Article

Prior History: CVD Equip. Corp. v. Taiwan Indus. Glass Corp., No. 10 Civ. 0573(JPO), 2012 WL 5506120 (S.D.N.Y. Nov. 7, 2012), noted at 2013 ; CVD Equip. Corp. v. Taiwan Indus. Glass Corp.,

No. 10 Civ. 573 (RJH), 2011 WL 1210199 (S.D.N.Y. March 31, 2011) [USA], noted at 2012.

Note: CVD Equipment Corporation (Manufacturer) entered into an agreement (Contract) to produce specialized glass-treatment equipment for Taiwan Industrial Glass Corporation (Buyer) for USD 15,800,000. Payment was to be by a commercial letter of credit (Commercial LC) issued by Mizuho Corporate Bank, Ltd. (Commercial LC Issuer). Under the agreement, Manufacturer provided a USD 3.5 million refund standby (Standby) issued by Capital One, N.A. (Standby Issuer), as security for Buyer's first payment installment in the event of Manufacturer's default. The Standby contained a cancellation clause that allowed for cancellation upon receipt by Standby Issuer of a "copy of an original bill of lading . . . dated not later than November 30, 2009". The Commercial LC on the other hand called for a "clean on board ocean bill of lading" dated no later than 30 November 2009.

Under the terms of the Contract, Manufacturer could only ship the equipment and draw on the Commercial LC for the second installment of the purchase price after Buyer instructed Manufacturer to arrange shipping and provided "acceptance for shipping by [Buyer]". On 28 October 2008, Buyer sent Manufacturer the required letter instructing it to arrange shipping but to wait to ship "on the condition that [Manufacturer] received the requisite acceptance". Buyer's representatives took advantage of an optional inspection term in the contract and visited Manufacturer's facility on 23-24 November 2009, where Manufacturer informed them that an essential component of the equipment, the "APCVD System", was incomplete. Buyer instructed its representatives not to provide acceptance for shipment.

Nonetheless, on 27 November 2009, a trucking firm sent by EMO TRANS, Inc. (Carrier) picked up the equipment from Long Island for delivery to the Staten Island port of shipment. Carrier provided Manufacturer with a bill of lading dated 27 November 2009 (First B/L). First B/L had no on board notation, and all of the goods did not arrive at the port of shipment until 1 December 2009. The following day, Manufacturer sent Standby Issuer the First B/L and requested that Standby Issuer cancel the Standby. Standby Issuer then notified Commercial LC Issuer (who was also the Standby beneficiary) that it was cancelling the Standby based upon the First B/L. Commercial LC Issuer objected, noting the lack of on board notation and alleging that the vessel carrying the goods had not actually left port until 6 December 2009. Standby Issuer responded that under UCP600 Art. 5, "determination [that the goods were timely shipped] was made based on the strength of the bill of lading presented and not on the disposition of the merchandise", and that under UCP600 Art. 20, the First B/L sufficed to cancel the standby notwithstanding the absence of an on board notation. Commercial LC Issuer responded that UCP600 Art. 20 required "evidence of the date the goods were shipped on board".

Meanwhile, Manufacturer received from Carrier a separate ocean bill of lading with an on board notation of 1 December 2009 (Ocean B/L), which Manufacturer believed it needed for payment under the Commercial LC. However, after email and phone correspondence with its bank (who was Standby Issuer), Manufacturer instead presented the First B/L as part of its demand on the Commercial LC. Commercial LC Issuer rejected the presentation because the First B/L had no on board notation. At Manufacturer's request, Standby Issuer sent Commercial LC Issuer a second draft of the First B/L with a 27 November 2009 on board notation (Second B/L).

On 4 January 2010, Buyer presented documents under the Standby, including documents not called for under the terms of the standby, namely a cargo tracking record from Carrier indicating that the cargo had been shipped on 5 December 2009. Standby Issuer refused, noting that it had cancelled the Standby and would disregard the extraneous documents under UCP600 Art. 14(g).

