Article

Factual Summary: Two banks issued five commercial letters of credit in an international sales transaction between a Bangladeshi textile manufacturer and an importer located in the United States. The buyer and seller agreed that the goods would be manufactured in Bangladesh. To demonstrate proof of origin, the credits required that the beneficiary submit an original invoice bearing an official Government of Bangladesh export visa stamp.

After partial delivery of the goods, the beneficiary made presentation to the nominated negotiating bank under each letter of credit. The negotiating bank then presented the documents, which included a Bangladeshi export visa stamp, to the issuing banks. One issuer made partial payment on a draft. The other issuer informed the negotiating bank, by telex, that it had accepted the documents and, that upon the maturity of the drafts, it would credit the negotiating bank's account for their amount.

In the meantime, the applicant sought to obtain the goods from U.S. Customs. U.S. Customs however, refused to release the goods because they were not manufactured in Bangladesh. In fact, the goods were manufactured in Pakistan and shipped to the beneficiary's facility in Bangladesh, from where they were reshipped. Upon learning that U.S. Customs would not release the goods, the applicant brought this action against the beneficiary and the issuing banks, and moved for a preliminary injunction to prevent payment on the drafts. The court denied the preliminary injunction, but granted a temporary restraining order enjoining payment.

The negotiating bank then moved to intervene, which the court permitted. The negotiating bank sued the applicant for payment on the drafts, claiming to be a holder in due course of the drafts. The applicant moved for summary judgment on this issue, which the court granted. In its ruling, the court found the drafts were not negotiable instruments because they were not payable on "demand" or at a "definite time," as required under the Uniform Commercial Code. UCC -- 3-104(I)(c) and 3-109(I)(a). It also noted that there was no question as to the existence of fraud in the transaction. However, the court granted the negotiating bank leave to cross-claim against the issuing banks.

The negotiating bank moved for summary judgment against the issuers for payment on each of the drafts. The court denied the negotiating bank's motion, and dismissed its claims against the issuing banks.

Legal Analysis:

1. Injunction: Exceptions: Time: Whether the Court's Temporary Restraining Order Came too Late to Interrupt Payment:The negotiating bank argued that the court's temporary restraining order could not bar payment on the drafts because they were accepted before the order was issued. The applicant based its argument on prior court decisions holding that legal process served on a bank could not suspend its duty to pay an item if the order comes after the bank accepted the item. First Commercial Bank v. Gotham Originals, Inc. 64 N.Y.2d 287 (N.Y. 1985); see also Supreme Merchandise Co. v. Chemical Bank, 117 A.D.2d 424 (N.Y. App. Div. 1986), aff 'd70 N.Y.2d 344 (N.Y. 1987).

The court rejected this argument. Despite the fact that one issuer made partial payment, and the other issuer sent written notice of its acceptance by telex, the court found that neither bank accepted the drafts because they did not indicate their acceptance on the face of the instruments. In its findings, the court relied upon the Uniform Commercial Code's definition of "acceptance," which requires acceptance to be "written on the draft." Prior UCC - 3-410. According to the court, because "acceptance" was not indicated, in writing, on the face of the instruments, none of the drafts had been accepted, and the temporary restraining order barred payment.

2. Whether the Issuing Banks had an Independent Contractual Obligation to Pay: The negotiating bank argued that the issuing banks were obligated as a matter of contract to pay the drafts, despite the fact that their acceptance was not effective under the Uniform Commercial Code. The negotiating bank argued that each issuer had created an independent contractual obligation to pay, one by making partial payment and the other by sending confirmation of acceptance by telex. Relying upon Prior UCC - 3-409, which states that "[n]othing in this section shall affect any liability in contract," the negotiating bank contended that the issuing banks' obligations could not be extinguished because the banks failed to provide "acceptance," as that term is defined under the Uniform Commercial Code.

The court did not agree. It stated that the negotiating bank failed to provide any evidence of a contractual relationship whereby the issuing banks were independently obligated to pay the drafts.

3. Whether the Letters of Credit were Effective as Deferred Payment Credits: The negotiating bank argued that the underlying letters of credit were analogous to deferred payment credits. On such credits, there usually is no draft, and the bank undertakes to pay on the date stipulated in the letter of credit. In such cases, by telex or other similar means, the issuer informs the beneficiary that it will pay. By characterizing the letters of credit as deferred payment credits, the negotiating bank contended that the bank which sent notice of acceptance by telex was obligated to pay on the letters of credit that it issued.

The court did not agree with this characterization of the letters of credit. The court found that the letters of credit used in the instant case were acceptance letters of credit, and not deferred payment credits. In its finding, the court noted that on acceptance credits, once a bank accepts a draft, the draft, not the letter of credit, becomes its obligation to pay. Therefore, because the credits were acceptance credits, the temporary restraining order enjoining payment on the drafts precluded the negotiating bank from receiving payment on the underlying letters of credit.

Comment:

1. Even an area of LC law which is unsettled and where the guidance offered by practice is subject to misunderstanding, the decision in Regent is bewildering.

2. In a prior order, the court concluded that drafts are not negotiable "since they were not payable 'on demand or at a definite time'." The court does not, however, state the text of the draft. Since silence would be construed to mean that the draft was payable at sight, the draft could only have been payable at an indefinite time. One is left to wonder how such a draft could be formulated or whether the court was mistaken.

3. The court ruled that the credits were acceptance credits rather than credits undertaking to make a deferred payment. It also ruled that the issuers had failed to accept the drafts when presented, instead telexing that the documents had been accepted. If the court is correct in these characterizations (and the terms of the LC are not stated), then it would appear that the issuers wrongfully dishonored by not accepting the drafts when presented there being no discussion of discrepancies. Under UCP500 Article 14, they would be precluded to any event from asserting discrepancies. Had the issuers fulfilled their apparent undertaking, the injunction would have come too late to interrupt the obligation to pay.

4. While the report of the case and the recital of its facts leave much to be desired, this result is troubling. It underscores the need for clarity regarding negotiation and correspondent banks which should be important feature of the UCP600 exercise.

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