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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
2003 LC CASE SUMMARIES 759 N.Y.S.2d 145 (N.Y. App. Div. 2d Dep't. 2003) [U.S.A.]
Topics: Breach of Warranty; Prior UCC Section 5-111(1)
Type of Lawsuit: Applicant sued Beneficiary for breach of warranty on LC presentation.
Parties:
Plaintiff/Appellant/First Issuer/Applicant- Ocwen Federal Bank FSB (Counsel: Jean E. Burke and Lino J. Sciarretta of Thacher, Proffitt & Wood)
Defendant/Respondent/Beneficiary- DeLuxe Building Systems (Counsel: Joseph Lubertazzi, Jr. and Lisa M. DeRose of McCarter & English, LLP)
Second Issuer- Federal Home Loan Bank of New York
Underlying Transaction: Silent as to underlying transaction.
LC: First Standby LC silent as to amount, second Standby LC for US$2,500,000. Both silent as to governing rules.
Decision: Applying Prior UCC Article 5, the New York Supreme Court, Appellate Division, Second Department, Florio, Friedman, McGinity, and Townes, J.J., reversed the decision of the New York Supreme Court, Westchester County, Rudolph, J., and granted Applicant's motion for summary judgment.
Rationale: Under former UCC Article 5-111(1), a beneficiary's presentation of false certifications in order to draw on an LC constitutes a breach of warranty.
Article
Factual Summary: Savings Bank issued an LC in favor of Beneficiary. Applicant also caused an additional standby LC to be issued by Second Issuer in favor of Beneficiary as security for payment under the first LC. In order to draw on the second LC, Beneficiary had to present:
a written drawing certificate in the form annexed to the letter. In the drawing certificate, [Applicant] [sic] was required to state that it was the beneficiary of the [Issuer's] LC issued for the account of the Customer, i.e., [Applicant], and to include, inter alia, the following language: "in connection with a transaction between Beneficiary . . . and Customer [Applicant] to which the Letter of Credit relates, [Beneficiary] is entitled to receive a payment from the Customer [Applicant]. Beneficiary . . . hereby certifies to you that: (1) it is the beneficiary of the above referenced Letter of Credit; [and] (2) the [Applicant] has failed to pay the amount of U.S. $ (the "Demand Amount") which has become due in connection with such transaction".
Subsequently, Beneficiary made two draws against the second LC. Both draws were accompanied by certificates stating that Applicant had not made payments required under the original LC, as was required by the terms of the second LC. Despite these statements, no transactions beyond the issuance of the LC had occurred between Applicant and Beneficiary. Following payment of these two drawings, Applicant sued Beneficiary for breach of warranty. The trial court held Applicant was not entitled to summary judgment for breach of warranty. On appeal, reversed.
Legal Analysis:
1. Breach of Warranty: Applicant argued that Beneficiary breached its warranty by improperly drawing against the second LC. Beneficiary presented a drawing certificate stating that [Applicant] had failed to pay the amount it owed to Beneficiary. The appellate court cited to former UCC Section 5-111(1), which states that "beneficiary by transferring or presenting a documentary draft or demand for payment warrants to all interested parties that the necessary conditions of the credit have been complied with."
By presenting the language in the drawing certificate that [Applicant] had failed to pay, Beneficiary was warrantying the accuracy of its statements. However, in its answer to Applicant's complaint, the appellate court held that Beneficiary admitted the only transaction between it and [Applicant] was the issuance of the first LC. The court pointed out that "the only way [Applicant] could subsequently have 'failed to pay' upon a transaction within the intendment of the [Second Issuer's] LC was if [Beneficiary] had attempted to draw upon the [Applicant/First Issuer's] LC before presenting a drawing certificate to the [Second Issuer], and [Applicant] had failed to honor that request." Therefore, the court determined that Beneficiary had falsified its claims relating to the first draw, which constituted a breach of warranty.
Comment:
It is easy to confuse these two LCs. The question is whether an applicant can recover an improper payment on an LC. Presumably, this drawing and payment were in breach of the underlying contract. Accordingly, Applicant has a cause of action on this contract or for fraud. Whether it needs to bring an action on a beneficiary's warranty of presentation is unclear. If it does (i.e. if there is no other cause available to it), it may be doubted whether it should recover absent proof of fraud.
[JEB/fkd]
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