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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
1997 LC CASE SUMMARIES 492 S.E. 2d 765 (Ga. Ct. App. 1997)
Topics:
Transfer by Operation of Law; Independence Principle; Strict Compliance; Prior UCC 5-114; Fraud; Non-documentary Condition; Revised Section 5-113.
Type of Lawsuit:
Interpleader action for the proceeds of a letter of credit.
Parties:
Plaintiff/Applicant- Jurisco, Inc.
Defendant/Beneficiary- American Bonding Company
Original Defendant/Issuer- Bank South, N.A.
Underlying Transaction:
Payment of bond claims.
LC:
Standby for US$ 100,000. Silent as to UCP.
Decision:
The Court of Appeals of Georgia, Andrews, C.J., affirmed the order of the trial court to disburse the proceeds of the letter of credit to the beneficiary.
Rationale:
Under Georgia law, a successor by operation of law can make a demand under a letter of credit. Where the presentation fully complies with the terms of the letter of credit and the applicant has not proven fraud, the beneficiary is entitled to honor.
Article
Factual Summary:
The beneficiary and applicant entered into a contract whereby the applicant would receive and accept proposals for the issuance of bonds on behalf of the beneficiary. The standby was procured to assure payment of claims for which the applicant was responsible. The terms of the standby required that presentation be made by "an authorized of ficer of the American Bonding Company", but did not connect this requirement to any document.
Prior to the renewal date, the issuer sent notice to the beneficiary, which was in receivership, that the $100,000 standby would not be renewed. Claiming that the applicant owed $53,000, the receiver made a drawing for the full amount prior to expiring under the standby. The issuer determined that the documents complied, but the court granted a restraining order at the request of the applicant after a hearing which the issuer failed to attend. When the beneficiary intervened to dissolve the order, the court ordered the full amount of the letter of credit paid into the registry of the court, dismissed the issuer, and substituted the beneficiary as defendant.
The beneficiary filed a motion for summary judgment, contending that it had fully complied with the terms of the letter of credit and was entitled to payment. The court denied this motion and ordered the parties to arbitrate the underlying contractual issues. The beneficiary then moved for reconsideration, contending that the contract issues were not before the court and that summary judgment should be decided solely on the issue of whether it had complied with the terms of the credit. Upon reconsideration, the court ordered that the funds be delivered to the beneficiary. The applicant protested this order by filing an emergency motion for protection. The court denied the motion, and the applicant appealed. On appeal, affirmed.
Legal Analysis:
1. Non-documentary Condition: On appeal, the applicant argued that the receiver, who made the presentation in its own name, was not "an authorized officer" of the beneficiary as required by the credit. The court rejected this argument by noting that the requirement was a nondocumentary condition and the issuer could not look beyond the face of the documents for compliance. Accordingly, the fact that the receiver was not an authorized officer had no bearing upon the bank's obligation to pay.
2. Transfer by Operation of Law: Noting that there was an issue as to whether a successor by operation of law could demand payment, the court looked to Revised UCC Article 5-1 13 which allows presentations by a successor even though Georgia had not yet adopted the revision. The court recognized that the question was linked to the requirement that a presentation comply with the terms of the LC. In this regard, it stated that Georgia did not follow the strict compliance standard but that the test is whether "there is no possibility that the documents could mislead the issuer to its detriment," citing First National Bank v. Wynne, 149 Ga. App. 811, 256 S.E.2d. 383 (1979). Noting that even where strict compliance obtains, some courts have enforced presentation by a liquidator, the court concluded that the receiver was entitled to demand payment.
First National Bank v. Wynne
3. Issuer's Obligation: The court then ruled that the independence principle, as stated in UCC 5-114, required that the beneficiary, which complied with the terms of the letter of credit, be paid absent a showing of fraud. The applicant here had contended that it only owed the beneficiary $53,000; as such, a drawing for the full amount of the credit was fraudulent. The court pointed out that the letter of credit had no requirement for calculating the actual amount owed and the applicant had not made allegations in its brief which amounted to a sufficient showing of fraud.
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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.