcy-related objections did not establish material fraud under UCC Article 5; DBNY therefore breached the LOC by dishonoring the draw, entitling TC Skyward to summary judgment on liability.


TC Skyward Aviation U.S., Inc. v. Deutsche Bank AG, N.Y. Branch, 557 F. Supp. 3d 477 (S.D.N.Y. 2021)