Barclay Knitwear Co., Inc. v. King'swear Enterprises Ltd.

• Decision Date: 10 November 1988
• Citation: 141 A.D.2d 241,533 N.Y.S.2d 724
• Parties: , 7 UCC Rep.Serv.2d 1592 BARCLAY KNITWEAR CO., INC., and Brooke Sweater Co., Inc., Plaintiffs-Appellants, v. KING'SWEAR ENTERPRISES LTD., Whei Pao Textile Ind. Co. Ltd., Kung Hsing Knitting Corp. Ltd., Union Trust Co. Chemical Bank, Israel Discount Bank of New York, Defendants, and National Westminster Bank, U.S.A., Defendant-Respondent, and Bank of Communications, Intervenor-Respondent-Cross-Appellant.
• Court: New York Supreme Court — Appellate Division

Page 724

533 N.Y.S.2d 724

141 A.D.2d 241, 7 UCC Rep.Serv.2d 1592

BARCLAY KNITWEAR CO., INC., and Brooke Sweater Co., Inc. Plaintiffs-Appellants, v. KING'SWEAR ENTERPRISES LTD., Whei Pao Textile Ind. Co. Ltd. Kung Hsing Knitting Corp. Ltd., Union Trust Co Chemical Bank, Israel Discount Bank of New York, Defendants and National Westminster Bank, U.S.A., Defendant-Respondent, and Bank of Communications, Intervenor-Respondent-Cross-Appellant.

Supreme Court, Appellate Division, First Department.

Nov. 10, 1988.

Stephen M. Harnik, of counsel (Wachtell, Manheim & Grouf, New York City, attorneys) for plaintiffs-appellants.

Eugene F. Farabaugh, of counsel (Andrew J. Connick and Anne M. Ronan with him on the brief, Milbank, Tweed, Hadley & McCloy, New York City, attorneys) for intervenor-respondent-cross-appellant.

Before KUPFERMAN, J.P., and SULLIVAN, CARRO, MILONAS and SMITH, JJ.

SULLIVAN, Justice.

This appeal presents the issue of whether the circumstances of a bank's negotiation of a draft drawn under a letter of credit established it as a holder in due course and, if so, whether the documents submitted on the draw against the credit conform to its requirements so that, notwithstanding the possibility of fraud in the transaction, the draft must be honored by the issuing bank pursuant to Uniform Commercial Code, 5-114[2](a).

Since 1978, Barclay Knitwear Co. Inc. and its subsidiary, Brooke Sweater Co. Inc. (collectively, Barclay), importers of men's and boys' wearing apparel, had successfully used King'swear Enterprises Ltd. and its principal, Amy Lee, as their agent in Taiwan. Barclay's would negotiate directly with the local Taiwan manufacturers regarding the style, quality and quantity of the merchandise it desired. Payment would be effected by the issuance of a transferrable letter of credit to King'swear, which would then assign the credit to the specified local manufacturer. Ms. Lee was given pre-signed blank inspection certificates which she was authorized to sign on Barclay's behalf once the goods were ready for delivery.

In February 1985 Barclay entered into contracts with King'swear and other Taiwan manufacturers for the production of approximately 13,000 dozen men's and boys' sweaters, with payment to be made by irrevocable letter of credit. In all, Barclay caused six letters of credit to be issued, each naming King'swear as beneficiary. Of the six, only one, an assignable $209,650 letter of credit issued on February 25, 1985 by National Westminster Bank, USA (Natwest), is at issue. The credit provided that it was payable upon presentation of King'swear's draft, accompanied by certain documents, including a "Special Customs Invoice-One 'VISAED' Original and two photocopies indicating Quota Category # 645."

In this particular transaction, it is alleged that instead of transferring the letters of credit to the local manufacturers with whom Barclay had previously made arrangements, Ms. Lee, apparently in deep financial trouble, assigned them to manufacturers not known to Barclay. According to Barclay, Ms. Lee also changed the terms of the contract so that fewer garments were being manufactured for the agreed price. As a result, Barclay found that it was being charged double and sometimes triple the contract price. Ms. Lee, it alleges, received kickbacks from these overcharges. On the basis of her actions in this matter, Barclay has caused criminal proceedings to be instituted against Ms. Lee in Taiwan.

In any event, on March 9, 1985, King'swear assigned $180,000 available under Natwest's $209,650 letter of credit to Lucky Jewel Knitwear Corp., which, on April 25, 1985, after several minor amendments had been added, applied in writing to Bank of Communications (BOC) to negotiate its draft for $180,000 under the letter of credit. After determining that the draft and the accompanying documents complied with the terms of the credit, BOC negotiated the draft and applied $50,250.26 of its proceeds in payment of Lucky Jewel's loan indebtedness to it, $1,901.68 for banking charges, and the balance of $128,657.06 as a credit to Lucky Jewel's account at BOC. On the same day, BOC forwarded the draft, accompanied by the documents required by the letter of credit, to Natwest for payment. On May 13, 1985, Natwest informed BOC that it would not honor the draft on the ground that the visa stamp on the special customs invoice showed numbers 645/646, not number 645 only, as required by the credit.

