Article

Factual Summary: Applicant, a broker of steel, sought to meet buyer's increasing demand for steel by obtaining a standby L/C payable to the supplier. In order to provide for security, for the standby, the buyer purchased a US $100,000 certificate of deposit from the issuer and signed an "Authority to Hypothecate", giving applicant the authority to pledge the CD to the issuer for debt owed by the applicant. Applicant also signed a promissory note for US $50,000 obligating it to reimburse the issuer for any draw on the L/C by the beneficiary which listed the CD as collateral. Upon applicant's request, issuer extended the expiration six times. The buyer did not consent to the renewal of the standby. After the beneficiary drew on the credit and issuer did not receive repayment from the applicant, it redeemed the proceeds from the CD. Buyer then filed an action claiming that issuer could not use the CD as security because the buyer was a "customer" of the L/C who did not consent to the extensions of the expiration date. Upon a jury verdict for the buyer, the issuer moved for a directed verdict and a judgment notwithstanding the verdict. The trial court denied the motions and entered judgement for the buyer. On appeal, the intermediate appellate court affirmed, but the state supreme court reversed and remanded.

Legal Analysis:

1. Customary Rules: Displacement of UCC Article 5:The court rejected the buyer's contention that amendment of the L/C in the instant case required the consent of the customer under UCC Section 5-105. Noting that the L/C was subject to the UCP, it concluded that UCP 400 Article 10(d) was "the sole source of substantive law governing the L/ C" so that "the rights of the parties in the instant dispute are governed by the UCP" which "supplanted" Section 5-105.

2. Variation by Agreement; UCC Section 1- 102(3): The court concluded that the issuer of an L/ C subject to the UCP constitutes variation of the UCC provisions on amendments.

3. Amendment: Consent of the customer unnecessary, UCP 400 Article 10(d): The court ruled that under UCP 400 article 10(d) the consent of the customer was not necessary for the amendment of a credit.

4. Customary Rules; Interpretation matter for court. UCC 1-205; UCP is "trade code": The court concluded that the determination of whether a person is a "customer" within meaning of the UCP is a matter of law for the judge under UCC Section 1- 205.

5. "Customer"; UCC 5-103 (A)(7); UCP 400 Article:As an alternative basis for its opinion, the court concluded that the buyer would not be a "customer" under the UCC provisions in any event. The court rejected the buyer's argument that it fell within the meaning of "other person" because without its participation, the credit never would have been issued. The court described the tenuous nature of this argument by noting that it would place the developer who constructed the building that produced the paper on which the L/C was issued within the definition of a "customer".

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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 ICC or the other partners in DC-PRO.