1 professor of law loyola law school, los angeles chapter 1 introduction
Download 1.49 Mb.
|
- Navigate this page:
- Problem 105
- Problem 106
- Problem 107
- Problem 108
- SZTEJN v. J. HENRY SCHRODER BANK CORP.
- Problems Problem 109
- Problem 110
- REGENT CORPORATION, U.S.A. v. AZMAT BANGLADESH, LTD.
Notes and Questions 1) The court’s reasoning in this case was approved by the drafters of Revised Article 5. See Revised UCC § 5-108, official comment 6. 2) UCC § 5-108(e) requires the issuer to use standard practices of financial institutions in reviewing documents presented under a letter of credit. The question of whether the issuer observed such standards is one for the court to decide. Why should a court decide such a fundamental question? See UCC § 5-108, official comment 1. Doesn’t this rule effectively deny the parties to litigation over a letter of credit the right to a jury trial? Problem 105 - How “strict” does “strict compliance” have to be? Assume that the letter of credit requires that drafts drawn under it make reference to “Letter of Credit No. 95 – 922.” The draft presented makes reference to “Letter of Credit No. 95-9222.” The bank’s letter of credit numbering system does not go higher than 95-999. Is the beneficiary entitled to payment? See Revised UCC § 5-108(a) & (e), official comment 1. If the bank wishes to dishonor the letter of credit, how soon must it do so and what must it tell the beneficiary regarding its reasons for dishonor? Revised UCC § 5-108(b) & (c). Problem 106 - The letter of credit calls for invoices describing shipment of “blue widgets.” In the widget industry “blue widgets” and “red widgets” are interchangeable and a contract calling for the shipment of blue widgets can be performed by shipping red widgets. Both buyer and seller are aware of this trade usage. The seller and beneficiary under the letter of credit ships red widgets, and the invoice describes the goods being shipped as “red widgets.” When the invoices are presented to the issuing bank, is it required to pay under the letter of credit? Revised UCC § 5-108(f)(3), official comment 10. Would the bank have a statutory right of reimbursement if it paid the buyer? Revised UCC § 5-108(i). See also UCC § 5-117(a). Would the seller have recourse against the buyer if the buyer refuses to accept the red widgets? Problem 107 - The documents presented to the issuing bank did not comply with the terms of the letter of credit. The bank contacted the applicant and asked if the discrepancies would be waived. The applicant responded that it would try to work things out with the beneficiary, but that for now it would not waive the discrepancies. The original presentation was thus properly dishonored. Subsequently, the applicant sent a letter to the issuing bank stating that if the beneficiary signed a letter, a copy of which was provided to the bank, the applicant would waive the discrepancies. The beneficiary then re-presented the documents along with a signed copy of the letter. The issuing bank contacted the applicant again, and was now told that the applicant would not waive the discrepancies. The bank thus dishonored the presentation and the letter of credit expired before a conforming presentation could be made. Did the bank properly dishonor the presentation? Marsala International Trading Co. v. Comerica Bank, 976 P.2d 275, 39 UCC Rep Serv 2d 217 (Colo. App. 1998). Problem 108 – Contract for the sale of shirts. Bank X issued a letter of credit in favor of Seller, which was confirmed by Bank Y. The letter of credit required, among other documents, that Seller present a sworn “Statement of Beneficiary” to the effect that the goods conformed to the contract of sale. The goods were shipped and Seller made a presentation of documents to Bank Y. Bank Y overlooked the missing Statement of Beneficiary and paid Seller. The goods were delivered to Buyer, who was unhappy with the quality of the goods. When the documents were presented to Bank X by Bank Y, Buyer contacted Bank X and asked it not to pay until it resolved its dispute with Seller regarding the quality of the goods. Bank Y agreed to the delay, provided it received interest on the money it had paid to Seller. Neither Buyer nor Bank X noticed the missing Statement of Beneficiary. Six months later, Buyer and Seller resolved their differences regarding the shirts with Buyer receiving some credit off of the purchase price. Bank X then noticed the missing Statement of Beneficiary and refused to pay under the letter of credit. Does Bank Y have recourse against Bank X? If Bank X pays Bank Y, does it have recourse against Buyer? See Revised UCC §§ 5-107(a), 5-108(b), (c) & (i)(1), official comment 5, 5-111, official comment 2 & 5-117. See also Petra Int’l Banking Corp. v. First American Bank of Virginia, 758 F. Supp. 1120 (E.D. Va. 1991). 