Factual Summary: Prior to forwarding documents for collection under a documentary collection, the remitting bank had been involved in two prior LC transactions involving the principal that were fraudulent. In the first LC transaction, the bank acted as an advising and negotiating bank, purchasing documents that on their face related to the delivery of raw cotton, but, in fact, represented worthless cotton lint. The applicant had obtained an arbitration award from the Liverpool Cotton Exchange but "there is no evidence, however, that the [applicants'] dissatisfaction with the shipment or the subsequent awards against [the fraudster] were ever communicated to [the bank]." In this transaction, the fraudster had acted as the agent for the fraudster's company. In a second fraudulent LC transaction, the fraudster's company was the beneficiary of LCs issued on behalf of Pakistani textile mills. The bank confirmed the LCs and, in that connection, inquired and was satisfied regarding the fraudster's authority to act on behalf of the fraudster's company. When the applicant waived discrepancies, the confirmer paid the amount drawn on the LC. In the transaction involved in the present action, the fraudster acted under an alias name as the company's principal. Pursuant to an agreement with Indian cotton mills, it submitted documents to the remitting bank in a documentary collection subject to the URC. When funds were remitted, the remitting bank forwarded them pursuant to the principal's instructions, charging a US$ 70 fee. Several days later, the remitting bank received communications from the presenting cash bank on behalf of the drawee seeking to rescind or prevent payment. The remitting bank responded that it had made payment. As a result, the drawee of the documentary collection brought an action against the fraudster, related companies, and the remitting bank, alleging fraud, racketeering, and conspiracy to defraud. In particular, the drawee alleged that the remitting bank: knew or should have known that [the fraudster] and his companies were fraudulently selling and shipping worthless "raw cotton lint" instead of "raw cotton," and that [the remitting bank] had a duty to disclose this fraudulent conduct. [The drawee] also argues that the documentary collections in which [the remitting bank] assisted are governed by the N.Y.U.C.C., which imposes a duty of good faith and ordinary care. [The drawee] contends that [the remitting bank] violated this duty when it: (1) carried out the documentary transaction knowing that [the. fraudster] did not have authority to act on behalf of the principal; (2) failed to disclose [the fraudster's] lack of authority on behalf of the principal to it and its bank, the collecting bank. The trial court granted summary judgment in favor of the remitting bank. On appeal, affirmed.

Legal Analysis

1. -Collection, Fraud: The drawee argued that the trial court erred in its assessment of the liability of the remitting bank. The appellate court concluded that the trial court properly concluded that no evidence was submitted to indicate that the remitting bank was aware or should have been aware of the fraud in the previous transactions which related to LCs. It stated "These other transactions were significantly different in that they involved different financial arrangements (they used letters of credit rather than the "cash against documents" transaction), and the remitting bank's role was at all times independent from the underlying cotton sale"

2. Trade Terms: The drawee argued that the remitting bank should have been aware "that there was a significant difference between the commercial terms "raw cotton lint" as referred to in an earlier letter of credit document involving [the fraudster], and raw cotton, the commodity sought by the buyer." The appellate court agreed with the trial court that the remitting bank had "no legal obligation" "to know or appreciate the difference between these two trade terms. "The bank is not expected or required to be familiar with or to consider the customs of, or the special meaning or effect given to particular terms in the trade," quoting from Marino Indus. Corp. v. Chase Manhattan Bank N.A., 686 F.2d 112, 115 (2d Cir. 1982). 3. Collection, Duty of Remitting Bank to Drawee: The drawee argued that the remitting bank had breached its duties of good faith to it. Noting that there was no evidence to suggest that the remitting bank had not acted in good faith, the appellate court also recited URC322 Article 15 to the effect that "moreover, banks similarly situated to [the remitting bank] in this arrangement are not responsible for the "form, sufficiency, accuracy, genuineness, falsification, or legal effect of any documents" reflecting the underlying agreement between the seller and buyer. 4. Collection, Standard of Care: The appellate court noted that the duty of the remitting bank to the drawee was that of reasonable care and similar to the standard mandated in UCC Article 4 with respect to documentary collections. The appellate court noted that "Exercising reasonable care as the remitting bank in this case does not mandate inquiry as to the bona fides of the documents involved beyond facial examination thereof."

Comment: The decision in this case is eminently correct. The opinion, however, contains several nuances that are somewhat unpolished and could be subject to misinterpretation.

1. While the court is correct that banks in collections are not responsible for trade terms, it does not go far enough. Moreover, it cites a LC case to support that proposition. Collections are significantly different from LC transactions, as this decision so properly recognizes. One difference is that in LC transactions banks must examine the documents. Therefore, it is necessary to have a rule that banks are not responsible for the meaning of technical trade terms. There would be no authority for that proposition with respect to collections-which is probably why the court cited an LC case. In a collection, the bank would never even notice the trade term because it does not examine the documents at all. The subsequent citation of URC322 Article 15 to the effect that banks are not responsible for the genuineness of documents could reinforce this impression. To be sure, they are not responsible for the genuineness of documents. Even more, they are not responsible for examining anything beyond the collection order 2001 LC CASE SUMMARIES

2. The court, probably taking its cue from the attorneys who should have known better, refers to the remitting bank as a "collecting bank". URC322 General Provision B2 defines a "collecting bank" as "any bank other than the remitting bank, involved in processing a collection order."


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.