Daiwa Products, Inc. v. NATIONSBANK, NA

• Decision Date: 01 September 2004
• Docket Number: No. 4D03-2190.,4D03-2190.
• Citation: 885 So.2d 884
• Parties: DAIWA PRODUCTS, INC., Appellant, v. NATIONSBANK, N.A., and United Mizrahi Bank, Ltd., Appellees.
• Court: Florida District Court of Appeals

885 So.2d 884

DAIWA PRODUCTS, INC., Appellant, v. NATIONSBANK, N.A., and United Mizrahi Bank, Ltd., Appellees.

No. 4D03-2190.

District Court of Appeal of Florida, Fourth District.

September 1, 2004.

Rehearing Denied November 23, 2004.

Jane Kreusler-Walsh and Rebecca Mercier-Vargas of Jane Kreusler-Walsh, P.A., West Palm Beach, and Paul A. Shelowitz of Akerman Senterfitt, Miami, for appellant.

Mark D. Bohm and Douglas E. Horelick of Thornton, Davis & Fein, P.A., Miami, for appellees.

GROSS, J.

Daiwa Products, Inc. appeals an order dissolving a temporary injunction and directing an issuing bank to pay a draft drawn on a letter of credit. We affirm the trial court's order. On the cross-appeal we remand for the assessment of interest against the injunction bond.

Daiwa imports health care products and distributes them to retailers, such as drug stores, in the United States. SAAT is an Israeli company which manufactures and distributes ear thermometers.

In September 1998, Daiwa entered into an agreement with SAAT to purchase a large quantity of ear thermometers for $229,665.60. To pay for the thermometers, Daiwa secured the issuance of a letter of credit from NationsBank that named SAAT as the beneficiary. The letter of credit specified the type of documentation that SAAT was required to present in order to be paid.

United Mizrahi Bank, which had an existing banking relationship with SAAT, acted as the advising bank on the letter of credit. An advising bank is a bank "which gives notification of the issuance of a [letter of] credit by another bank." § 675.103(1)(e), Fla. Stat. (1997).¹ An advising bank does not incur an obligation to honor drafts drawn under a letter of credit, but it does "assume obligation for the accuracy of its own statement [s]" made to the beneficiary. § 675.107(1), Fla. Stat. (1997). The sales agreement required SAAT to ship the goods by March 31, 1999. On March, 30, 1999, SAAT provided United Mizrahi with documents conforming to the requirements of the letter of credit; these documents confirmed that SAAT had shipped the goods to Daiwa on March 26, 1999. At the same time, SAAT delivered to United Mizrahi a draft drawn on the line of credit in the amount of $229,665.60. The draft was given to United Mizrahi to pay on an unrelated loan the bank had made to SAAT.

Although on their face the documents conformed to the requirements of the letter of credit, they were fraudulent. SAAT's fraud is beyond dispute. SAAT had not shipped the thermometers as the documents claimed. Daiwa never received any ear thermometers from SAAT.

On April 1, 1999, United Mizrahi presented the conforming documents to NationsBank, along with the $229,665.60 draft. On April 8, 1999 Daiwa obtained a temporary injunction from the circuit court prohibiting NationsBank from releasing the funds. See § 675.114(2)(b), Fla. Stat. (1997) (providing that "a court of appropriate jurisdiction may enjoin" the honoring of a "draft or demand for payment" under the letter of credit). The court required that Daiwa post a $50,000 bond with the clerk of the court. On July 1, 1999, United Mizrahi intervened in the circuit court action and sought dissolution of the temporary injunction. The dissolution issue was tried in March 2003.

As framed in the circuit court and this appeal, the primary issue is whether United Mizrahi was a holder in due course of the $229,665.60 draft. If United Mizrahi was a holder in due course, then it was entitled to payment under section 675.114(2)(a), Florida Statutes (1997), which provides, in pertinent part:

(2) Unless otherwise agreed 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:

(a) The issuer must honor the draft or demand for payment if honor is demanded by a negotiating bank or other holder of the draft or demand which has taken the draft or demand under the [letter of] credit² and under circumstances which would make it a holder in due course (s.673.3021)....

After the non-jury trial, the circuit court determined that United Mizrahi was a holder in due course.³ The court dissolved the temporary injunction and ordered NationsBank to make payment of $229,665.60 on the draft.

