Article

Factual Summary: A broker contracted with the ultimate buyer to buy and sell eucalyptus wood. The purchase was to be paid for by means of letters of credit. To supply the wood, the broker contracted with a supplier and arranged with a third party to apply for the necessary L/Cs to finance this purchase. Through contracts with the applicant and the issuer, the broker remained primarily responsible for bank fees and reimbursement and the applicant guaranteed the broker's obligations to the issuer. The broker also opened an account with the issuer to deposit proceeds from its sale of wood to the ultimate buyer and granted the issuer a security interest in the proceeds.

Later, the same year, the issuer and applicant refused to perform on this financial arrangement unless the broker agreed to assign the proceeds from the sale of the wood to the applicant. These proceeds would be held in the applicant's account with the issuer. The issuer and the applicant would deduct their fees from the account, and any reimbursement for payments made by the issuer on the letters of credit. The broker complied with these requests and the first L/C was issued.

The issuer honored a presentation under this L/C despite discrepancies (the absence of a certificate stating that the wood met the ultimate buyer's specifications). Because the wood did not meet those specifications, the broker had to lower its selling price considerably.

The broker then requested that the issuer and the applicant arrange to issue a second letter of credit to finance the next purchase. The issuer, who also acted as the broker's advising bank for L/Cs used to pay the broker for the sale of wood, refused to accept the ultimate buyer's L/C for the second shipment.

The broker then brought an action against the applicant and issuer asserting eight different causes of action. The broker contended that as a result of the issuer and applicant's actions, it lost the remaining contracts and resulting profits. The defendants moved to dismiss, stating that the broker, not a party to the L/C, had no standing to bring the claims involving that credit, relying on UCP Article 3, the independence principle, for this proposition. The court denied the motion.

Legal Analysis:

1. Standing: Although the broker was not a party to the L/C, the court ruled that it was not suing under the letter of credit, but under the reimbursement contract with the issuer. Thus, the broker had standing to bring the claims. The court distinguished Kools v.Citibank,872 F. Supp. 67 (S.D. N.Y. 1995). (undisclosed principal of an applicant not entitled to bring suit for wrongful honor.) The court noted that in the instant case the issuer knew it was dealing with the broker and that it still was not clear that even an undisclosed principal could not sue because of the pending appeal in Kools.

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