Article

Factual Summary:

Applicant and beneficiary entered into a contract for the sale/purchase of leather athletic shoes. To secure the transaction, applicant had bank issue an LC in the amount of US$ 1.5 million that provided that payment would be made "on a draft upon presentation of (1) a bill of lading, (2) a commercial invoice, (3) a packing list, and (4) a "copy of authenticated [sic] telex from issuing bank to advising bank, indicating quantity to be shipped, destination, and nominating transporting company" (the 'Authenticated Telex')". The issuer required the fourth document to ensure that "[n]o draft would be honored until [the applicant] first deposited and pledged funds backing the total amount of the L/C". After its third and last amendment, the LC required, "Any other conditions should be in accordance with 'Option Contract' signed by applicant and beneficiary dated May 31, 1996". This clause was thought to preclude the need for further amendment to the LC.

Subsequently, beneficiary drew down the LC without the Authenticated Telex, offering in its place "two documents: one entitled 'special instructions' ... and the other a copy of an option contract dated May 31, 1996 between [beneficiary] and [applicant] which contained a reference to the special instructions".

The negotiating bank negotiated the documents and "sent to [the issuing bank] the documents it obtained from [beneficiary] along with a request for payment of $1.5 million. [Issuing bank] received the documents on July 22, 1996 and returned them to [negotiating bank] via courier on July 24 with an accompanying letter stating that they were being returned because presentment was 'not in compliance with the terms and conditions of the credit.' On August 2, the [negotiating bank] again presented the documents to the [issuing bank]. Four days later, [the issuing bank] again returned the documents to [the negotiating bank] and sent a [telecommunications message] the same day stating that [the issuing bank] was returning them because [the negotiating bank] had not presented the Authenticated Telex as required by the L/C".

The negotiating bank brought suit against the issuing bank in the Korean courts to recover damages under the LC. The issuing bank then brought an action in the U.S. District Court for the Southern District of New York seeking: 1) declaratory judgment nullifying the Korean litigation and 2) damages for libel accrued by the negotiating bank's submission of letter reporting the issuing bank's behavior to the Office of the Comptroller of the Currency (OCC). The issuing bank joined the applicant under the first claim seeking indemnity.

The court denied the issuing bank's motion for declaratory relief and granted the negotiating bank's motion for summary judgment dismissing the issuer's claims against it.

Legal Analysis:

1. Preclusion; UCP 500 Article 14: The negotiating bank argued that the "[issuing bank's] failure to follow precisely the procedures of the UCP precludes [the issuing bank] from relying on the lack of the Authenticated Telex to justify dishonoring [the negotiating bank's] draft drawn on the L/C". More specifically, the negotiating bank urged that the issuing bank "is precluded under the UCP from relying on [the absence of the Telex] because it did not (a) notify [the negotiating bank] via telecommunication of the specific reason for its refusal to pay; and (b) state all discrepancies in respect of which the bank refused the documents".

The relevant language of Article 14 of the UCP "provides that an issuing bank may refuse documents presented to it for the purpose of drawing on a letter of credit if it 'determines that the documents appear on their face not to be in compliance with the terms and conditions of the Credit.' If the issuing bank does so, 'it must give notice to that effect by telecommunication ... no later than the close of the seventh banking day following the day of receipt of the documents.' Moreover, 'such notice must state all discrepancies in respect of which the bank refuses the documents ... ' Failure to act in accordance with these provisions 'precludes the issuing bank from claiming that the documents are not in compliance with the terms and conditions of the Credit.'"

The issuing bank argued that, despite the lack of specificity and timeliness, it fulfilled the requirements of Article 14 of the UCP. Its reasoning is that the negotiating bank was on constructive notice of the discrepancy from a refusal of a similar presentation for the same reason to another Korean bank. The court rejected this claim, noting that the facts here showed no privity between the two banks coupled with an insufficient amount of time for the one to notify the other of the refusal had such privity existed even if a prior notice were relevant.

2. Notice on Re-Presentation: The issuer argued that the notice given on the re-presentation was adequate. The court did not agree. It noted that the notice was given later than seven business days from the business day following the presentation of the documents. It was, therefore, deficient because "the Eleventh Circuit has held that 'a bank will be stopped from subsequent reliance on a ground for dishonor if it did not specify that ground in its initial dishonor. ' In consequence, [the issuer] did not meet the requirements of Article 14", citing Kerr-McGee, 872 F.2d at 973.

3. Fraud: Where the issuer alleged that certain documents presented by the beneficiary were not authentic. Citing the 2nd Circuit Court of Appeals in 3Com Corp. v. Banco de Brazil, S.A., 1999 U.S. App. LEXIS 4749 (1999), the court stated that fraud "'authorizes dishonor only where 'a drawdown would amount to an outright fraudulent practice by the beneficiary." The fraud must infect the underlying contract. Here, the fraud alleged has nothing to do with the contract - there is no allegation that the items shipped were so completely and obviously defective as to render worthless any claim of performance [footnotes omitted]".

4. Intentional Presentation of Discrepant Documents:The issuing bank asserted also that the negotiating bank is not entitled to recover because it knowingly submitted discrepant documents. The issuer relied on Philadelphia Gear Corp. v. Central Bank, 717 F.2d 230 (5th Cir. 1983), and Brenntag Int'l Chemicals Inc. v. Norddeutsche Landesbank GZ, 9 F. Supp. 2d 331 (S.D.N.Y. 1998) for this proposition. While recognizing these authorities, the court did not find them persuasive and noted that the courts of the jurisdiction where the law applied (Florida), had rejected this view.

