RECOMMENDED FOR FULL-TEXT PUBLICATION

Pursuant to Sixth Circuit Rule 206

File Name: 09a0033p.06

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT _________________

ROBERT LANGLEY; MOUNTAINEER

DEVELOPMENT COMPANY, LTD; COLONY

CROSSING, LLC; LANGLEY-COLONIAL, LLC,

 Plaintiffs-Appellees,

v.

PRUDENTIAL MORTGAGE CAPITAL COMPANY,

LLC,

 Defendant-Appellant,

NATIONAL CITY BANK,

Defendant.

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No. 08-5032

Filed: February 3, 2009 

Before: MERRITT, MOORE, and ROGERS, Circuit Judges.

_________________

O R D E R

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The court having received a petition for rehearing en banc, and the petition having

been circulated not only to the original panel members but also to all other active judges of

this court, and no judge of this court having requested a vote on the suggestion for rehearing

en banc, the petition for rehearing has been referred to the original panel.

The panel has further reviewed the petition for panel rehearing and concludes that

the petition for panel rehearing should be denied. Accordingly, the petitions are denied.

1
No. 08-5032 Langley et al. v. Prudential Mortgage Capital Co. Page 2

ROGERS, Circuit Judge. The petition for rehearing is denied. The district court’s

order below was explicitly based in part on the invalidity of the forum selection clause. As

explained in the per curiam opinion, that analysis was not correct, and the preliminary

injunctive relief based on that analysis was therefore reversed. Rehearing is accordingly not

warranted.
No. 08-5032 Langley et al. v. Prudential Mortgage Capital Co. Page 3

1

Because the district court assumed that the contracts containing choice-of-law clauses specifying

New York law were not enforceable, it applied Kentucky law. Prudential argues that the district court

should have applied New York law, but acknowledges that the error was harmless because the relevant

Kentucky and New York statutes are identical. Langley appears to suggest that Kentucky law applies but

also cites New York cases. I will assume, therefore, that Kentucky law applies for purposes of this appeal.

KAREN NELSON MOORE, Circuit Judge, with whom MERRITT, Circuit Judge,

joins, concurring in the denial of panel rehearing. I concur in the denial of panel rehearing.

Our per curiam opinion correctly concluded that the preliminary injunction granted by the

district court must be vacated. I write separately to explain that the preliminary injunction

must be vacated because the district court abused its discretion in determining that the four

preliminary-injunction factors weighed in favor of granting preliminary injunctive relief in

this case.

As the per curiam opinion explains, this case involves an ordinary—if

complex—contract dispute. As I explain below, this fact is critical to the conclusion that the

district court abused its discretion in granting a preliminary injunction preventing Prudential

from drawing on the standby letters of credit and forbidding National City Bank from

honoring them. This court reviews a district court’s decision to grant a preliminary

injunction for abuse of discretion. Certified Restoration Dry Cleaning Network, L.L.C. v.

Tenke Corp., 511 F.3d 535, 541 (6th Cir. 2007). “A plaintiff seeking a preliminary

injunction must establish that he is likely to succeed on the merits, that he is likely to suffer

irreparable harm in the absence of preliminary relief, that the balance of equities tips in his

favor, and that an injunction is in the public interest.” Winter v. Natural Res. Def. Council,

Inc., --- U.S. --- , 129 S. Ct. 365, 374 (2008). “A preliminary injunction is an extraordinary

remedy never awarded as of right.” Id. at 376.

Because the district court issued the injunction pursuant to KY.REV. STAT. § 355.5-

109,1

 Langley’s likelihood of success on the merits is evaluated under § 355.5-109,

which provides in relevant part:

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 . . . enjoin the issuer from honoring a

presentation or grant similar relief against the issuer or other persons

only if the court finds that: . . . [o]n the basis of the information
No. 08-5032 Langley et al. v. Prudential Mortgage Capital Co. Page 4

submitted to the court, the applicant is more likely than not to succeed

under its claim of . . . material fraud . . . .

KY. REV. STAT. § 355.5-109(2)(d) (emphasis added). Kentucky courts have not yet

considered what constitutes “material fraud” under § 355.5-109, which was enacted in

2000 to codify a revised provision of the Uniform Commercial Code, U.C.C. § 5-109.

However, like other courts, the Kentucky Court of Appeals interpreted the former

provision’s standard of “fraud in the transaction” to authorize a court to enjoin letters of

credit only in very limited circumstances. See Audio Sys., Inc. v. First Nat’l Bank of

Louisville, 753 S.W.2d 553, 555 (Ky. Ct. App. 1988) (“[T]he circumstances which will

justify an injunction against honor must be narrowly limited to situations of fraud in

which the wrongdoing of the beneficiary has so vitiated the entire transaction that the

legitimate purpose of the independence of the issuer’s obligation would no longer be

served.” (internal quotation marks omitted) (alteration in original)).