After Natwest informed BOC that it would not honor Lucky Jewel's draft, Barclay obtained a temporary restraining order prohibiting Natwest from honoring drafts drawn against the various letters of credit, including the one at issue, pending a hearing on Barclay's motion for a preliminary injunction. In support of that motion, Barclay alleged that the special customs invoice submitted to Natwest indicated the wrong customs quota category number, and that Barclay had been defrauded by its own agent. In asserting fraud, Barclay alleged that Ms. Lee assigned the letter of credit to Lucky Jewel, a manufacturer unknown to Barclay, in order to alter the specifications of Barclay's order and thus make the goods cheaper to produce. Barclay further alleged that Ms. Lee submitted fraudulent documentation under the letter of credit, including an inspection certificate signed by Barclay, purportedly representing that the goods had been manufactured in accordance with contract specifications.

BOC moved to intervene and to vacate the temporary restraining order. The motion court (Ira Gammerman, J.) permitted intervention and granted Barclay's motion for a preliminary injunction, finding that the visa stamp on the special customs invoice submitted by BOC to Natwest appeared to contain a material discrepancy from the terms of the letter of credit, and that Barclay had demonstrated a likelihood of success in ultimately establishing fraud in the transaction.

After discovery had been taken, BOC moved for summary judgment and vacatur of the preliminary injunction restraining Natwest from honoring the Lucky Jewel draft on the letter of credit. Barclay cross-moved for summary judgment converting the preliminary injunction into a permanent injunction. The court (Burton Sherman, J.) denied both motions, finding that factual issues existed which precluded the grant of summary judgment. In so concluding, the court determined that "[t]he letter required presentation of a special customs' invoice visa stamp quota category number 645." It also found that "in view of the underlying fraud claim, it would appear that a triable issue of fact is presented to determine if the intervenor bank is a holder in due course." The parties cross-appeal. Since we believe that, pursuant to the Uniform Commercial Code, BOC is entitled to payment because it negotiated the draft under circumstances making it a holder in due course, and the documents submitted with the draft strictly complied with the terms of the letter of credit, we modify to grant summary judgment to BOC and to vacate the preliminary injunction as to it.

A letter of credit provides "a quick, economic and predictable means of financing transactions for parties not willing to deal on open accounts by permitting the seller to rely not only on the credit of the buyer but also on that of the issuing bank." (First Commercial Bank v. Gotham Originals, 64 N.Y.2d 287, 297-298, 486 N.Y.S.2d 715, 475 N.E.2d 1255.) It has been held that "[a] letter of credit represents a separate contract between the issuing or confirming bank and the beneficiary, independent of the contract for the sale of goods between the buyer and seller." (Fertico Belgium, S.A. v. Phosphate Chems. Export Assn., 100 A.D.2d 165, 172, 473 N.Y.S.2d 403, appeal dismissed, 62 N.Y.2d 802; see, United Bank v. Cambridge Sporting Goods Corp., 41 N.Y.2d 254, 259, 392 N.Y.S.2d 265, 360 N.E.2d 943.) A letter of credit is a "commitment on the part of the issuing bank that it will pay a draft presented to it under the terms of the credit, and if it is a documentary draft, upon presentation of the required documents of title...." (United Bank, supra at 258-259, 392 N.Y.S.2d 265, 360 N.E.2d 943, citing Uniform Commercial Code, § 5-103.) It is will settled that "[b]anks issuing letters of credit deal in documents and not in goods and are not responsible for any breach of warranty or nonconformity of the goods involved in the underlying sales contract [citations omitted.]" (United Bank, supra at 259, 392 N.Y.S.2d 265, 360 N.E.2d 943.) In New York, strict compliance with the terms of a letter of credit is required. (United Commodities--Greece v. Fidelity Intl Bank, 64 N.Y.2d 449, 445, 489 N.Y.S.2d 31, 478 N.E.2d 172; see, Matter of Supreme Mdse. Co. v. Chemical Bank, 70 N.Y.2d 344, 352, 520 N.Y.S.2d 734, 514 N.E.2d 1358.)

Section 5-114[2](a) of the Uniform Commercial Code provides that "when documents appear on their face to comply with the terms of a credit but a required document ... is forged or fraudulent or there is fraud in the transaction ... the issuer must honor the draft or demand for payment if honor is demanded by a negotiating bank ... which has taken the draft or demand under the credit and under circumstances which would make it a holder in due course...." Finally, it should be noted, disputes involving letters of credit "are well suited to determination by motion for summary judgment because they normally present solely legal issues relating to an exchange of documents." (Banque Worms v. Banque Commerciale Privee, S.D.N.Y., 679 F.Supp. 1173, 1178.)

As already noted, the letter of credit at issue required, inter alia, "Special Customs Invoice One 'VISAED' Original and two photocopies indicating Quota Category # 645." This is a condition which is neither complicated nor vague, since it calls for one original and two photocopies of a special customs invoice that indicates in its text that goods corresponding to quota category number...