Type of Lawsuit: Issuer sued negotiating bank for declaratory judgment that it had no liability and for libel. Negotiating bank counterclaimed for wrongful dishonor.

Parties: Plaintiff/Issuing Bank- Hamilton Bank, N.A. (Counsel: Kevin C. Logue and William C. Rand of Paul, Hastings, Janofsky & Walker) Defendant/Negotiating Bank- Kookmin Bank (Counsel: Elliot Silverman of McDermott, Will & Emery) Applicant/Buyer- Sky Industries Corp. Beneficiary/Seller- Sung-Jin Trading Co.

Underlying Transaction: Purchase of leather athletic shoes.

LC: Commercial LC for US$ 1.5 million. Subject to UCP500.

Decision: The U.S. Court of Appeals for the Second Circuit, Pooler, J., applying the law of Florida, the location of the issuer, affirmed the dismissal of issuer's claims and an award of summary judgment with interest in favor of the negotiating bank on its counterclaim by the U.S. District Court for the Southern District of New York, Kaplan, J., but vacated and remanded for a determination of whether the judgment should be reduced by the bank's commission and the partial payment from proceeds. Dissent by Kearse, J.

Rationale: Failure to state the discrepancies on which dishonor is based results in preclusion under UCP500 Article 14, unless material documents are fraudulent. Knowing submission of documents that do not comply does not prevent application of the preclusion rule. An LC bank has no duty to mitigate damage, but where it does so, amount of recovery may be adjusted accordingly. In the absence of proof of malice, a complaint to a bank regulatory authority falls within a qualified privilege.

Prior History: Hamilton Bank, N.A. v. Kookmin Bank, 44 F. Supp. 2d 653, 1999 U.S. Dist. LEXIS 6073, 38 U.C.C. Rep. Serv. 2d (CBC) 930 (S.D.N.Y. 1999) [U.S.A.], abstracted at 2000 Annual Survey 323, full text at 434.

Factual Summary: To pay for applicant's purchase of leather athletic shoes, bank issued an LC in the amount of US$1.5 million. In addition to stating documentary requirements, the LC required a copy of authenticated telex from issuer to adviser, indicating quantity to be shipped, destination, and nominating transporting company (the "Authenticated Telex"). The issuer required the authenticated telex to ensure that "[n]o draft would be honored until the applicant first deposited and pledged funds backing the total amount of the L/C". The third amendment stated that "Any other conditions should be in accordance with 'Option Contract' signed by applicant and beneficiary dated May 31, 1996". Apparently, the credit was a negotiation credit. The beneficiary, who was previously unknown to the negotiating bank, presented documents. Initially. the presentation was refused since the authenticated telex from the issuer was missing. Later, but within the validity of the credit, the beneficiary re-presented the amended LC with its reference to the "Option Contract" and a purported copy of special instructions. The version presented "eliminated the authenticated telex requirement." After ascertaining the validity of the LC, the negotiating bank duly negotiated by giving value less a US$50,421 commission. The negotiating bank then sent the documents it obtained from beneficiary to the issuer together with a request for payment of $1.5 million. The issuer received the documents, and returned them by courier two days later with an accompanying letter stating that "they were being returned because presentment was 'not in compliance with the terms and conditions of the credit."' When the documents were presented again more than a week later, the issuer again refused because the negotiating bank "had not presented the Authenticated Telex as required by the L/C". The negotiating bank brought suit against the issuer in Korea to recover damages under the LC. The issuer then brought an action in the U.S. District Court for the Southern District of New York seeking: 1) declaratory judgment enjoining the Korean litigation, and 2) damages for libel caused by the negotiating bank's complaining in a letter to the Office of the Comptroller of the Currency (OCC) of the issuer's behavior. Seeking indemnity, the issuer joined the applicant under the first claim. In the meantime, judgment was entered in the Korean action in favor of the negotiating bank. The negotiating bank counterclaimed in the U.S. litigation for the amount of the LC with interest from date of demand. The trial court granted the negotiating bank's motion for summary judgment on the action for declaratory relief, dismissing the issuer's claims against it. The appellate court affirmed, but vacated and remanded the judgment for a determination of whether the full amount of the judgment should be reduced by the commission and partial payment the negotiating bank received.