Daiwa challenges the trial court's ruling that United Mizrahi was a holder in due course. Because United Mizrahi prevailed on this issue at the evidentiary hearing on the motion to dissolve, we view the evidence in the light most favorable to it. See McPherson v. Phillips, 877 So.2d 755 (Fla. 4th DCA 2004)

(on rehearing) ("In reviewing the trial court's ruling, we are required to view the evidence taken at the hearing in the light most favorable to upholding the ruling."); White v. Metro. Dade County, 563 So.2d 117, 134 (Fla. 3d DCA 1990) (noting that the evidence adduced during a temporary injunction hearing would be viewed on appeal in the light most favorable to the prevailing party).

From 1997-1999, SAAT financed the assembly of thermometers through loans from United Mizrahi, with the buyers' letters of credit forming the collateral for the loans. Typically, once SAAT received a purchase order and letter of credit, United Mizrahi advanced 40% of the purchase price to begin the manufacturing process; thirty days before the anticipated delivery date, United Mizrahi advanced 30% of the purchase price; when SAAT presented the documentation required by the letter of credit, the bank advanced the remaining 30% of the purchase price. In these letter of credit transactions, United Mizrahi acted as both a creditor of SAAT and an advising bank. Daiwa's banking expert testified that there was nothing inappropriate or unusual about a bank serving in such a dual role.

Throughout United Mizrahi's banking relationship with SAAT, the company's liabilities always exceeded its assets. Nevertheless, prior to the transaction here at issue, SAAT successfully completed twenty-six letter of credit transactions through United Mizrahi, always fulfilling its manufacturing and shipping obligations. The twenty-six transactions involved over $12 million in merchandise. In none of the transactions had SAAT been accused of fraud.

During the banking relationship, United Mizrahi reviewed SAAT's annual financial statements and met periodically with its executives. Between March 1997 and March 1999, United Mizrahi representatives visited SAAT's plant eight times.

In late February or early March 1999, Morton Nyman, Daiwa's principal, learned from a personal friend that SAAT had canceled its order for plastic cases, a necessary component of ear thermometers. On March 9, 1999, twenty-two days before the shipping deadline, Daiwa requested an amendment to the letter of credit, asking for an increase in the order quantity and letter of credit amount, and seeking an inspection certificate to be added to the list of documents necessary to receive payment. On March 11, SAAT rejected the proposed amendments. On March 16, Daiwa requested a second amendment, this time only asking that a certificate of inspection be added to the list of documentation required for payment. On March 18, SAAT rejected the second request.

Although Daiwa's banking expert testified that SAAT's rejection of the inspection certificate amendments should have raised a "red flag," United Mizrahi's expert disagreed. He testified that the rejection of the amendments could have occurred for other reasons, such as to avoid additional cost or inconvenience so close to the shipment date.

United Mizrahi's loan department never received Daiwa's certificate of inspection amendment requests. Rather, the bank's letter of credit department received the requests and forwarded them directly to SAAT for response. The bank's credit manager reasoned that technical amendments, such as certificates of inspection, were issues for the buyer and seller, not the bank, a position supported by an expert witness in banking practices.

In October or November 1998, United Mizrahi's senior lending officer issued memoranda to staff expressing concerns about SAAT's ability to continue to manufacture and ship products. The bank's testimony at trial downplayed the significance of the memoranda as being a character flaw of that lending officer, who was something of a worrywart. After the memoranda were issued, SAAT successfully completed several orders involving $471,000 in product. On March, 14, 1999, United Mizrahi's senior lending credit committee denied SAAT's request for renewal of its $1.5 million line of credit and asked SAAT to develop a plan to reduce borrowing. The bank did not immediately call for payment of its outstanding loans or declare any loans in default. Prior to March 14, the bank had approved all of SAAT's previous loan requests, including one made on March 11, 1999. The bank's March 14 decision was a business decision not to continue its relationship with a company that was struggling to be profitable. It had no connection to the company's ability to fill the March 30 order for Daiwa.

As part if its ongoing relationship with the company, an employee of United Mizrahi visited SAAT's operational facility on March 16, 1999. The facility appeared to be fully functional. Workers were on the production line. Thousands of finished thermometers were ready for shipment. Employees in the quality control department were conducting tests on the thermometers. Electronic components for making thermometers were kept in a storage area. SAAT's general manager and employees were on-site and working. From his observations, the bank's employee concluded that SAAT's plant was "fully functional" on March 16, 1999.

Section 675.114(2)(a) adopts the definition of "holder in due course" contained at section 673.3021, Florida Statutes (1997). Under that section, a "holder in due course" is a "holder who takes an instrument without `apparent evidence of forgery or alteration' for value, in good faith,...