The drafters of the revised U.C.C. provision intended the terms “material” and

“materially” to raise the burden of proof on the party seeking an injunction as compared

to the former version’s focus on “fraud in the transaction.” 3JAMES J.WHITE &ROBERT

S.SUMMERS, UNIFORM COMMERCIAL CODE § 26-9, at 200 (5th ed. 2008). Although the

revised U.C.C. provides no definition of “material” fraud, the comments to § 5-109

endorse the fraud standard previously articulated by the First Circuit in Ground Air

Transfer, Inc. v. Westates Airlines, Inc., 899 F.2d 1269 (1st Cir. 1990) (Breyer, J.):

[C]ourts may not normally issue an injunction because of an important

exception to the general no injunction rule. The exception . . . concerns

fraud so serious as to make it obviously pointless and unjust to permit the

beneficiary to obtain the money. Where the circumstances plainly show

that the underlying contract forbids the beneficiary to call a letter of

credit; where they show that the contract deprives the beneficiary of even

a colorable right to do so; where the contract and circumstances reveal

that the beneficiary’s demand for payment has absolutely no basis in fact;

where the beneficiary’s conduct has so vitiated the entire transaction that

the legitimate purposes of the independence of the issuer’s obligation

would no longer be served; then a court may enjoin payment.
No. 08-5032 Langley et al. v. Prudential Mortgage Capital Co. Page 5

Id. at 1272-73 (internal quotation marks and citations omitted); see also U.C.C. § 5-109

cmt. 1 (endorsing this passage). I find this formulation persuasive and helpful and

conclude that Kentucky courts would likely adopt a similar standard.

Applying this standard to the instant case, nothing in the record indicates that

Prudential’s conduct rises to the level of “fraud.” As the discussion in the per curiam

decision makes clear, this case involves an ordinary contract dispute. The merits of this

contract dispute have not yet been litigated, and there is no need to decide whether

Prudential breached the Rate Lock Agreements by refusing to honor the interest rates,

or whether Prudential will ultimately be entitled to keep the Rate Lock Deposits.

Whatever the merits of Prudential’s claims and defenses in this case, it is clear that

Prudential’s position is at least “colorable.” Because Langley has not shown that

Prudential is acting fraudulently, he is not likely to succeed on the merits under KY.REV.

STAT. § 355.5-109.

The district court found that payment on the letters of credit would cause Langley

irreparable harm by causing “loss of goodwill and reputation in the eyes of lenders who

are essential” to his real-estate-development business. J.A. at 139 (Dist. Ct. Op. at 10).

The general rule is that “a plaintiff’s harm is not irreparable if it is fully compensable by

money damages.” Basicomputer Corp. v. Scott, 973 F.2d 507, 511 (6th Cir. 1992).

However, this court has recognized that a loss of business goodwill may constitute

irreparable harm because of the difficulty in calculating damages. Id. at 512. Langley

of course may ultimately recover any amount paid to Prudential under the letters of

credit if he ultimately succeeds on the merits of this contract dispute. The district court

made its finding based solely on Langley’s testimony that he feared that a draw on the

letters of credit would hurt his reputation among lenders. This finding misunderstands

the nature of letters of credit. Under the so-called “independence principle,” a bank’s

duty to pay on letters of credit is independent of whether or not the applicant (here

Langley) and the beneficiary (here Prudential) have performed on the underlying

contract. WHITE &SUMMERS, supra, § 26-2, at 138. In other words, the bank “must pay

on a proper demand from the beneficiary even though the beneficiary may have breached
No. 08-5032 Langley et al. v. Prudential Mortgage Capital Co. Page 6

the underlying contract with the applicant.” Id. Consequently, payment on the letters

of credit in no way suggests that Langley breached or otherwise failed to perform under

the contracts with Prudential. It therefore strains credulity to think that Langley’s

reputation or goodwill would be tarnished upon payment of the letters. Accordingly,

Langley has not shown that he will suffer irreparable harm if the injunction is not

maintained.

Finally, the remaining equities weigh against an injunction. Most important, the

“independence principle” is threatened if courts are willing to enjoin payment of letters

of credit not just in exceptional cases involving fraud, but in ordinary contract disputes

as well. As this court has explained elsewhere:

There are important policy reasons for upholding the validity of

the documents without reference to the underlying agreements. The

letter of credit’s primary value to the financial world is its reliability.

Without it, a borrower requesting a loan from an institution unfamiliar

with him would be unable to obtain funds. In such a situation, the lender

must rely on the credit instrument to ensure that payment will be made.

Security Fin. Group, Inc. v. N. Ky. Bank & Trust, Inc., 858 F.2d 304, 307 (6th Cir.

1988). When courts are too willing to enjoin payment of letters of credit, the

independence principle is weakened because parties must look not only at the “paper

transaction” embodied in the letters but also at the underlying contracts.

Because each of the factors discussed above weighs against injunctive relief, the

district court abused its discretion in issuing the preliminary injunction.

ENTERED BY ORDER OF THE COURT

/s/ Leonard Green

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Clerk