Article

Factual Summary: To pay for a large quantity of ear thermometers, buyer obtained a letter of credit for $229,665.60 in favor of Seller/Beneficiary that was advised through Advising Bank.

Beneficiary presented Advising Bank required documents that affirmed shipment of the thermometers. At the same time, Beneficiary gave Advising Bank a draft drawn on the full amount letter of credit to pay on an unrelated loan that Advising Bank had made to Beneficiary. Although complying on their face, the documents were fraudulent. Two days after it received the documents, Advising Bank forwarded the documents to Issuer together with Beneficiary's draft.

Applicant brought an action for temporary injunction prohibiting issuer from making payment and 278 posted a $50,000 bond. Advising Bank intervened and moved for dissolution of the injunction, and the trial court dissolved the injunction and ordered payment of $229,665.60 from Issuer to Advising Bank. On appeal, affirmed.

Legal Analysis:

1. Fraud: As to whether there was letter of credit fraud, the appellate court stated that "[Beneficiary's] fraud is beyond dispute. [Beneficiary] had not shipped the thermometers as the documents claimed. [Applicant] never received any ear thermometers from [Beneficiary]."

2. Fraud, Exception; Holder in Due Course; Prior UCC Section 5-114(2)(a); Nominated Bank, Fraud: The trial court framed the issue before it as "whether [Advisor] was a holder in due course of the [LC]." In doing so, it looked to the applicable statute, Prior UCC Section 5-114(2)(a), which provided that even if there is letter of credit fraud, "[t]he issuer must honor the draft or demand for payment if honor is demanded by a negotiating bank or other holder of the draft or demand which has taken the draft or demand under the [LC] and under circumstances which would make it a holder in due course... ."

The appellate court reviewed the evidence, concluding that "competent substantial evidence supported the trial court's conclusion that [Advisor] was a holder in due course of the draft presented to [Issuer]."

[Advisor] presented evidence that, as a creditor bank, it had comported with reasonable banking standards which were reasonably related to achieving fair dealing. There was no evidence that [Advisor] knew that [Beneficiary] had fraudulently prepared the documents required under the letter of credit. In spite of its tiptoeing at the edge of solvency, [Beneficiary] had successfully completed twenty-six letter of credit sales transactions during its relationship with [Advisor]. Two weeks before the scheduled delivery date, [Advisor's] employee visited [Beneficiary] and observed a fully functioning manufacturing facility. [Advisor] viewed [Applicant's] request for amendments to the letter of credit as matters properly left to the buyer and seller. As the trial court implicitly held, it was not [Advisor's] duty as a creditor to police the sales transaction between [Beneficiary] and [Applicant].

Many of [Applicant's] arguments are quibbles with the weight of the evidence. For example, [Applicant] argues that [Advisor] violated reasonable banking standards by failing to generate a protocol and committee meeting minutes when denying [Beneficiary's] request to renew its credit line... Whether the absence of the protocol at trial was the smoking gun that [Applicant] claimed was a matter for the trial judge, who accepted the testimony of [Advisor's] witnesses about what the bank knew and when the bank knew it.

3. Faith; Holder in Due Course; Fraud, Exception; Prior UCC Section 5-114(2)(a): The court distinguished the present case from others in which there is "direct evidence that the holder of a draft had actual knowledge of fraud in either documentation required by a letter of credit or the underlying transaction." It noted that the trial court had not found that Advisor had either actual knowledge of fraud or that it had "participated in a manipulation of documents in order to get paid under a letter of credit." In determining whether Advisor was a holder in due course of the draft, the appellate court stated that the issue in this case "boiled down" to whether the Advisor "accepted" the draft and presented it in good faith. In making this determination, the court looked to the definition of good faith in UCC Article 3 (Commercial Paper) which requires that there be "honesty in fact and the observance of reasonable commercial standards of fair dealing." Accordingly, the appellate court gave careful consideration to the lending practices of Advisor.

4. Prejudgment Interest, Injunction; Injunction, Prejudgment Interest: The appellate court noted that pursuant to the law of Florida, an injunction bond must be posted on obtaining a preliminary injunction to be applied against foreseeable damages. These damages include any that result from the wrongful issuance of the injunction. The appellate court concluded that the decision to dissolve the injunction constituted a determination that the injunction was wrongfully issued, and that the trial court erred in awarding prejudgment interest, and remanded for a determination of interest.

Comments:

1. This decision follows the literal text of the prior UCC provision dealing with injunctive relief. In doing so, however, it overlooks one critical aspect of law and practice relating to exceptions to beneficiary fraud, namely whether or not the bank seeking the exempt status is nominated to act under the credit and duly so acted.

2. The court addressed the issue of holder in due course and good faith as if these questions existed in isolation from the question of whether or not the advising bank was a negotiating bank or otherwise has taken the draft or demand under the letter of credit. The only information given in the opinion is that the bank seeking to have the injunction dissolved was nominated as an advising bank. As the court recognizes, the obligation of an advising bank is to check the apparent authenticity and accuracy of the credit that it advises. An advising bank, however, is not nominated to act under the credit in confirming, paying, or negotiating drafts or documents. As a result, under letter of credit practice and law, it is not entitled to any special status in the face of beneficiary fraud simply by virtue of being nominated to advise.

3. The appellate court, however, does not provide any information on this vital question, and one is left with the impression that it believes that the status of advising bank is sufficient. The court does look to the statute on commercial paper in order to determine the meaning of "good faith," and it may be wondered if it considered it sufficient that the draft have been negotiated to the advising bank. However, there is no indication that the draft was made payable to the advising bank or endorsed to it, although such steps would not satisfy the requirements of LC law, practice, or the applicable statute that the bank have acted pursuant to nomination in order to be entitled to claim special exempt status.

4. If the advising bank was not nominated to negotiate or otherwise to act under the credit, the court is wrong to accord it special status. In such a situation, it would simply be a correspondent bank that had financed the beneficiary and stand in the shoes of the beneficiary.

[JEB/jcj]

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.