"[T]he approach advanced by Hamilton would undermine the simplicity and certainty that are the hallmarks of the letter of credit. Letters of credit enhance the fluidity of commerce - a goal furthered by Article 14. To inquire into the subjective element of whether the negotiating bank knew it was presenting discrepant documents each time an issuing bank fails to adhere to the Article 14 requirements would contravene the very purpose of this very exacting system. Judge Goldberg, dissenting in Philadelphia Gear, summed up this point as follows:

'An inherent advantage of letters of credit is that questions regarding dishonorment are easily answered - a court or potential litigant need merely look to the choreography and see if the dancers took the proper steps. This usually poses an objective question, with the answer obvious from the face of the documents and the terms of the letter of credit. The rule [Hamilton wants this Court] to apply ... injects into the otherwise mechanical and simple inquire that most subjective issue of the knowledge of the beneficiary.

"In the last analysis the question regarding the interplay of UCP Articles 13 and 14 is who should bear the risk of loss - the bank attempting to present discrepant documents or the issuing bank which fails to adhere to the prescribed notification requirements. In Bank of Cochin, our Circuit reasoned that

'in this era of near instantaneous international communications, we can find no rationale to justify [the issuer's] delay in informing [the beneficiary] of the specific defects. ... Had this information been imparted in a timely fashion, some part or all of the funds might have been recovered. ... [The issuer] was at all times in the best position to learn of the fraudulent nature of [the] activities.'

Similarly, Hamilton here was in the best position to know that it had not waived the Authenticated Telex requirement and it could have minimized the risk of loss at the least cost. It should have done so [footnotes omitted]".

5. Collection on LC Presentation: The issuer claimed that the negotiating bank presented the documents on a collection basis. The court flatly rejected this argument as meritless, since there was "no such phrase implicating the Rules of Collection was used. Nor is there any other basis for supposing that Kookmin acted for collection".

6. Damages; Duty to Mitigate: The issuer argued that the negotiating bank failed to mitigate damages. The court concluded that there was no duty to do so. "Pursuant to New York law, actual damages under a letter of credit need not be proved. And while Florida law reduces the award on a dishonored letter of credit by the amount for which any goods are resold, it imposes no duty to resell the goods. The reasoning of the Fifth Circuit is instructive:

'The measure of damages used in ordinary contract cases is inapplicable because a letter of credit simply is not an ordinary contract. The letter of credit is a unique device developed to meet specific needs of the marketplace. If the letter of credit is to retain its utility as a commercial instrument, the rights and duties of the issuer, the beneficiary, and the procurer must remain clear. Parties to commercial transactions must be able to rely on the fact that as soon as the conditions contained in a particular letter are satisfied, payment is due' [footnotes omitted].

7. Libel: The issuer alleged that a letter from the negotiating bank to the OCC about the issuer was libelous. The negotiating bank argued that its statements were opinion, truthful, and privileged.

The court noted that while pure opinion is not libelous, mixed statements of opinion and fact may be. The court stated that "Kookmin's statement in its letter - 'we have evidence that Hamilton ... has issued similar documents with same results' - referenced undisclosed facts that were not known or available to, or assumed to exist by, the OCC. The statement also was arguably defamatory. The reference to 'similar documents' was to letters of credit on which Hamilton allegedly had no intention of honoring. In consequence, the statement was one of mixed opinion which is actionable for fraud.

Kookmin's claim that its statements were true fares no better. Its contention that Hamilton issued the L/C with the intent to dishonor it is highly dubious. Kookmin reaches this conclusion from the fact that 'Hamilton agreed with Sky from the outset that any letters of credit issued ... would be 'inoperative' and that Hamilton would never issue the telexes necessary to make them operative. ' This is at best a parochial reading of the L/C application and Hamilton's internal memoranda concerning its issuance. At the very least, there is a question of fact whether Hamilton had no intention of honoring the L/C.

To be privileged, the court noted that "the statement must have been made (1) in good faith, (2) by one who had a duty or interest in the subject matter, (3) to someone who had a corresponding duty or interest, (4) on a proper occasion, and (5) in a proper manner". The court concluded that the statement was qualifiedly privileged. The "statements were made in good faith in response to Hamilton's failure to make payment on Kookmin's draft presented under the L/C. Its publication was limited in scope, and the information was not disclosed to persons other than the OCC. Furthermore, this was a statement to 'a political authority regarding matters of public concern, ' a recognized legal ground for privilege". Although express malice would obviate the privilege, the court also ruled that there was no evidence of express malice to create a question.

Construing the statement in the light most favorable to Hamilton, Kookmin (a) had no basis for its accusation of fraud, and (b) did not perform any reasonable investigation prior to sending the letter. That notwithstanding, Kookmin attempted to work out a favorable resolution to the matter with Hamilton for over a year, Kookmin made its statements only to one entity - the chief regulating body of the banking industry, and most of its statements - including the accusation of fraud - were couched as opinion.

In these circumstances, the letter and other evidence of record cannot support an inference that Kookmin wrote it to 'gratify its malevolence' or simply to harm Hamilton. In addition, the words in Kookmin's letter clearly 'were not so extreme as to demonstrate express malice.' In consequence, a jury could not reasonably find that Kookmin's statement was made with express malice. At most, the evidence would allow a finding of recklessness, but that is insufficient to support express malice.

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