Article

Note: To enable Danny Markowitz (Buyer) to purchase retail goods for resale from Benetton U.S.A Corp. (Seller), Melvyn Weiss (Guarantor) applied for and obtained a USD 500,000 standby LC from Republic National Bank (succeeded by HSBC) (Creditor) in favor of Seller. The standby did not require Seller to make any statements about Buyer’s debt, but only to demand payment, present the original standby, and state a reference number.

Buyer made purchases from a subsidiary company of Seller, although the subsidiary company was not the named beneficiary of the standby. After accruing USD 1,000,000 in debt to Seller and its subsidiary company, Buyer informed Seller that he would be unable to repay the debt due to losses in Bernard Madoff’s Ponzi scheme. Seller then drew upon the standby and was paid. Creditor then debited USD 500,000 from Guarantor’s account and applied it as payment for debt owed by Buyer.

Guarantor sued Seller for fraud, breach of contract, and unjust enrichment. Guarantor claimed that Seller made material omissions in drawing on the standby. Guarantor and Seller both moved for summary judgment on the complaint. Both motions were denied by the New York Supreme Court because there were triable issues of fact about whether Buyer owed to Seller or its subsidiary company.

On appeal, the Appellate Division of the Supreme Court of New York, Leventhal, J. reversed. The appellate court ruled that the trial court erred in its decision to deny Seller’s cross-claim for summary judgment, granted Seller’s cross-motion for summary judgment, and upheld as appropriate the denial of Guarantor’s motion for summary judgment.

The appellate court stated that Seller made a compliant presentation of the standby, including the appropriate reference number to Guarantor. The appellate court concluded that the omission of a reference to Buyer’s debt in demanding payment on the standby was not intended to induce reliance on the part of Guarantor. Therefore the court concluded that Seller was entitled to judgment as a matter of law on the fraud claim. On the ground of breach of contract, the standby did not create a contractual relationship between Guarantor and Seller, so Seller was entitled to judgment as a matter of law to dismiss breach of contract. Finally Seller was entitled to summary judgment in the dismissal of unjust enrichment because express contracts not between Guarantor and Seller already governed the matter.

[HK]

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