Article

Note: Through Pacific Bay Apparel Co. (Sales Agency), Dolgencorp, Inc. (Buyer) contracted with Prime Sportswear Corp. (Seller), for the purchase of denim jeans. In need of funds to produce the goods, Seller arranged for financing with Rockford Funding Corp. (Financer No. 1/Beneficiary), which is described as the "Confirming Agent." To pay for the denim jeans, Buyer obtained an LC from Bank of America (Issuer) in the amount of US$1,275,000, in favor of Financer No. 1/Beneficiary.

Seller shipped the denim jeans in six installments and Financer No. 1/Beneficiary made six drawings on the LC, two of which were dishonored.

In the meantime, Buyer ordered and received, in a subsequent purchase order, US$518,286.50 worth of denim jeans.

Subsequently, both Financer No. 1/Beneficiary and Midlantic Commercial Co. (Financer No. 2), a factor that claimed a security interest in Seller's accounts receivable, demanded payment for the goods from Buyer.

When payment was not forthcoming, Financer No. 2 sued Financier No. 1/Beneficiary for a declaratory judgment that it was entitled to all payments and that Financer No. 1/Beneficiary had converted the LC proceeds. Financer No. 1/ Beneficiary cross-claimed against Buyer, claiming a breach of a contractual relationship or that it was the owner of the proceeds. At the close of discovery, Buyer moved for summary judgment on Financer No. 1/Beneficiary's cross-claim. Financer No. 2 also moved for partial summary judgment on its declaratory judgment and conversion claims.

The U.S. District Court for the Southern District of New York, Kram, J., granted Financer No. 2's motion for summary judgment against Financer No. 1/Beneficiary and Buyer's motion for summary judgment against Financier No. 1/Beneficiary on the cross claim. The U.S. Court of Appeals for the Second Circuit, Oakes, Straub, and Raggi, JJ, affirmed in a summary order.

On appeal, Financer No. 1/Beneficiary argued it was entitled to the funds, or, in the alternative, that Buyer had breached an independent obligation it owed to Financer No. 1/Beneficiary by issuing the subsequent purchase order, preventing Financer No. 1/Beneficiary from drawing on the LC. It also argued that there were general issues of material fact concerning the existence of a contract between Buyer and Financer No. 1/Beneficiary precluding summary disposition.

The appellate court stated that Buyer had a relationship with Seller to purchase the jeans and that Financer No. 1/Beneficiary had a relationship with the LC Issuer. In its opinion, the LC did not create a contract between Financer No. 1/Beneficiary and Buyer. Financer No. 1/Beneficiary's contract was with the LC Issuer, and was separate and distinct from the commercial contract between Seller and Buyer.

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