Article

Note: At the request of Republic Steel (Buyer/Applicant), HSBC USA, N.A. (Issuer) issued a commercial standby letter of credit that, as amended, was for USD 10,000,000 in favor of ProTrade Steel Co. Ltd. (Seller/Beneficiary) to assure payment for the purchase of scrap metal. The standby required Seller/Beneficiary to present the original LC, “a copy of an unpaid commercial invoice,” and a signed statement by a representative stating Buyer/Applicant’s invoice was presented, unpaid, and that payment was ten days past due.

Following Buyer/Applicant’s cancellation of several orders, Seller/Beneficiary invoiced Buyer/Applicant for resulting losses. Claiming that it could cancel orders pursuant to agreed terms and conditions, Buyer/Applicant refused to pay, and Seller/Beneficiary drew on the LC which was honored by Issuer.

Buyer/Applicant then sued Seller/Beneficiary and Issuer for wrongful honor and civil conspiracy. When Issuer moved to dismiss Buyer/Applicant’s suit for failure to state a claim, the United States District Court for the Northern District of Ohio, Eastern District, Adams, J., granted Issuer’s motion, dismissing the claims against the Issuer.

Buyer/Applicant’s claim alleged that Issuer “ignored discrepancies” on the face of Seller/Beneficiary’s unpaid invoice and that Issuer “ignored correspondence” sent by Buyer/Applicant regarding the invoice’s fraudulent nature. Buyer/Applicant further alleged that Issuer failed to evaluate Seller/Beneficiary’s claim of “market loss” in the demand for payment.

The Judge concluded that the unpaid invoice did not contain any discrepancies and that Buyer/Applicant failed to include any additional facts in its complaint to supplement its legal conclusions suggesting that the invoice was commercially invalid or that Issuer ignored any inconsistencies upon Seller/Beneficiary’s demand. The Judge stated “[Issuer] is required to honor the letter of credit when its terms have been fully complied with by [Seller/Beneficiary].”

[MJK]

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of the ICC or Coastline Solutions.