3. Fraud As previously noted, the obligation of the issuer to pay under the letter of credit is independent of the underlying contract. If the documents comply on their face, it doesn’t matter if the goods that are shipped are non-conforming. The issuer is required to pay, and the buyer’s recourse is against the seller. What happens, however, if the buyer learns before the letter of credit is honored that the seller has forged the necessary documents or has shipped empty boxes? Should the bank pay any attention to the buyer’s allegations of fraud? The following famous case deals with this issue. SZTEJN v. J. HENRY SCHRODER BANK CORP. New York Supreme Court 177 Misc. 719, 31 N.Y.S.2d 631 (1941) This is a motion by the defendant, the Chartered Bank of India, Australia and China, (hereafter referred to as the Chartered Bank), made pursuant to Rule 106(5) of the Rules of Civil Practice to dismiss the supplemental complaint on the ground that it fails to state facts sufficient to constitute a cause of action against the moving defendant. The plaintiff brings this action to restrain the payment or presentment for payment of drafts under a letter of credit issued to secure the purchase price of certain merchandise, bought by the plaintiff and his coadventurer, one Schwarz, who is a party defendant in this action. The plaintiff also seeks a judgment declaring the letter of credit and drafts thereunder null and void. The complaint alleges that the documents accompanying the drafts are fraudulent in that they do not represent actual merchandise but instead cover boxes fraudulently filled with worthless material by the seller of the goods. The moving defendant urges that the complaint fails to state a cause of action against it because the Chartered Bank is only concerned with the documents and on their face these conform to the requirements of the letter of credit. On January 7, 1941, the plaintiff and his coadventurer contracted to purchase a quantity of bristles from the defendant Transea Traders, Ltd. (hereafter referred to as Transea) a corporation having its place of business in Lucknow, India. In order to pay for the bristles, the plaintiff and Schwarz contracted with the defendant J. Henry Schroder Banking Corporation (hereafter referred to as Schroder), a domestic corporation, for the issuance of an irrevocable letter of credit to Transea which provided that drafts by the latter for a specified portion of the purchase price of the bristles would be paid by Schroder upon shipment of the described merchandise and presentation of an invoice and a bill of lading covering the shipment, made out to the order of Schroder. The letter of credit was delivered to Transea by Schroder's correspondent bank in India, Transea placed fifty cases of material on board a steamship, procured a bill of lading from the steamship company and obtained the customary invoices. These documents describe the bristles called for by the letter of credit. However, the complaint alleges that in fact Transea filled the fifty crates with cowhair, other worthless material and rubbish with intent to simulate genuine merchandise and defraud the plaintiff and Schwarz. The complaint then alleges that Transea drew a draft under the letter of credit to the order of the Chartered Bank and delivered the draft and the fraudulent documents to the 'Chartered Bank at Cawnpore, India, for collection for the account of said defendant Transea'. The Chartered Bank has presented the draft along with the documents to Schroder for payment. The plaintiff prays for a judgment declaring the letter of credit and draft thereunder void and for injunctive relief to prevent the payment of the draft. For the purposes of this motion, the allegations of the complaint must be deemed established and 'every intendment and fair inference is in favor of the pleading' Madole v. Gavin, 215 App.Div. 299, at page 300, 213 N.Y.S. 529, at page 530; McClare v. Massachusetts Bonding & Ins. Co., 266 N.Y. 371, 373, 195 N.E. 15. Therefore, it must be assumed that Transea was engaged in a scheme to defraud the plaintiff and Schwarz, that the merchandise shipped by Transea is worthless rubbish and that the Chartered Bank is not an innocent holder of the draft for value but is merely attempting to procure payment of the draft for Transea's account. It is well established that a letter of credit is independent of the primary contract of sale between the buyer and the seller. The issuing bank agrees to pay upon presentation of documents, not goods. This rule is necessary to preserve the efficiency of the letter of credit as an instrument for the financing of trade. One of the chief purposes of the letter of credit is to furnish the seller with a ready means of obtaining prompt payment for his merchandise. It would be a most unfortunate interference with business transactions if a bank before honoring drafts drawn upon it was obliged or even allowed to go behind the documents, at the request of the buyer and enter into controversies between the buyer and the seller regarding the quality of the merchandise shipped. If the buyer and the seller intended the bank to do this they could have so provided in the letter of credit itself, and in the absence of such a provision, the court will not demand or even permit the bank to delay paying drafts which are proper in form. Of course, the application of this doctrine presupposes that the documents accompanying the draft are genuine and conform in terms to the requirements of the letter of credit. However, I believe that a different situation is presented in the instant action. This is not a controversy between the buyer and seller concerning a mere breach of warranty regarding the quality of the merchandise; on the present motion, it must be assumed that the seller has intentionally