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

Facts

In 1991, the plaintiffs, who were major shareholders of Mennen Medical, Inc., sold their shares to a group of investors including Odyssey Partners, L.P. The transaction was financed through promissory notes issued to each plaintiff, with payments scheduled over five years. To secure these notes, Mennen obtained standby irrevocable letters of credit from defendant Morgan Guaranty Trust Company. The letters of credit required payment within 10 days after presentation of a draft accompanied by a notarized statement certifying the amount due under the notes. The letters included a merger clause stating that they could not be modified by reference to any other document, and they were expressly subject to the Uniform Customs and Practice for Documentary Credits (UCP). After Mennen paid the first two installments, Odyssey took financial control and subsequently defaulted on its obligations. The plaintiffs accelerated the notes and drew upon the maximum payment provided under the letters of credit. Morgan promptly paid but later claimed that the amounts paid exceeded what was actually due under the promissory notes by approximately $230,000. Morgan demanded reimbursement, alleging misstatements in the notarized draw statements. The plaintiffs argued that the “overpayments” represented a premium negotiated at the time of purchase to compensate them for increased tax liabilities upon acceleration and loss of future interest. Notably, Morgan had previously entered into a defeasance agreement with Odyssey, releasing Odyssey from any obligation to reimburse Morgan for payments made under the letters of credit.