Article

Factual Summary: An Ethiopian seller sold the documents of title to coffee to a local bank. Subsequently, a bank in the U.S. issued a commercial letter of credit to pay for the coffee. The Ethiopian bank, acting as "collecting bank", forwarded the documents under the LC.

When it received a discrepant presentation under its commercial letter of credit, the issuer sought the applicant's consent to pay. When no response was forthcoming, the issuer dishonored. Before could return the documents to the presenting correspondent bank, however. the applicant obtained Temporary Restraining Order preventing the issuer from returning the documents. Subsequently, the court ordered that the documents be released to the applicant in exchange for payment of the amount due under the LC to the issuer.

The applicant, however, claimed the sum in set off against arbitration awards rendered in its favor against the seller and the issued filed an inter-pleader action, seeking judicial determination of the proper owner of the funds as between the beneficiary, the applicant, and the correspondent bank. The beneficiary defaulted, and the trial court awarded the funds to the correspondent bank.

Legal Analysis:

1. Correspondent Bank Privity with Beneficiary: The applicant argued that the correspondent should not be permitted to claim the funds because it was in privity with the beneficiary who was in default. The court noted that the beneficiary, having been paid, had no interest in the action, whereas the correspondent bank did have an interest since it paid its funds to the beneficiary and was contesting the entitlement of the applicant to the funds.

2. Applicant Waiver/Conversion of Documents:The applicant argued that the correspondent bank could not have a claim under the LC since the documents were discrepant. Describing this argument as "inapposite", the court noted the applicant's action in preventing the return of the documents to the correspondent bank was critical. "Obviously, both the letter and the spirit of the law would be violated if the [correspondent bank], having paid [the beneficiary] for the coffee, ended up with neither the documents nor the money, while [the applicant] got the documents, the coffee and the money".

3. Attorney's Fees: Although the court declined to award either attorney's fees or punitive damages to the correspondent bank, it directed the applicant to pay the fees awarded to the issuer out of the inter-pleaded funds to pay for the cost of the interpleader. "I conclude that [the applicant], by obfuscating any distinction between [the seller] and [the beneficiary], acted unreasonably at best, and it rather than the [corresponding bank], to whom the full amount of the interpleaded funds are due, should bear the burden of covering those costs".

Comment:

1. The court specifically avoided the correspondent's arguments that it was a holder in due course of the bills of lading or the consignee of the coffee on the ground that it was unnecessary to the determination of the case. Surely, however, its conclusion is based on such a notion. The real issuer is who is entitled to the documents representing the ownership of the coffee. The claim of the applicant is based on an arbitration award in favor of an affiliate of the beneficiary. As a judgment creditor, it would bear the burden of proving that the transfer of the documents of title to the correspondent bank constituted a fraudulent transfer, a matter as to which there is no suggestion in the opinion. The claim of the correspondent bank is based on its purchase of the documents. Whether or not the correspondent bank is a holder in due course is irrelevant since there is no claim from another purchaser of the goods or the documents.

2. Moreover, the court fails to give due attention to the action of the applicant in taking possession of the goods. This action constituted waiver of the discrepancies or conversion of the documents such that either it or the issuer were estopped from raising any discrepancies. As a result, the obligation of the issuer was to forward the funds to the correspondent which claimed payment in its own right as a purchaser of the documents. The only issue was whether the correspondent had, in fact, given value for the documents. The court seemed satisfied on this point. As a result, the correspondent was entitled to the proceeds without any inquiry as to its status with respect to the documents, no fraud in the LC related transaction having been alleged.

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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.