failed to ship any goods ordered by the buyer. In such a situation, where the seller's fraud has been called to the bank's attention before the drafts and documents have been presented for payment, the principle of the independence of the bank's obligation under the letter of credit should not be extended to protect the unscrupulous seller. It is true that even though the documents are forged or fraudulent, if the issuing bank has already paid the draft before receiving notice of the seller's fraud, it will be protected if it exercised reasonable diligence before making such payment. However, in the instant action Schroder has received notice of Transea's active fraud before it accepted or paid the draft. The Chartered Bank, which under the allegations of the complaint stands in no better position than Transea, should not be heard to complain because Schroder is not forced to pay the draft accompanied by documents covering a transaction which it has reason to believe is fraudulent. Although our courts have used broad language to the effect that a letter of credit is independent of the primary contract between the buyer and seller, that language was used in cases concerning alleged breaches of warranty; no case has been brought to my attention on this point involving an intentional fraud on the part of the seller which was brought to the bank's notice with the request that it withhold payment of the draft on this account. The distinction between a breach of warranty and active fraud on the part of the seller is supported by authority and reason. As one court has stated: 'Obviously, when the issuer of a letter of credit knows that a document, although correct in form, is, in point of fact, false or illegal, he cannot be called upon to recognize such a document as complying with the terms of a letter of credit.' Old Colony Trust Co. v. Lawyers' Title & Trust Co., 2 Cir., 297 F. 152 at page 158, certiorari denied 265 U.S. 585, 44 S.Ct. 459, 68 L.Ed. 1192. No hardship will be caused by permitting the bank to refuse payment where fraud is claimed, where the merchandise is not merely inferior in quality but consists of worthless rubbish, where the draft and the accompanying documents are in the hands of one who stands in the same position as the fraudulent seller, where the bank has been given notice of the fraud before being presented with the drafts and documents for payment, and where the bank itself does not wish to pay pending an adjudication of the rights and obligations of the other parties. While the primary factor in the issuance of the letter of credit is the credit standing of the buyer, the security afforded by the merchandise is also taken into account. In fact, the letter of credit requires a bill of lading made out to the order of the bank and not the buyer. Although the bank is not interested in the exact datailed performance of the sales contract, it is vitally interested in assuring itself that there are some goods represented by the documents. On this motion only the complaint is before me and I am bound by its allegation that the Chartered Bank is not a holder in due course but is a mere agent for collection for the account of the seller charged with fraud. Therefore, the Chartered Bank's motion to dismiss the complaint must be denied. If it had appeared from the face of the complaint that the bank presenting the draft for payment was a holder in due course, its claim against the bank issuing the letter of credit would not be defeated even though the primary transaction was tainted with fraud. This I believe to the better rule despite some authority to the contrary. The plaintiff's further claim that the terms of the documents presented with the draft are at substantial variance with the requirements of the letter of credit does not seem to be supported by the documents themselves. Accordingly, the defendant's motion to dismiss the supplemental complaint is denied. Problems Problem 109 - If the issuing bank is told by the applicant of a fraud, either in terms of forgery of the documents or similar to the situation described in Sztejn, what are its options if the documents comply on their face? Is Sztejn still good law? See Revised UCC § 5-109. What is the bank’s exposure in the event that it dishonors the presentation and it turns out that the applicant was lying? Can the bank be liable for consequential damages or attorney’s fees? Revised UCC § 5-111. Problem 110 - Assume that a bank wrongfully dishonors a presentation under a letter of credit and returns the documents to the seller. The seller is able to stop delivery of the goods to the buyer. Is the seller required to resell the goods, and thus reduce the issuing bank’s liability? If the seller does resell the goods, is the bank’s liability reduced? Revised UCC § 5-111(a). REGENT CORPORATION, U.S.A. v. AZMAT BANGLADESH, LTD. Supreme Court, Appellate Division, New York 253 A.D.2d 134, 686 NYS2d 24 (1999) Plaintiff, Regent Corporation, U.S.A. (Regent), is a New York corporation which imports finished textile products for resale in the United States. In March and April 1994, Regent contracted with Azmat Bangladesh, Ltd. (Azmat), a textile company located in Bangladesh, for the purchase of bed sheets and pillow cases for import and resale into the United States. An essential condition of the