Legal Analysis:

1.Preclusion; UCP500 Article 14: The trial court had ruled that the issuer had failed to comply with the requirements of UCP500 Article 14 and was precluded from asserting that the documents did not comply. The appellate court agreed that the issuer did not comply with UCP500 Article 14 in two respects: its first and only timely disclaimer was not sent by telecommunication and did not specify the grounds for disclaimer.

2. Impact of Fraud on Preclusion:Notwithstanding its failure to comply with UCP500 Article 14, the issuer argued that it was not precluded from asserting a defense based on fraud. Noting that case law supported this argument, the appellate court concluded that "fraud in the transaction and fraudulent documentation are defenses even in cases governed by the UCP" and that such fraud need not be raised as a defense within the time period set by UCP500 Article 14, but can be raised subsequently.

3. Fraud in the Transaction: The issuer argued that the fraudulent character of the "Option Contract" that was presented created a material issue of fact for the trier of fact, making summary judgment inappropriate. The appellate court rejected this argument, noting that "the letter of credit here did not require that the negotiating bank furnish either an option contract or special instructions." Therefore, fraud in these two documents did not entitle the issuer to disclaim pursuant to prior UCC Section 5-114. The court also concluded that the documents were immaterial.

4. Knowing Submission of Discrepant Documents: The issuer argued that there was an outstanding issue of fact as to whether the negotiating bank negligently or knowingly forwarded non-complying documents by submitting the letter of credit without the required authenticated telex. Although the appellate court agreed that a reasonable.43 2001 LC CASE SUMMARIES juror could find that the negotiating bank knew or should have known that an authenticated telex was required, it noted that there was no compelling support for the proposition that a negotiating bank that knowingly presents non-conforming LC documents in connection with a letter of credit cannot rely on the UCP's preclusion principle. The issuer had relied on the decisions in Philadelphia Gear Corp. v. Central Bank, 717 F.2d 230 (5th Cir. 1983), and Brenntag Int'l Chemicals Inc. v. Norddeutsche Landesbank GZ, 9 F. Supp. 2d 331 (S.D.N.Y. 1998), abstracted at 1999 Annual Survey 332. Noting that Florida courts had rejected the Philadelphia Gear approach, the appellate court stated that the UCP's preclusion language is mandatory and admits of no exception.

5. Damages, No Duty to Mitigate: The issuer argued that the negotiating bank had a duty to mitigate damages. The appellate court concluded that there was no duty to do so, relying on a Florida decision which ruled that "in light of the sanctity attached to a letter of credit, beneficiary had no duty to issuing bank to mitigate damages by self-help repossession even though contract between beneficiary and its vendee authorized this remedy." Chrsyler Motors Corp. v. Florida Nat'l Bank at Gainesville, 382 So.2d 32, 38 (Fla. Dist. Ct. App. 1979).

6. Damages; Commission and Partial Reimbursement: Noting that the evidence indicated that the negotiating bank had received a commission and that the beneficiary had repaid a portion of the amount outstanding, the appellate court remanded for consideration of whether these amounts must be reduced for the amounts received.

7. Libel: The issuer argued that whether or not the negotiating bank acted with express malice in sending allegedly libelous letters to the OCC was a question of fact. The appellate court found that the communication to the bank's regulator enjoyed a qualified privilege creating a presumption that the negotiating bank acted in good faith. To defeat this presumption, the appellate court stated that the issuer had to prove express malice, i.e. that the negotiating bank was "motivated more by a desire to harm the person defamed than by a purpose to protect the personal or social interest giving rise to the privilege." The court found that the issuer had no evidence that the allegedly libelous letter was sent to anyone other than the OCC, which tended to establish that the negotiating bank was only seeking to protect its self-interest. The appellate court concluded that no express malice could be deduced from its actions.

