GP3 II, LLC v. Bank of the W.

467 F.Supp.3d 765

GP3 II, LLC, Plaintiff,

v.BANK OF THE WEST, et al., Defendants.

Case No. 20-00424-CV-W-BP

United States District Court, W.D. Missouri, Western Division.

Signed June 18, 2020

Danielle Twait, Lathrop GPM LLP, Clayton, MO, Michael J. Abrams, Lathrop GPM LLP, Kansas City, MO, for Plaintiff.

Christopher G. Addy, Pro Hac Vice, Mark R. Figueiredo, Pro Hac Vice, Structure Law Group, LLP, San Jose, CA, Jeffrey S. Lawrence, Smith Lawrence, LC, Kansas City, MO, for Defendant Litong Capital, LLC.

Justin Marshall Nichols, Kutak Rock, LLP, Kansas City, MO, Mark G. Hanchet, Pro Hac Vice, Victoria Whitney, Pro Hac Vice, New York, NY, for Defendant Bank of the West.

ORDER GRANTING MOTION FOR TEMPORARY RESTRAINING ORDER

BETH PHILLIPS, CHIEF JUDGE

On June 2, 2020, Plaintiff GP3 II, LLC ("GP3") filed this action seeking a temporary restraining order ("TRO"), to enjoin Defendants Bank of the West ("BOTW") and Litong Capital LLC ("Litong") from drawing on a standby letter of credit. (Doc. 1.) GP3 argues a TRO is necessary to prevent BOTW and Litong from facilitating a material fraud. The Court held a telephone hearing on the motion for a TRO on June 9, 2020. For the following reasons, the request for a TRO is GRANTED and GP3 is directed to post a $21,000,000.00 bond.

I. BACKGROUND

In 2018, New Mexico Regional Water, LLC ("NM Water") began obtaining financing to build a water pipeline in New Mexico ("the Project"). (Verified Compl., Doc. 1, ¶¶ 1, 9.) To secure financing, NM Water asked Garney Construction – who was interested in serving as the general contractor – to invest in the Project. (Id. at ¶ 10.) GP3 (an affiliate of Garney Construction) subsequently agreed to loan NM Water money to facilitate the issuance of a standby letter of credit ("SBLC") to support financing of the Project. (Id. at ¶ 11.)

NM Water also sought financing from CIG Capital LLC ("CIG"), and CIG later involved Litong in the Project. (Id. at ¶ 12, 17.) The parties dispute whether Litong was involved in the Project to offer funding or to source materials for the Project. Regardless, on February 15, 2019, Litong purportedly entered into a contract with GP3 in the amount of $19,978,350.00 for "[p]iping for GP3's construction of New Mexico Regional Water." (Doc. 17-1, pp. 16–19.)¹ The contract described the pipe as

40' joints of 3/8" thick welded steel pipe that is 36" in diameter, lined with ¼ inch cement mortar and coated with ¼ inch cement plus wrapped in plastic for corrosion protection[.]

(Id. at p. 16.) The contract also provided that various documents would be created pursuant to the transaction, including:

• Five copies of an invoice indicating the contract number and shipping mark;

• A certificate of origin of the goods;

• A certificate of quality and quantity in one copy issued by the manufacturers; and

• A buyer-signed receipt of quality and quantity

(Id. at p. 18.)

The contract was purportedly signed by Ron Green, in his capacity as a "Partner" for GP3. However, Ron Green is the President and Manager of NM Water. (Green Affidavits, Doc. 6-2, ¶ 2; Doc. 25-4, ¶ 2.) Green states that he "had no authority to sign any document on behalf of GP3 or to bind GP3." (Doc. 25-4 at ¶ 7.) Green further asserts that he "did not execute the [February 15, 2019 contract, (Doc. 23-3) ] ... in [his] individual capacity, or in [his] capacity as the President and Manager of NM Water, or as a Partner of GP3." (Doc. 25-4, ¶ 8.)

Later, NM Water, CIG, and GP3 amended the existing SBLC. (Doc. 1, ¶ 18.) The amendment provided that the SBLC would be issued by JP Morgan Chase Bank ("JP Morgan") "in favor of BOTW with further credit to" Litong, with Litong as the Beneficiary of the SBLC. (Id. ; Doc. 1-3, p. 3.) Under the terms of the SBLC (as amended), before a draw may occur JP Morgan must be presented with a signed statement by an authorized representative of Litong stating:

We hereby draw USD ... under JPMorgan Chase Bank N.A. letter of credit No. NUSCGS029318 and certify that GP3 II, LLC (the "Account Party") has defaulted in remitting invoice payment for the New Mexico Regional Water Project ... and that payment is sixty (60) days past due. We further certify that a notice was sent ten (10) days prior to the date of this draw to the Account Party ... advising of our intent to draw on JPMorgan Chase Bank, N.A. letter of credit and the amount of the draw represents the amount that is past due and owed at the time of the draw.

