Mennen v. J.P. Morgan & Co., Inc.

Mennen Medical, Inc. bought-out its shareholders (plaintiffs) in exchange for a note to each. Each note called for five equal annual disbursements and contained an acceleration clause to cover defaults. To secure the notes, Mennen obtained irrevocable letters of credit from J.P. Morgan & Co. (defendant) that called for prompt disbursement to plaintiffs after presentation of a draft accompanied by a notarized statement that the draw represented an unpaid note installment or that the outstanding balance was due as a consequence of default. Mennen paid the first two installments due under the notes, but Odyssey Partners, L.P., who had assumed Mennen’s obligations thereunder, defaulted on the third installment. The plaintiffs accelerated the notes and drew upon the maximum amount allowed under the letters of credit. Morgan promptly paid the respective draws to each of the plaintiffs. Several months later, however, Morgan discovered that the amounts it had paid exceeded the amounts due under the notes themselves and demanded reimbursement from the plaintiffs for such excess amounts. Morgan alleged misstatements of the amounts declared to have been owed in the notarized draw statements. On the other hand, the plaintiffs argued that the amounts allegedly paid in excess represented a premium negotiated at the time of purchase that was designed to compensate them for increased tax liabilities upon acceleration of the notes and for the loss of future interest. The plaintiffs sued for a declaration that their draws under the letters of credit were correct in amount and that Morgan had no separate rights against them. The lower court held against Morgan, concluding that it had violated the independence principle. Morgan appealed.