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Supreme Court, v. J. HENRY SCHRODER
BANKING CORPORATION et al. 177 Misc. 719, 31
N.Y.S.2d 631 Action by Chester Charles Sztejn against the J. Henry Schroder
Banking Corporation and others to restrain the payment or presentment for
payment of drafts, and for judgment declaring letter of credit and drafts null
and void. On motion by defendant the Chartered Bank of [**632]
[*719] COUNSEL: Natbony,
Stein & Solomon, of Kurzman
& Frank, of Sullivan
& Cromwell, of Duer,
Strong & Whitehead, of [*720] JUDGE: SHIENTAG, Justice. DATE: 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. [**633] On The
letter of credit was delivered to Transea by Schroder’s
correspondent bank in 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 [**634] 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. O’Meara Co. v. National Park Bank of New York, 239 N.Y.
386, 146 N.E. 636, 39 A.L.R. 747; Laudisi v. Am. Exch. Nat. Bank, 239 N.Y. 234, 146 N.E.
347; Williams Ice Cream Co., Inc., v.
Chase Nat. Bank, 210 App.Div. 179, 205 N.Y.S.
446; Frey & Son, Inc., v. E. R.
Sherburne Co., 193 App.Div. 849, 184 N.Y.S. 661; Bank of New York & Trust Co. v. Atterbury Bros., Inc., 226 App.Div.
117, 234 N.Y.S. 442, affirmed 253 N.Y. 569, 171 N.E. 786; Brown v. C. Rosenstein Co., 120 Misc. 787, 200 N.Y.S. 491, affirmed
208 App.Div. 799, 203 N.Y.S. 922; Bank of Taiwan v. Gorgas-Pierie
Mfg. Co., 3 Cir., 273 F. 660; American
Steel Co. v. Irving Nat. Bank, 2 Cir., 266 F. 41, certiorari denied 258 However,
I believe that a different situation is presented in the instant action. This
is not a controversy between the buyer and [*722]
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. Bank of New York &
Trust Co. v. Atterbury Bros., Inc., 226 App.Div. 117, 234 N.Y.S. 442, affirmed 253 N.Y. 569, 171
N.E. 786; 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 [**635]
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 See,
also, Higgins v. Steinhardter,
106 Misc. 168, 175 N.Y.S. 279, distinguished in Frey & Son, Inc., v. E. R. Sherburne Co., 193 App.Div.
849, 184 N.Y.S. 661; Societe Metallurgique v. British Bank for Foreign Trade,
11 Lloyd’s List L.Rep. 168, 170 [K.B.D.1922]; Legal Aspects of
Commercial Letters of Credit, by Herman N. Finkelstein, pp. 230, 238, 246;
Guaranties & The Suretyship Phases of Letters of
Credit, by Morton C. Campbell, 85 U. of Pa.L.R. 261,
271, 272; Irrevocable Credits in International Commerce: Their Legal Effects,
by Philip W. Thayer, 37 C.L.R. 1326, 1335, 1342; The Law of Banker’s Commercial
Credits, by H. C. Gutteridge, pp. 43, 72; Documentary
Conditions of Payment in Commercial Letters of Credit, by Wood Brown, 13 Tulane
Law Rev. 495, [*723] 507; Cases and Materials
on Security, 1st Ed., by John Hanna, p. 182; 29 Ill. L.R. 806, 808; 38 H.L.R.
1117. 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 detailed performance of the sales contract, it is vitally
interested in assuring itself that there are some goods represented by the
documents. Finkelstein, Legal Aspects of Commercial Letters of Credit, p. 238; O’Meara v. National Park Bank of
New York, 239 N.Y. 386, 401, 146 N.E. 636, 39 A.L.R. 747, opinion of Cardozo, J., dissenting; Thayer, Irrevocable Credits in
International Commerce, 37 C.L.R. 1326, 1335. 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. [**636] This I believe
to the better rule despite some authority to the contrary. See Old Colony Trust Co. v. Lawyers’
Title & Trust Co., 2 Cir., 297 F. 152, certiorari denied 265 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.
This case cited in (through March
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Center, Inc. v. Equibank, 359 Pa.Super.
388, 518 A.2d 1291, 2 UCC Rep.Serv.2d 1632, Pa.Super.,
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Not Reported in F.Supp., 1986 WL 11001, N.D.Ill., Sep 30, 1986 (NO. 86 C 6648) 28. U.S. v. Mercantile Nat. Bank at
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1814, La., Feb 25, 1985 (NO. 84-C-1104) 35. First Commercial Bank v. Gotham Originals, Inc., 64 N.Y.2d 287, 475 N.E.2d 1255, 486
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UCC Rep.Serv. 250, N.Y.A.D. 1 Dept., 37. Sabolyk
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of 73. Balbo
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Bank v. National City Bank of 83. Sztejn
v. J. Henry Schroder Banking Corp., 177 Misc. 719, 31
N.Y.S.2d 631, N.Y.Sup., |