8. Dissent: Kearse, J., dissented. Judge Kearse relied on two cases, Boston Hides & Furs, Ltd v. Sumitomo Bank, Ltd., 870 F. Supp. 1153 (D. Mass. 1994), Bank of Cochin, Ltd v. Manufacturers Hanover Trust Co., 808 F.2d 209 (2d Cir. 1986), for the proposition that "where issuing bank has not properly dishonored the LC, it can defeat enforcement of LC on ground of latent fraud if the party seeking enforcement of LC was complicitous, but not if that party were innocent." He urged that there existed a triable issue as to whether the negotiating bank's status as an innocent party, making summary judgment inappropriate.


1. On the whole, there is much in this decision about which to be relieved. It properly rejects the notion from the discredited 5th Circuit Philadelphia Gear decision that knowledge that a presentation is discrepant works an exception to the UCP preclusion rule. It also properly recognizes that an issuer may raise the defense of fraud at any time and not just within the reasonable time for refusal set by UCP500 Article 14. 2. It also raises an interesting question, whether a bank may give notice under UCP500 Article 14 by means other than telecommunication. Because the content of the notice was not sufficient in any event, the issue was moot. We are informed that the notice of refusal was entrusted to the courier on Wednesday 24 July, two days after presentation. It was delivered. on Saturday 27 July to the negotiating bank in Korea. There is no indication whether Saturday was a banking day for the Korean bank. UCP500 Article 14(d)(i) indicates that notice of refusal must be given "by telecommunication or, if that is not possible, by other expeditious means". While UCP500 does not expressly recognize face-to-face communication of refusal, that means would certainly satisfy the requirements of the rule even if it were possible to communicate by telecommunication. Such a situation would arise where an official of the beneficiary was present at the bank awaiting a decision. Seaconsar Far East Limited v. Bank Markazi Jomhouri Islami Iran (a body corporate) Ct. App. Civ. Div., 30 July, 1998, abstracted at 1999 Annual Survey 381. On the other hand, the use of an alternative means must be "expeditious". Whether a means is expeditious depends on the available alternatives. Absent some special situation as a result of which the negotiating bank was not able to receive telecommunications in Korea, a couriered notice of refusal would not satisfy the requirements of expeditious notice of refusal. 3. However, the decision does contain some quirky portions. In particular, its reference to the outmoded and discredited distinction between "latent" and "patent" fraud strikes an odd chord. Without ever asking the telling question as to what constitutes the difference between the two, the court uses that distinction to explain its rule that the issuer may defend its obligation to pay even if it has not given notice of refusal within a reasonable time pursuant to UCP500 Article 14. The court tells us that this rule only applies to those defects that are patent. The distinction is inapposite. All LC examination relates to the data that appears on the face of the documents. In that sense, what is examined might be described (but no banker does so) as "patent". That distinction, however, is not parallel with so-called "latent" fraud. There is no LC fraud that is "patent" which would be the only appropriate parallel to "latent" fraud. "Patent" fraud would have to be a document bearing a legend such as "This document is fraudulent." The distinction, then, is between examination of the documents on their face, a matter governed by the UCP, and operative rules when there is fraud, a matter that is governed by applicable law informed by those aspects of LC practice that are predicated on protection of innocent third parties. To use the artificial and awkward terminology of "latent" and "patent" to characterize these distinctions is inaccurate and silly. 4. As to whether there is an issue of fact as to whether there is fraud, the opinion contains statements that raise interesting questions. In concluding that the alleged forgeries are immaterial to the LC, the court adds this aside: "If the forged option contract or special instructions had purported to eliminate any requirement under the LC, arguably they would have been material, but in the absence of any connection to the requirements of the LC, they cannot justify [issuer's] disclaimer." It is difficult to understand this distinction from the perspective of LC law. Since it appears that the goods were, in fact, shipped, the issue relates to documentary fraud. If the option contract was irrelevant to the LC, then it had no bearing on whether the documents were fraudulent. It is unclear how a supposed statement in an irrelevant document could change this result. If the character of the document or the negotiating bank's knowledge of it is relevant, then the dissent is correct that there is a triable issue of fact as to whether or not the negotiating bank duly negotiated the documents in good faith and for value.


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.