(Doc. 1-11, pp. 2–3.) In this way, the SBLC purportedly secured payment for the pipe in the event GP3 did not pay for it. The SBLC was not available for drawing prior to June 11, 2020 and expires on June 26, 2020. (Doc. 1, ¶ 28.)

In June 2019, Litong approached BOTW about purchasing Litong's right to payment on the February 15, 2019 contract between Litong and GP3. Litong eventually sold its rights under the contract to BOTW in return for partial payment of the contracted amount. (Doc. 23-14.) Litong remains the Beneficiary of the SBLC, but Litong assigned the proceeds from the contract to BOTW. (Id. at p. 9; see also Doc. 23-16, pp. 2–4.)

On July 5, 2019, Litong created an invoice seeking payment on the contract. (Doc. 17-1, p. 30.) On July 10, 2019, Litong asked GP3 to acknowledge the July 5, 2019 invoice.² (Doc. 1-7.) GP3 subsequently inquired with NM Water and CIG as to why Litong created a "bogus invoice." (Doc. 1, ¶ 31; Doc. 1-9.) In an email on July 12, 2019 to CIG, Steve Lin³ explained that

[BOTW] requires that we provide clarification regarding where this money is going. The money is for a larger project including materials, equipment, investors, labor and operations of a water project in New Mexico. The problem is that investors, labor, and operations aren't clear that can be put into an invoice. Materials are easier for [Litong] to explain to [BOTW] in a simple invoice. [CIG] told me that this SBLC will be used to fund all of these items so that's why we chose the materials; it's a lot easier. The invoice is not bogus. This is a partial amount given by the manufacture of materials that the project needs. [Litong] understands that ... [CIG does not] want us to call the SBLC and only use for collateral. We don't intend to call it. We just need it there for our collateral when we give you the funding for the project and if our funds are not returned. We can give an undertaking to you if this will help.

(Doc. 6-1.) Lin's response did not reference the February 15 contract or any contract for pipe.

On March 20, 2020, GP3 sent a letter to NM Water, CIG, and BOTW demanding that BOTW surrender the SBLC to JP Morgan by no later than April 3, 2020. (Doc. 23-22, pp. 2–3.) On May 7, 2020, BOTW confirmed that it anticipated collecting on the SBLC. (Doc. 1, ¶ 52.) This lawsuit followed.

On June 10, 2020, the Court granted the motion for a TRO "temporarily" to allow the parties an opportunity to fully develop the relevant issues before the Court. (Doc. 27.) After considering the parties' briefing and the relevant law, the Court concludes that GP3's motion for a TRO should be granted.

II. DISCUSSION

The Court has the authority to issue a temporary restraining order under Federal Rule of Civil Procedure 65. The standard for a temporary restraining order involves consideration of four factors:

(1) the threat of irreparable harm to the movant;

(2) the state of the balance between this harm and the injury that granting the injunction will inflict on other parties litigant;

(3) the probability that movant will succeed on the merits; and

(4) the public interest.

Dataphase Sys., Inc. v. C L Sys., Inc. , 640 F.2d 109, 113 (8th Cir. 1981). While "a court must consider all of the factors to determine whether the balance weighs toward granting the injunctive relief," the likelihood of success on the merits is the most significant factor. E.g., Barrett v. Claycomb , 705 F.3d 315, 320 (8th Cir. 2013). "To that end, the absence of a likelihood of success on the merits strongly suggests that preliminary injunctive relief should be denied." Id.

A. GP3 is Likely to Succeed on the Merits

GP3 seeks an injunction pursuant to its allegations of fraud under § 5-109 of the Uniform Commercial Code ("UCC"). Section 5-109 applies to letters of credit, and specifically to a court's power to enjoin presentation on a letter of credit due to fraud and forgery.⁴ GP3 presents several arguments to establish that any certification by Litong would be materially fraudulent. The Court agrees that GP3 is likely to succeed on its claim of material fraud because the evidence suggests that the pipe allegedly ordered by GP3 does not exist, making it unnecessary to address GP3's other arguments.

1. Injunctive Relief under § 5-109(b)

Section 5-109(b) states that

(b) If an applicant claims that a required document is forged or materially fraudulent or that honor of the presentation would facilitate a material fraud by the beneficiary on the issuer or applicant, a court of competent jurisdiction may temporarily or permanently enjoin the issuer from honoring a presentation or grant similar relief against the issuer or other persons only if the court finds that:

(1) the relief is not prohibited under the law applicable to an accepted draft or deferred obligation incurred by the issuer;

(2) a beneficiary, issuer, or nominated person who may be adversely affected is adequately protected against loss that it may suffer because the relief is granted;

(3) all of the conditions to entitle a person to the relief under the law of this State have been met; and

(4) on the basis of the information submitted to the court, the applicant is more likely than not to succeed under its claim of forgery or material fraud and the person demanding honor does not qualify for protection under subsection (a)(1).

Comment 1 to § 5-109 explains that "[m]aterial fraud by the beneficiary occurs only when the beneficiary has no colorable right to expect honor and where there is no basis in fact to support such a right to honor." The comment also...