BISKER v. NATIONSBANK, N.A., 95-CV-1782

• Decision Date: 19 December 1996
• Docket Number: No. 95-CV-1782,95-CV-1782
• Citation: 686 A.2d 561
• Parties: Morris BISKER, Appellant, v. NATIONSBANK, N.A., Appellee.
• Court: D.C. Court of Appeals

686 A.2d 561

Morris BISKER, Appellant, v. NATIONSBANK, N.A., Appellee.

No. 95-CV-1782.

District of Columbia Court of Appeals.

Argued November 21, 1996.

Decided December 19, 1996.

APPEAL FROM THE SUPERIOR COURT, LINDA TURNER HAMILTON, J.

Kenneth C. Smurzynski, Washington, DC, with whom Bruce R. Genderson was on the brief, for appellant.

Nicholas T. Christakos, Washington, DC, with whom Jay Y. Mandel was on the brief, for appellee.

Before FERREN, STEADMAN, and FARRELL, Associate Judges.

FARRELL, Associate Judge:

This appeal concerns the refusal of a bank which issued a letter of credit to honor a demand for payment by the beneficiary because a principal document accompanying the demand was not in compliance with the terms of the letter of credit. We join the broad majority of courts in concluding that strict compliance is necessary in this unique setting. As the compliance here did not meet that standard, we hold that the bank breached no contractual or other duty to appellant in refusing to honor presentment.

I.

In 1985, appellant (Bisker) entered an agreement with Beer Distributing Company (BDC) to sell BDC his interest in American-Potomac Distributing Company (AP). Bisker received a promissory note from BDC which was guaranteed by Stanley S. Bender. In exchange, Bisker relinquished his 50% interest in AP to BDC; his shares were to be escrowed until payment of the note. In 1987, a new agreement replaced the earlier one. Bisker relinquished his right to hold the AP stock in escrow, as well as the personal guarantee of Bender. In return, Bisker received Irrevocable Letter of Credit No. 1791(LOC) issued by Sovran Bank/DC National, the predecessor in interest of appellee NationsBank. Bisker was also to receive a new promissory note in the amount of $800,000 which was non-recourse and secured exclusively by the LOC. The note was executed on May 22, 1987, by Bender as maker on behalf of BDC. On or about that same day, Bisker received what he believed was the original of the note, but in fact was a photocopy.¹ The LOC,however, required by its express terms that demand for payment on the credit must be accompanied by, inter alia, "1. Original of the promissory note executed May 22d 1987, ('the Promissory Note')."

When payment on the final balloon installment of the note was not made as promised, Bisker, on July 10, 1995, demanded payment on the LOC by NationsBank in the amount of $595,853.71, representing the outstanding principal, interest and late penalties due. NationsBank refused the demand, asserting that the presentment did not meet the terms of the LOC because, among other things, the promissory note accompanying the demand was not the original note but instead a duplicate photocopy. After Bisker confirmed this fact through an expert document examiner, Bender, the original signator, re-signed the copy of the note just above his previous signature. On August 14, 1995, Bisker resubmitted the LOC along with the re-executed note, but NationsBank again refused the demand stating: "Original of the promissory note executed on May 22, 1987, not presented."²

Bisker filed suit in Superior Court alleging breach of contract and breach of the implied covenants of good faith and fair dealing by NationsBank. On November 20, 1995, Judge Hamilton granted NationsBank's motion to dismiss on the ground that it failed to state a claim upon which relief could be granted. The judge explained:

This court has applied the rule of strict compliance as set forth in Washington Fed. Sav. & Loan v. Prince George's Cty., 80 Md. App. 142, 143, 560 A.2d 585 [582], 583, cert. denied, 317 Md. 641, 566 A.2d 102 (1989). Moreover, the court finds Vanden Brul v. MidAmerican Bk. & Trust, 820 F. Supp. 1311 (D.Kan. 1993) dispositive.³

II.

The issue of first impression in this jurisdiction presented by this case is whether something less than strict compliance by the beneficiary with the terms of a letter of credit is enough to require the issuing bank to honor a demand for payment. Recognizing, as have the courts and commentators, the unique role of this "quick, efficient, inexpensive" tool in commercial transactions, LeaseAmerica Corp. v. Norwest Bank Duluth, 940 F.2d 345, 349 n.4 (8th Cir. 1991) (citation omitted), we hold that strict compliance as defined below is required. The essential features and purposes of a letter of credit dictate that answer.

