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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
1999 LC CASE SUMMARIES 1999 U.S. App. LEXIS 18153 (2 nd Cir.) [U.S.A.]
Topics:
Fraud; Common Law Fraud; Misrepresentation; Independence Principle.
Type of Lawsuit:
By applicant against beneficiary for fraudulent presentation. Counter-claim by ben-eficiary for unjust enrichment, breach of contract and quantum merit.
Parties:
Plaintiff/Applicant/Financier- Hyosung America, Inc. (Counsel: Matthew Gluck, Jennifer Colyer of Fried, Frank, Harris, Shriver & Jacobson; Lazarus & Lazarus)
Defendant/Beneficiary/Seller- Sumagh Textile Co., Ltd. (Counsel: Joseph F. De May, Jr.; Cichanowicz Callan Keane Vengrow & Textor, LLP)
Issuer- Bank of Seoul
Broker- Orkid Tex., Inc.
Underlying Transaction:
Purchase of fabric.
LC:
Commercial letters of credit. Subject to UCP500.
Decision:
On appeal from a finding in favor of the applicant after a bench trial, the U.S. Court of Appeals for the Second Circuit affirmed.
Rationale:
Where the applicant relied on the beneficiary's presentation of genuine documents to the issuer or confirmer, presentation of false documents materially affected the applicant.
Prior History:
Hyosung America, Inc. v. Sumagh Textile Co. , 94 Civ. 568, 1998 U.S. Dist. LEXIS 13303 (S.D.N.Y. 25 August 1998), abstracted at 1999 Annual Survey 349.
Hyosung America, Inc. v. Sumagh Textile Co.
Factual Summary:
Article
Factual Summary: The applicant and broker agreed to the sale and purchase of fabric consisting of 65% rayon and 35% wool. Although the LC required documents indicating this ratio, the broker and beneficiary agreed to sell fabric which was 70% rayon and 30% wool. At the insistence of the broker, and in order to ensure payment, the beneficiary presented documents which falsely indicated that the fabric shipped contained 35% wool. Payment was made and neither the issuer nor the applicant were aware of the true nature of the goods shipped until the applicant ceased to receive payment under its underlying contract with the ultimate purchaser due to the wool content. The issuer had honored several draws made by the beneficiary in reliance on the false documents, and the applicant subsequently reimbursed the issuer.
On learning of the false nature of the documents presented, the applicant brought an action against the beneficiary for fraud and sought to enjoin the issuer from further payment under the credit.
In a previous opinion, the court had granted the beneficiary's motions for summary judgement on the nine claims made against it. On appeal, the appellate court upheld the dismissal of eight the plaintiff's claims, but reversed on the claim of fraud and remanded for trial.
Legal Analysis:
1. Fraud Materiality of Misrepresentation: The beneficiary claimed that the misrepresentation was not material because the goods actually shipped were not of lesser value or quality than those promised. Rejecting this arguments, the court noted that the misrepresentation was material because the issuer would not have honored the credit had the misrepresentation not been made.
2. Intend to Defraud: The beneficiary also claimed that its misrepresentation was not made with the intend to defraud, arguing that there was a colorable basis for drawing on the LC and that its conduct was, at most, careless. Noting that the trial court found that it was "cognizant for the need for exact conformity between the description in the letter of credit and the description of goods in the documents submitted to the Bank, an thus intentionally mismarked these documents for the purpose of collecting payment on the fabric that it shipped", the appellate court ruled that the finding of fraudulent intent was not clearly erroneous.
The appellate court also rejected the arguments that there was no effort to conceal the content of the fabric from the applicant and that it paid no attention to the content until later, noting that the trial court had heard and not been persuaded by these arguments.
3. Damages: The appellate court also rejected the argument that the fabric would have been rejected even had it been designed to meet the specified standard because of unavoidable variations in fiber content since the trial court's finding of liability was not clearly erroneous.
© 2000 INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE
COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE
The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.