Article

Factual Summary: Prior to forwarding the documents for collection, the remitting bank had been involved in two prior LC transactions involving the principal that were fraudulent. In the first LC transaction, the bank acted as an advising and negotiating bank, purchasing documents that on their face related to the delivery of raw cotton, but, in fact, represented worthless cotton lint. The applicant obtained an arbitration award from the Liverpool Cotton Exchange but "[t]here is no evidence, however, that the [applicants'] dissatisfaction with the shipment or the subsequent awards against [the fraudster] were ever communicated to [the bank]." In this transaction, the fraudster had acted as the agent for the fraudster's company.

In a second fraudulent LC transaction, the fraudster's company was the beneficiary of LCs issued on behalf of Pakistani textile mills. The bank confirmed the LCs and, in that connection, inquired and was satisfied regarding the fraudster's authority to act on behalf of the fraudster's company. When the applicant waived discrepancies, the confirmer paid the amount drawn on the LC.

In the third transaction, the fraudster acted under an alias name as the company's principal. Pursuant to an agreement with the Indian cotton mills, it submitted documents to the remitting bank in a documentary collection subject to the URC. When funds were remitted, the remitting bank forwarded them pursuant to the principal's instructions, charging a US$ 70 fee.

Several days later, the remitting bank received communications from the bank seeking to rescind or prevent payment. The remitting bank responded that it had made payment. As a result, the drawee of the documentary collection brought an action against the fraudster, related companies, and the remitting bank, alleging fraud, racketeering, and conspiracy to defraud. In particular, the drawee alleged that the remitting bank:

knew or should have known that [the fraudster] and his companies were fraudulently selling and shipping worthless "raw cotton lint" instead of "raw cotton," and that [the remitting bank] had a duty to disclose this fraudulent conduct. [The drawee] also argues that the documentary collections in which [the remitting bank] assisted are governed by the N.Y.U.C.C. which imposes a duty of good faith and ordinary care. [The drawee] contends that [the remitting bank] violated this duty when it: (1) carried out the documentary transaction knowing that [the fraudster] did not have authority to act on behalf of [the principal]; (2) failed to disclose [the fraudster's] lack of authority on behalf of [the principal] to it and its bank, [the collecting bank].

Legal Analysis:

1. Fraud, Knowledge of: The drawee alleged that the remitting bank knew or should have known that the fraudster and his companies were engaged in a series of frauds due to its involvement with the prior fraudulent LC transactions.

Noting that there was no proof of actual knowledge of fraud by the remitting bank, the court considered whether it should have known of the fraud. The gravamen of the allegation was the presentation of an extraneous document, invoice from the ultimate supplier indicating that the goods were "raw cotton lint".

The court noted that the document examiner testified that she was unaware of a difference between raw cotton and raw cotton lint. Noting that there was no requirement that an examiner be familiar with trade terms, the court concluded that there was no duty to examine the extraneous document under UCP500 Article l3(c). The court also noted that UCP500 Article 15 exonerated the bank from responsibility regarding the documents

2. URC: The drawee contended that the collecting bank did not agree that the URC would govern the collection although the remitting bank's collection letter indicated that the collection letter was subject to the URC. Noting that the standard of care and duty of good faith under New York Law and the URC "is the same and both the URC and N.Y.U.C.C.", the court did not reach this issue.

3. Documentary Collection; Remitting Bank, Duty of: The court stated that the remitting bank "was obligated to verify that the documents it received from [the principal] appeared to be as listed in the collection order; to notify [the principal] of any documents missing; and to forward the documents to the appropriate 'collecting' bank ... " under both URC Article 2 and UCC Section 4-104(f) and 4- 501.

4. Documentary Collection: Remitting Bank, Duty of: The drawee contended that the duty of a collecting bank under the UCC includes a duty of inquiry. Noting that the case law urged in support of this proposition applied to credit cards, the court declined to extend the duties of a collecting bank to include a duty of inquiry.

5. Summary Judgment, Issue of Fact: The drawee argued that summary judgement should be denied because the documentary collection specialist could not remember the names of the fraudster or his companies. It alleged that "this demonstrates that '[the remitting bank] is attempting to hide their prior knowledge of [the fraudster's] wrongdoings.'" Describing the argument as "meritless", the court stated:

[The drawee's] counsel asked [the collections specialist] questions without first showing her any documents. Later in the deposition, when [the remitting bank's] counsel showed her documents with her signature, [the collections specialist] was able to read and interpret her notations and provide a description of the transactions. It is incredible to suggest that [the collections specialist], who processes over one thousand collections per year, should recall from memory alone a collection that took place more than three years before her deposition.

6. Documentary Collections; Warranty; UCC 4- 207; 4-501: The drawee argued that the remitting bank breached warranties made by a collecting bank under UCC Section 4-207 guaranteeing that all signatures are genuine. The court ruled that these warranties do not apply to documentary collections.

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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.