Article 5 of the Uniform Commercial Code (UCC) deals with letters of credit. It "treat[s] credits as unique devices" and sets out the "formal requirements" governing them, including the relationship of the parties to the credit transaction and the duty and privilege of an issuer with respect to payment. JOHN F. DOLAN, THE LAW OF LETTERS OF CREDIT ¶ 2.01, at 2-3 (rev. ed. 1996). These requirements are contained in D.C. Code §§ 28:5-101 to 28:5-117 (1996). Article 5, however, does not deal with "all of the rules and concepts of letters of credit as such rules or concepts have developed . . . or may hereafter develop. . . ." Id. § 28:5-102(3). Further understanding is provided by the Uniform Customs and Practice for Documentary Credits (1983 rev.), International Chamber of Commerce Brochure No. 400 (UCP 400), referenced in the LOC in this case, and by case law. See Mercantile-Safe Deposit & Trust Co. v. Baltimore County, 309 Md. 668, 526 A.2d 591, 594 (1987).

D.C. Code § 28:5-103(1)(a) defines a "[c]redit" or "letter of credit" as:

an engagement by a bank or other person made at the request of a customer and of a kind within the scope of this article (section 28:5-102) that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit. A credit may be either revocable or irrevocable. The engagement maybe either an agreement to honor or a statement that the bank or other person is authorized to honor.

Besides a "customer" (a "buyer or other person who causes an issuer to issue a credit," § 28:5-103(1)(g)) and an "issuer" ("a bank or other person issuing a credit," § 28:5-103(1)(c)), the third party to the typical letter of credit is a "beneficiary," a person "entitled under [the] terms [of a credit] to draw or demand payment." § 28:5-103(1)(d). Although historically the letter of credit was used primarily in international transactions involving the sale of goods, today it is

used increasingly in domestic transactions and functions as much as a means of "standby" credit as [it does as a form] of commercial credit. A standby letter of credit serves a purpose similar to that of a guaranty by providing payment to a beneficiary upon default of a party that was obliged to perform. . . . [It] serve[s], as in the present case, as a "back up" device against customer default.

Mercantile-Safe Deposit, 526 A.2d at 593-94 (citations omitted).

The unique feature of a letter of credit transaction is that it "deals in documents and is wholly independent of the underlying transaction in goods [or credit]." Confeccoes Texteis de Vouzela v. Riggs Nat'l Bank, 301 U.S.App. D.C. 304, 305, 994 F.2d 851, 852 (1993). Unless otherwise agreed, it relieves the issuer of responsibility "for performance of the underlying contract for sale or other transaction between the customer and the beneficiary," and "for any act or omission of any person other than itself . . . or for loss or destruction of a draft, demand or document . . . in the possession of others." § 28:5-109(1)(a) & (b). The issuer's duty, besides general "good faith and observance of any general banking usage," is to "examine documents with care so as to ascertain that on their face they appear to comply with the terms of the credit. . . ." § 28:5-109(2) (emphasis added).⁴ Once the issuer determines that a draft or demand for payment "complies with the terms of the relevant credit," it must honor the demand "regardless of whether the goods or documents conform to the underlying contract for sale or other contract between the customer and the beneficiary." D.C. Code § 28:5-114(1). Unless otherwise agreed, the issuer is then "entitled to immediate reimbursement of . . . payment made under the credit" by the customer. § 28:5-114(3).

In keeping with its disavowal of "deal[ing] with . . . all of the rules and concepts of letters of credit," § 28:5-102(3), the District's version of the UCC does not expressly state whether the conformity of a tender is governed by a test of strict compliance or one of lesser, "substantial" compliance.⁵ The overwhelming weight of decisional and commentator authority, however, favors strict compliance and the oft-cited maxim from a case of the House of Lords that, in letter of credit transactions, "[t]here is no room for documents which are almost the same, or which will do just as well." Equitable Trust Co. of New York v. Dawson Partners, Ltd., 27 Lloyd's List L. Rep. 49, 52 (H.L. 1927).⁶ Thisstandard, which treats the issuing bank's duty to check documents for compliance as "entirely ministerial," Insurance Co. of N. Am. v. Heritage Bank, 595 F.2d 171, 173 (3d Cir. 1979), serves two purposes:

(1) providing certainty of payment to the beneficiary and (2) allowing the issuing bank to evaluate precisely its risks under the letter of credit. It is the certainty of payment that gives the letter of credit its unique value as an instrument to secure obligations of all kinds. . . . By the same token, the fact that the bank's obligation is defined solely by the terms and conditions of the letter of credit allows the bank to evaluate precisely the extent of the risks involved in its undertaking pursuant to the letter of credit. . . . "These risks . . . involve potential liability to at least two parties: the beneficiary of the credit and the party for whose account the credit is issued. Under these circumstances the issuer . . . of a credit must know who does what and with whom, and must be sure that his expectations in that regard will not be altered."

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