Continental Nat. Bank v. National City Bank

• Decision Date: 23 February 1934
• Docket Number: No. 7028.,7028.
• Citation: 69 F.2d 312
• Parties: CONTINENTAL NAT. BANK et al. v. NATIONAL CITY BANK OF NEW YORK.
• Court: U.S. Court of Appeals — Ninth Circuit

69 F.2d 312 (1934)

CONTINENTAL NAT. BANK et al. v. NATIONAL CITY BANK OF NEW YORK.^*

No. 7028.

Circuit Court of Appeals, Ninth Circuit.

February 23, 1934.

Le Roy M. Edwards, Oscar C. Sattinger, and A. S. Goldflam, all of Los Angeles, Cal., for appellants.

Gibson, Dunn & Crutcher and H. F. Prince, all of Los Angeles, Cal., for appellee.

Before WILBUR, SAWTELLE, and MACK, Circuit Judges.

MACK, Circuit Judge.

This is an appeal from a judgment for plaintiff, National City Bank of New York, in an action for damages suffered because of alleged wrongful refusal of defendant, Continental National Bank, to honor drafts drawn under its letter of credit and purchased by plaintiff. The Continental will for convenience be referred to as if it were sole defendant and appellant.

On April 12, 1929, the case was submitted to the District Court on a stipulation of facts, without any requests being made by either party for findings of fact, general or special, or for a declaration of law in its favor either generally or specially because of the insufficiency of the evidence to permit of a judgment for the opponent. On August 10, 1932, an entry was made in the minutes of the trial judge and also on the record, which, after reciting the delay in the consideration of the case as due to the desires and hopes of the parties for a settlement, sustaining plaintiff's objections to the materiality of a part of the stipulated facts and noting an exception to the ruling, proceeds: "And it is further ordered that judgment be for plaintiff in the first and second causes of action alleged in the first amended complaint for the sum of Twenty Four Thousand Dollars ($24,000.00) with interest at the rate of seven per cent (7%) per annum from May 5th, 1924, with costs of suit."

On August 31, 1932, the court granted defendant's motion for leave to request a declaration of law that, on the admitted stipulated facts, plaintiff, because of its failure to comply with the terms of the letter of credit, was not entitled to recover, but refused to make this declaration. Thereupon, on the same day, defendant requested special findings of fact and conclusions of law, but these likewise the court, on September 5, 1932, refused to make. On that day the court made and signed and on the following day filed both its own findings of fact and conclusions of law in favor of plaintiff and the judgment now before us on appeal. Exceptions were taken and allowed to each of the rulings, on August 31st and on September 5th, which were adverse to defendant.

In a case such as this, tried by the court without intervention of a jury, the review of the appellate court is limited by Rev. St. ß 700, 28 U. S. C. ß 875 (28 USCA ß 875), to "the rulings of the court in the progress of the trial of the cause, if excepted to at the time, and duly presented by a bill of exceptions," except that, "when the finding is special the review may extend to the determination of the sufficiency of the facts found to support the judgment."

The ruling excluding a part of the stipulated facts as immaterial, is duly presented for review. We therefore summarize first the other stipulated facts, all of which are also in the court's findings.

On April 5, 1924, defendant wired plaintiff in New York City the contents of the letter of credit;¹ pursuant to defendant's request, plaintiff advised its Brussels branch, which thereupon purchased from the drawer its 60 days after sight draft for $24,000 drawn on defendant under its letter of credit and accompanied by the following documents: commercial invoice, consular invoice, ocean bill of lading, marine insurance policy, copy of charter party, and also a document entitled "A certificate of quality." The draft with these documents attached, sent by plaintiff direct to defendant for acceptance, was received by the latter in Los Angeles on the 5th day of May.

The cement covered by these documents, together with other cement purchased by I. A. Stub & Co. under other letters of credit, arrived in Los Angeles harbor before receipt of the draft and documents by defendant.

Between the 7th and 15th of May, telegraphic communications passed between defendant and plaintiff which were generally to the effect that defendant would not honor the draft because the character of the cement did not comply with the specifications in the letter of credit.

On the 29th of May, the draft was formally presented for acceptance and protested for nonacceptance.