sale was that the goods be manufactured in Bangladesh since such goods were not subject to quota restrictions. However, upon their delivery to New Jersey, United States Customs refused entry for the reason that the goods required a visa designating Pakistan as the country of origin. The contract between Regent and Azmat required payment by Regent by "100% confirmed irrevocable letter of credit, 90 days from bill of lading date," to be drawn upon by Azmat after it presented documents, including the bill of lading, and an export visa stamp showing the goods originated in Bangladesh. Regent obtained the necessary letters of credit from the Bank of New York and Citibank. Defendant-appellant, International Finance Investment and Commerce Bank Limited (International Bank), acted as Azmat's advising bank, and between April and June 1994, it presented drafts and relevant documents to Citibank and The Bank of New York for payment. Each draft indicated that payment was to be made "at 90 days deferred from bill of lading date" and was accompanied by a dated bill of lading. The Bank of New York made partial payment and Citibank notified International Bank that the requirements for partial payment under its letter of credit were met and indicated it would pay International Bank the amounts requested when due. However, as noted, the goods were detained for inspection by United States Customs at the port of Newark on the ground they were not manufactured in Bangladesh, but in Pakistan, and therefore Regent sought to enjoin The Bank of New York and Citibank from further payments on the letters of credit, claiming fraud in the transaction by Azmat. International Bank intervened after Regent commenced this action against Azmat, Bank of New York and Citibank. Thereafter, Regent served an amended complaint asserting, inter alia, a first cause of action for fraud against Azmat and International Bank and thereafter sought partial summary judgment on International Bank's liability. In support of this motion, an affidavit by Hafeez Azmat was submitted to the effect that the goods sold to Regent were not manufactured entirely in Bangladesh and did not satisfy Customs regulations. As of June 1994, Azmat's looms had not been fully operational for several months and could not weave fabric for yarn. As a result, to fill the order from Regent, Azmat was required to use "griege goods," i.e., unfinished goods, which were woven in Pakistan and shipped to Azmat for processing. Azmat printed, cut, hemmed and packaged the griege goods in Bangladesh, but the goods were not dyed in either Bangladesh or Pakistan. Azmat also noted in his affidavit that Customs had visited his facility in Bangladesh and seen that the looms necessary for weaving and dyeing and printing were not operational. He also noted that Customs had advised him during the visit that his finishing operations were insufficient to qualify as goods "made in Bangladesh." The court granted Regent's motion for partial summary judgment against International Bank on the issue of liability and denied International Bank's cross motion for a commission to take depositions in Bangladesh. Thus, the motion court determined that the affidavit of Hafeez Azmat demonstrated he knew the requirements for goods to qualify as being made in Bangladesh but shipped goods which did not meet those requirements with the intent to deceive Regent, which constituted fraud in the transaction. The court found that each draft declared on its face that it was payable a specified number of days subsequent to the bill of lading date on another writing, and that, therefore, the drafts were non-negotiable instruments. Since it found these drafts to be non-negotiable instruments, the court concluded that International Bank could not be a holder in due course and was a mere transferee of a claim. In light of the findings of fraud, the court denied the cross motion by the Bank for a closed commission to depose former Azmat employees in Bangladesh on that issue. The lower court properly determined, that there was fraud in the transaction at issue. Thus, Regent showed that a material term of the contract was that the goods be manufactured in Bangladesh; that Hafeez Azmat knew what the regulations required for "substantial transformation" of the goods; that due to its economic situation, Azmat's factory was incapable of dyeing the goods; that Hafeez Azmat knowingly failed to fulfill Customs requirements due to the economic pressures on his factory; that Hafeez Azamt knew that the goods he shipped to Regent would not qualify as being manufactured in Bangladesh; and that, nonetheless, Hafeez Azmat sent Regent documents attesting that the goods were made in Bangladesh in order to be paid on the shipment. However, we find that the lower court erred in determining that the drafts presented by International Bank did not constitute negotiable instruments. The requirements for negotiability (concerning the form and content of the instrument itself) are set out in Uniform Commercial Code § 3-104[1]. A negotiable instrument must "be payable on demand or at a definite time." This "definite time" is defined by UCC 3-109[1] as, inter alia, "at a fixed period after a stated date" or "at a fixed period after sight" (UCC 3- 109[1][a], [b] ). While the indicia of negotiability must be