Forgot your password?
Please enter your email & we will send your password to you:
My Account:
Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
1999 LC CASE SUMMARIES 175 F.3d 245 (2d Cir. 1999) [U.S.A.]
Topics:
Fraud, Negotiation, Preliminary Injunction against Honor, Foreign Sovereign Immunities Act (FSIA)
Type of Lawsuit:
Applicant against issuer to enjoin honor and against nominated bank to enjoin collection under a standby letter of credit.
Parties:
Plaintiff/Applicant- Brenntag International Chemicals, Inc. (Counsel: Katten, Muchin & Zavis)
Defendant/Issuing Bank- Norddeutsche Landesbank GZ (Counsel: McDermott, Will & Emory)
Defendant/Nominated Bank- Bank of India (Counsel: Sidley & Austin)
Underlying Transaction:
Sale of naphtha.
LC:
Standby letter of credit subject to UCP 500.
Decision:
The U.S. Court of Appeals for the 2 nd Circuit, Winter, Chief Judge, affirmed an order of the U.S. District Court for the Southern District of New York, Sweet, Judge, preliminarily enjoining honor by the issuer and collection by the nominated bank.
Prior History:
Brenntag International Chemicals, Inc. v. Norddeutsche Landesbank GZ, 9 F.Supp. 2d 331 (S.D.N.Y. 1998) (ordering preliminary injunction), abstracted at 1999 Annual Survey 332.
Brenntag International Chemicals, Inc. v. Norddeutsche Landesbank
Subsequent History:
Brenntag International Chemicals, Inc. v. Norddeutsche Landesbank GZ and Bank of India, 1999 U.S. Dist. LEXIS 17356 (U.S. Dist. Ct. S.D.N.Y.) (ordering permanent injunction).
Brenntag International Chemicals, Inc. v. Norddeutsche Landesbank GZ and Bank of India
Rationale:
A nominated bank cannot avoid fraud defenses where, without sufficient authorization from the beneficiary, it dated and presented a statement of applicant default that was pre-signed by the beneficiary and that was false when pre-signed and when dated.
Article
Factual Summary:
Applicant agreed to purchase chemicals from the beneficiary and to support ultimate payment of the purchase price by furnishing a standby LC. The standby was "payable at sight, but not earlier than 361 days after the loading date" against presentation of a copy of a negotiable bill of lading, a copy of a letter sent to the applicant indicating that originals had been sent directly, and a statement from the beneficiary to the effect that "payment, which was due 360 days after completion of loading, has not been received and is due from [applicant]." The standby was available by negotiation at a nominated bank located near the beneficiary.
The beneficiary requested the nominated bank to advance funds against receipt of (i) the documents that would be required to draw under the standby, including copies of documents evidencing a recent shipment to the applicant and a statement of applicant default signed but not dated by the beneficiary and (ii) a telex from the issuer that all payments under the LC would be made to the nominated bank.
There was no shipment of goods, the copies of commercial documents were fraudulent, the beneficiary was bankrupt, and the beneficiary's statement of applicant default would necessarily be forever false.
360 days after the loading date shown on the bill of lading, the nominated bank dated the pre-signed default statement and, as negotiating bank under the standby, sent the documents to the issuer. Issuer dishonored the documents for discrepancies and so notified the nominated bank. The nominated bank disputed the alleged discrepancies and refused to withdraw its demand for honor. The applicant claimed that the drawing was fraudulent and obtained preliminary injunctions against honor by the issuer and against collection by the nominated bank.
Legal Analysis:
1. Fraud: No goods were shipped. The copies of the commercial documents presented under the standby evidenced a shipment that did not occur. The statement that the applicant had not paid an amount due the beneficiary was false, and the beneficiary knew it was false from the outset. Accordingly, there was fraud in the transaction and in the documents presented sufficient to excuse honor.
2. Holder in due Course: The nominated bank did not know that the sale and sale documents were fraudulent, but it did know that the statement of applicant default was premature and unfounded when it received the signed but undated statement from the beneficiary. Moreover, the nominated bank knew that dating (and sending) the statement was not authorized by the beneficiary when the nominated bank dated it and sent it to the issuer. Accordingly, the nominated bank was not in the position of a holder in due course entitled to avoid the effects of beneficiary fraud.
3. Irreparable Harm: Irreparable harm followed from the beneficiary's insolvency and was not affected by the applicant's possible post honor remedies against the banks. Moreover, the fact that the issuer had itself refused to pay based on discrepancies did not offset the need for injunctive relief based on fraud.
4. Foreign Sovereign Immunities Act: Nominated bank, which was a wholly owned subsidiary of a sovereign state, was not protected under the Foreign Sovereign Immunities Act, 28 U.S.C. Section 1610(d), which bars prejudgment attachment. The bank did not acquire a property interest in the standby LC so that granting injunctive relief was not the equivalent of attaching the bank's property.
Comment:
The opinion in this case on appeal, like the trial court opinions that precede and follow it, are confusing about when and on what basis the nominated bank negotiated the beneficiary's documents under the letter of credit. The result in this case follows from findings of fact that, although the nominated bank gave value to the beneficiary against the beneficiary's rights in the underlying account receivable and supporting letter of credit and held the documents until the account was to became due, it never received sufficient authorization from the beneficiary to date the default statement, i.e., that the beneficiary never credibly signified to the nominated bank that the applicant had failed to pay an amount due to the beneficiary. There may be circumstances in which a bank takes a pre-signed default statement and is authorized by the beneficiary to complete it in good faith, but the nominated bank here was unable to persuade the court that it acted on such authority.
© 2000 INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE
COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE
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.