Plaintiff's sustained objection was to the materiality of the following stipulated facts: That part of the cement, shipped under other letters of credit, was removed on arrival, used in construction work, and found to be of inferior quality, and that the 60,000 bags shipped under the present letter which were stored in a warehouse in San Pedro until after the arrival of the documents were there sampled and tested by a firm of inspecting engineers, who reported that the cement failed to pass the specifications of the American Society for Testing Materials.

1. Appellee contends, in support of the ruling, that, as the issuer of a letter of credit is bound to accept drafts drawn under that letter when the documents presented conform to its terms, the question of actual conformity of the goods to the description in the documents is not material. Arguing that a letter of credit is a contract which must be construed strictly according to its terms, that whatever conditions the issuer may put into the letter must be fulfilled before he can be charged, appellant contends that the stipulated facts are material to prove that the alleged express condition that the cement should be of sound merchantable quality and standard and should meet with the requirements of the American Society for Testing Materials had not been fulfilled.

When the transaction between the issuer of a letter of credit and the holder of drafts drawn thereunder is a documentary one, independent of the underlying sales contract between the purchaser and seller of the goods, as is ordinarily the case, it is well established that, if the documents are not in accordance with the specifications of the letter of credit, the bank of issue is justified in refusing to honor the draft. This is true even though the goods themselves may conform to the specifications of both the letter of credit and the sales contract. Crocker First Nat. Bank of San Francisco v. De Sousa, 27 F.(2d) 462 (C. C. A. 9th), certiorari denied 278 U. S. 650, 49 S. Ct. 94, 73 L. Ed. 561 (1928); Banco National Ultramarine v. First National Bank of Boston, 289 F. 169 (D. C. Mass. 1923); Bank of Italy v. Merchants' National Bank, 236 N. Y. 106, 140 N. E. 211 (1923); National City Bank v. Seattle National Bank, 121 Wash. 476, 209 P. 705, 30 A. L. R. 347 (1922). Moreover, if the documents are in proper order, the bank of issue ordinarily may honor the drafts and charge the account of its customer, even though, before honoring, it is informed by its customer that the goods are unsatisfactory. Laudisi v. American Exchange Nat. Bank, 239 N. Y. 234, 146 N. E. 347 (1924); Tocco v. Bank of Italy, 249 Mass. 267, 143 N. E. 905 (1924).

The question whether or not under these circumstances the bank of issue must honor the drafts is, however, not so completely answered by prior decisions. The leading case on this specific question is Maurice O'Meara Co. v. National Park Bank of New York, 239 N. Y. 386, 146 N. E. 636, 639, 39 A. L. R. 747 (1925). There the bank had issued its letter of credit covering the shipment of newsprint paper in "rolls to test 11-12, 32 lbs." Although the documents presented included an affidavit attesting that the paper did test "twelve points, thirty-two pounds," the bank refused to honor the drafts presented by the seller because there had not been presented "evidence reasonably satisfactory to it that the newsprint was of the bursting or tensile strength specified in the letter of credit." In an action by the seller against the bank, the New York Court of Appeals held that the claim that the paper was not up to specifications was immaterial to the question of the bank's liability. The court said: "Whether the paper was what the purchaser contracted to purchase did not concern the bank and in no way affected its liability. It was under no obligation to ascertain, either by a personal examination or otherwise, whether the paper conformed to the contract between the buyer and seller. The bank was concerned only in the drafts and the documents accompanying them. This was the extent of its interest. If the drafts, when presented, were accompanied by the proper documents, then it was absolutely bound to make the payment under the letter of credit, irrespective of whether it knew, or had reason to believe, that the paper was not of the tensile strength contracted for."

From this view Judges Cardozo and Crane dissented. Judge Cardozo said: "I assume that no duty is owing from the bank to its depositor which requires it to investigate the quality of the merchandise. * * * I dissent from the view that, if it chooses to investigate and discovers thereby that the merchandise tendered is not in truth the merchandise which the documents describe, it may be forced by the delinquent seller to make payment of the price irrespective of its knowledge. We are to bear in mind that this controversy is not one between the bank on the one side and on the other a holder of the drafts who has taken them without notice and for value. The controversy arises between the bank and a seller who has misrepresented the security upon which advances are demanded. Between parties so situated payment may be resisted if the documents are false."

This decision was followed in Bank of East Asia, Ltd., v. Pang, 140 Wash. 603, 249 P. 1060 (1926), an action by the bank of issue against the seller to recover money paid under a letter of credit before discovery that the goods shipped were not according to...