visible on the face of the instrument, a note containing an otherwise unconditional promise is not made conditional merely because it refers to, or states that it arises from, a separate agreement or transaction. The drafts herein were payable at fixed periods after sight in conformity with UCC 3-109[1][b]. Thus, they were payable within 90 days of the dated bills of lading which accompanied them. The notes, which are by their terms to be paid a certain number of days after the date of the bill of lading, are, therefore, negotiable and the mere reference to the bill of lading date does not impair the note's negotiability. Accordingly, since the drafts at issue constituted negotiable instruments, the issue that must then be determined is whether International Bank was a holder in due course of the drafts. Where a presenter of drafts under a letter of credit claims to be a holder in due course, the defenses it remains subject to are those available under UCC 5-114[2], i.e., non-compliance of required documents, forged or fraudulent documents, or fraud in the transaction These defenses operate to place the burden of proof of holder in due course status upon the party asserting such status. Thus, "[a]fter it is shown that a defense exists a person claiming the rights of a holder in due course has the burden of establishing that he or some person under whom he claims is in all respects a holder in due course" (UCC 3-307[3] ). That party has the full burden of proof by a preponderance of the total evidence which must be sustained by affirmative proof. Pursuant to UCC 3-302[1], a holder in due course is (1) a holder, (2) who takes a negotiable instrument (3) for value, (4) in good faith, and (5) without notice that the instrument is overdue or has been dishonored, or of any defense or claim against it on the part of another. Here, International Bank demonstrated possession of the bill of lading and of the sight draft payable to it, which we have held constitutes a "negotiable" instrument. In addition, the parties do not contest the fact that the Bank gave value for the drafts. As a result, only the fourth and fifth elements concerning the Bank's good faith and knowledge are in dispute. The inquiry into "good faith" as defined by UCC 3- 302 is what, in fact, the holder actually knew. If the Bank did not have actual knowledge of some fact which would prevent a commercially honest individual from taking the drafts, then its good faith would be sufficiently shown. Constructive knowledge is insufficient and it is irrelevant what a reasonable banker in International Bank's position should have known or should have inquired about. With respect to the element of notice of Regent's claims and defenses, a subjective test also applies and also requires a showing of the Bank's actual knowledge. In this case, plaintiff relied on evidence consisting of International Bank's knowledge in 1992 that Azmat had misused the Bank's credit facility; the Bank's involvement in separate litigation where Azmat allegedly committed a similar fraud and International Bank's efforts to insure repayment of Azmat's credit facility with it, which included documents indicating that the Bank intended to post people at the Azmat facility to monitor Azmat's export and stock; the Bank's instructions to Hafeez Azmat to expedite the shipment of all outstanding orders in order to collect on the letters of credit, and evidence that Hafeez Azmat and an International Bank manager were in daily or almost daily contact. However, this evidence, although impressive, does not demonstrate clearly that the International Bank had actual knowledge of Azmat's fraud. Thus, they do not actually indicate that in fact the Bank did post someone at Azmat's facility. They also did not indicate the content of the daily communication between the Bank's branch manager and Hafeez Azmat. Finally, the documents suggest, but do not clearly indicate, that the Bank was aware that Azmat's license had been suspended for "irregularities" stemming from the other litigation. However, the most that can be said of the testimony offered to controvert [the Bank's] position is that it indicated suspicious circumstances which might well have induced a prudent banker to investigate more thoroughly than did [the bank] before taking the notes. However, as has been previously indicated, this is not enough. [The Bank] was not bound to be " 'alert for circumstances which might possibly excite the suspicions of wary vigilance' " (Hall v. Bank of Blasdell, 306 N.Y. 336, 341, 118 N.E.2d 464, supra). (Chemical Bank of Rochester v. Haskell, supra, at 93, 432 N.Y.S.2d 478, 411 N.E.2d 1339) Thus, the evidence submitted by plaintiff creates an issue of fact concerning the Bank's holder in due course status. Accordingly, the order of the Supreme Court, New York County (Herman Cahn, J.), entered on or about May 16, 1997, which, inter alia, granted plaintiff's motion for partial summary judgment on the issue of liability against defendant International Finance Investment and Commerce Bank Limited, should be modified, on the law, to deny plaintiff's motion for partial summary judgment on the issue of liability against the Bank, and otherwise affirmed, without costs, and the matter remanded for further proceedings. Download 1.49 Mb. Share with your friends:
|