SAN FRANCISCO (CN) – An Israeli cable television broadcaster won its appeal in the 9th Circuit against Warner Brothers International Television Distribution over a $5 million “letter of credit” that Judge Kleinfeld likened to a large-scale pawn shop transaction.
The dispute hinges on a 1999 contract between the parties, in which Golden Channels agreed to buy programming from Warner for 30 months. The contract stipulated that Golden had to provide “an irrevocable unconditional draw down letter of credit” for at least $5 million as security for its debts.
Like a travelers check, the letter of credit allowed Warner to rely solely on the financial stability of the issuing bank, and “not on the financial strength and willingness to pay of the vendee,” the ruling states.
But the contract explicitly stated that Golden would maintain the letter of credit for the duration of the contract “only.”
When the contract expired, Warner exercised its option to extend and the parties started negotiating the terms of the new contract. Warner insisted that any future contracts had to retain the letter of credit, while Golden seemed less sold on the idea, despite having renewed the letter for an extra year during negotiations.
As it became clear that the parties would not be able to agree on the terms of a new contract, Warner drew down the full $5 million letter of credit to satisfy Golden’s debts, which at that point were $5,083,301. Golden had already paid the extra $83,301 in cash.
For reasons unexplained by either party, Golden wanted to pay Warner using $5 million cash in escrow, rather than the letter of credit, while Warner would only accept the letter of credit as payment. They sued each other for breach of contract, and the district court awarded Warner more than $19 million in damages on the ground that Golden had created an implied second contract by extending the letter of credit during negotiations.
The 9th Circuit reversed, saying Warner was wrong to draw down the $5 million letter of credit. The 1999 contract “could not have said more clearly that the letter of credit was agreed upon to May 2002 ‘only’ and that any changes would have to be in writing,” the ruling states.
Kleinfeld added that anyone who pledges something tangible as security gets it back when he pays the secured obligation.
“That is why someone who pawns a violin gets it back from the pawnshop when they pay the loan the pawnshop extended to them. The letter of credit was worth more than the usual pawned violin, but the principle is the same.”
The court reversed and remanded to determine damages.