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. On 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 trial 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. Prior 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 trial 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 trial court denied the negotiating bank's motion, and dismissed its claims against the issuing banks. On appeal, the appellate court modified the award of summary judgment against the negotiability bank and remanded for further proceedings.

Legal Analysis:

Legal Analysis:

[A] material term of the contract was that the goods be manufactured in Bangladesh; that [the principal of the beneficiary] knew what the regulations required for 'substantial transformation' of the goods; that due to its economic situation, [the beneficiary's] factory was incapable of dyeing the goods; that [the principal of the beneficiary] knowingly failed to fulfill Customs requirements due to the economic pressures on his factory; that [the beneficiary] knew that the goods he shipped to [the applicant] would not qualify as being manufactured in Bangladesh; and that, nonetheless, [the beneficiary] sent [the applicant] documents attesting that the goods were made in Bangladesh in order to be paid on the shipment.

2. Negotiability of Drafts: Payable at a fixed term from the date of the Bill of Lading: The trial court had found that the drafts presented under the credit were not negotiable because the were payable within 90 days of the date of the bill of lading. so that the negotiating bank could claim that it qualified for the good faith purchaser exception in the event of LC fraud. The appellate court recited the requirements of negotiability under New York's UCC Section 3-104. It concluded that "the mere reference to the bill of lading's date does not impair the note's negotiability".

3. Fraud: Holder in Due Course; Prior UCC Section 5-114(2): The court stated that under New York law the person asserting holder in due course status bears the burden of proof, referencing the requirements of UCC Article 3 which refers to Commercial Paper. The issue in the case, the court noted, was whether the negotiating bank had notice of the defenses and whether it acted in good faith. The court stated that the applicant had recited various alleged facts which indicated suspicious circumstances that might cause a prudent banker to investigate, while noting that there is no duty to investigate. Despite this statement, the appellate court indicated that this evidence "creates an issue of fact concerning the Bank's holder in due course status ... ."

Comment:

1. The court's treatment of the both negotiability and the holder in due course doctrine is hardly comforting. To be negotiable, an instrument must be payable at a definite time or on demand. N.Y. Section 3-109(2) indicates that "an instrument which is by its terms otherwise payable only upon an act or event uncertain as to time of occurrence is not payable at a definite time even though the act or event has occurred." Moreover, a negotiable instrument may not be conditional. To be required to look to a separate paper, the bill of lading, to determine when the instrument is due runs afoul of both of these requirements. This reference is not a casual reference to another document for purposes of rights of acceleration or collateral but goes to the very essence of the undertaking, namely when it is due. Such an instrument cannot be negotiable.

2. This conclusion, however, does not mean that the bank is not entitled to claim special status as a good faith purchaser under LC law. What is involved here is not the intricacies of negotiability under the law of negotiable instruments. It is letter of credit law and references to negotiable instrument law are not likely to shed any light on the subject. The fact is that the bank was nominated and purchased the documents. Whether the documents contained an instrument that could fall within the technical definition of "negotiable instrument" is irrelevant to whether it can claim extraordinary rights even if the beneficiary has engaged in letter of credit 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.