Manufacturer sued Buyer and Commercial LC Issuer for breach of Contract and wrongful dishonor. Buyer counterclaimed against Standby Issuer for wrongful dishonor. Standby Issuer filed a motion to dismiss the counterclaim. The U.S. District Court for the Southern District of New York, Holwell J., denied Standby Issuer's motion to dismiss and Buyer's motion for summary judgment on its counterclaim. Noting that UCP600 requires bills of lading to have on board notation to provide a basis for cancellation, Judge Holwell held that Standby Issuer was not estopped under UCP600 to rely on the Second B/L to cancel the refund standby, despite it having previously relied on the First B/L. Judge Holwell rejected Buyer's argument that the Second B/L was "obviously fraudulent" based on purported inconsistencies in stamp and signature and the impossibility of picking up the equipment on Long Island and loading it onto a ship in Staten Island the same day, noting that an issuing bank's duties do not include investigating alleged underlying fraud.

Standby Issuer subsequently moved for summary judgment. The district court, Oetken J., denied Standby Issuer's motion, finding that a jury could reasonably infer that Standby Issuer acted in bad faith in dishonoring Buyer's presentation because it knew that the 27 November date on the Second B/L was false. Email correspondence indicated that Standby Issuer instructed Manufacturer not to use the Ocean B/L in presentation under Commercial LC, presumably because Standby Issuer knew that the date on the Ocean B/L would not meet Commercial LC's requirement that the ocean bill of lading be dated no later than 30 November 2009. Therefore based on the documents alone, Standby Issuer arguably knew that the shipment was not made on 30 November 2009 and that the 27 November 2009 on board notation was inaccurate. Further, Standby Issuer's representative had over 30 years of experience dealing with LCs, and Manufacturer had discussed with that representative the need for an on board notation and possibly the shipment date itself.

Judge Oetken rejected Standby Issuer's contention that the inferences above were merely speculative, noting that unlike an aiding and abetting fraud claim, which requires clear and convincing evidence of actual knowledge of fraudulent activity, "red flags" that would cause a reasonable issuer to question the legitimacy of a bill of lading are sufficient in defending against a motion for summary judgment. Judge Oetken found that a jury could, in any event, reasonably infer that Standby Issuer actually knew that the Second B/L was fraudulent.

Following the denial of Standby Issuer's motion for summary judgment, Buyer moved for partial summary judgment against Manufacturer for breach of the Contract and for denial of Manufacturer's breach of contract claim. In its motion, Buyer alleged that Manufacturer breached the Contract by shipping the glass-treatment equipment without receipt of "acceptance" from Buyer, and attempting to draw on the Commercial LC upon shipment. Judge Oetken granted Buyer's motion and entered judgment against Manufacturer for USD 3,564,000.

Judge Oetken noted that the Contract unambiguously required Manufacturer to obtain Buyer's acceptance prior to shipping the goods, and rejected Manufacturer's argument that a copy of Buyer's 28 October 2009 letter instructing Manufacturer to arrange for shipping, which Buyer provided to Standby Issuer under the terms of the Standby, was proof of Buyer's acceptance. Judge Oetken found that the relevant term in the Standby, Item 46A, was intended to ensure that Buyer had met its contractual obligations before calling on the Standby, rather than fulfill a pre-shipment requirement. Further, in its letter Buyer indicated that its instruction to ship was conditional on its acceptance to be given following the inspection. Judge Oetken also agreed with Buyer that Manufacturer's argument was nonsensical, given that Buyer's 28 October 2009 letter was sent well before it could know whether Manufacturer had assembled the equipment to be shipped.

In finding that Manufacturer breached the Contract by shipping before it had received Buyer's acceptance, and noting that Manufacturer's shipment did not even contain all of the contracted-for equipment, Judge Oetken held that Manufacturer had also breached the Contract by subsequently attempting to draw on the Commercial LC. Judge Oetken rejected Manufacturer's claim that Buyer breached the Contract by withholding its acceptance, finding that Buyer did so in good faith after Manufacturer failed to produce essential components of the equipment during Buyer's inspection.

[KCM/mjb

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