Dynamics Corp. of Amer. v. Citizens & Southern Nat. Bank

• Decision Date: 28 March 1973
• Docket Number: Civ. A. No. 17197.
• Citation: 356 F. Supp. 991
• Parties: DYNAMICS CORPORATION OF AMERICA, Plaintiff, v. The CITIZENS AND SOUTHERN NATIONAL BANK, Defendant, The President of India, Intervenor.
• Court: U.S. District Court — Northern District of Georgia

356 F. Supp. 991

DYNAMICS CORPORATION OF AMERICA, Plaintiff, v. The CITIZENS AND SOUTHERN NATIONAL BANK, Defendant The President of India, Intervenor.

Civ. A. No. 17197.

United States District Court, N. D. Georgia, Atlanta Division.

March 28, 1973.

COPYRIGHT MATERIAL OMITTED

Witte & Witte, Bronxville, N. Y., Kilpatrick, Cody, Rogers, McClatchey & Regenstein, Atlanta, Ga., for plaintiff.

Alston, Miller & Gaines, Atlanta, Ga., for defendant.

Lefkoff & Hanes, Atlanta, Ga., and Baker, Nelson & Williams, New York City, for intervenor.

ORDER

EDENFIELD, District Judge.

In this unusual diversity¹ case, which touches some of the political and legal consequences of the emergence in Asia of Bangladesh, the court is called upon to strike a balance between the principles of equity jurisprudence and the requirements of commercial law.

In March of 1971 plaintiff, Dynamics Corporation of America "DCA", entered into a contract the "Agreement" with intervenor, the President of India "India", under which DCA agreed to sell and India agreed to buy defense-related communications equipment for some $1.368 million. The Agreement obligated DCA both to deliver the equipment FOB its plant and to provide technical assistance and "know-how" to India. The Agreement contained an arbitration clause stipulating that any disputes arising out of or in connection with the Agreement would be arbitrated in New Delhi, India. The Agreement was to be governed by Indian law.

The United States, not a party to this suit, undertook to finance India's purchase of the DCA equipment through the Military Sales Credit program as part of the so-called Peace Indigo Project established by the United States and India. Under the elaborate payment procedure, DCA agreed to periodically prepare and submit invoices to the designated representatives of India in Washington, D. C. India agreed to forward these invoices to the United States Army with a request for payment accompanied by India's certification that (a) the equipment due to be delivered was received, or (b) the work or services promised by DCA were satisfactorily rendered, or (c) payment was otherwise due DCA. It appears that the United States agreed to deposit the amounts due on the invoices to the account of DCA at defendant bank, the Citizens and Southern National Bank the "Bank", upon receipt of the certified invoices from India. DCA further agreed to have the Bank issue irrevocable letters of credit in favor of India at intervals roughly corresponding to the periodic submissions of invoices by DCA to India. These letters of credit were to be for amounts corresponding to the amounts due on the invoices and were to be payable to India on demand by sight drafts accompanied by India's certification in an agreed form that DCA had failed to carry out certain of its obligations under the Agreement. They were to become effective upon the Bank's receipt of the amounts of the respective invoices in collected funds to DCA's account and were to be valid for limited periods of time.²

On April 14, 1971 DCA submitted its first invoice in the amount of $410,472.60 to the designated representatives of India. On July 28, 1971 DCA had the Bank issue an irrevocable letter of credit (No. G-2076) in favor of India for the amount of $410,472.60 which was to become effective upon the Bank's receipt of that amount in collected funds to DCA's account and which was to be valid until September 30, 1972. The invoice was duly certified by India and on October 18, 1971 the United States paid the invoice by depositing $410,472.60 the "Deposit" to the account of DCA at the Bank. When the Bank received the Deposit the letter of credit in India's favor became operative as something akin to a lien on DCA's bank account.

DCA prepared two new invoices later in October of that year in the respective amounts of $88,216.80 and $230,700 and presented them for certification to the designated representatives of India. A fourth invoice in the amount of $410,472.60 was prepared and submitted on December 2, 1971. On December 29, 1971 DCA had the Bank issue three letters of credit in India's favor for the amounts of those invoices.

In the meanwhile India shifted its attention from commercial letters of credit to war with Pakistan over the Bengali situated in East Pakistan. In reaction to this war President Nixon announced a partial embargo of military supplies and the Indian Ministry of Defense was notified December 3, 1971 by the United States Army that an immediate ban on shipment of "ammunition, components thereto or machinery/equipment facilitating the manufacture of ammunition" was imposed. The ban apparently covered the DCA equipment ordered by India.³

Despite the protestations of DCA India has refused to certify the last three invoices submitted by DCA and those invoices have never been paid. By the same token the three letters of credit obtained by DCA in India's favor on December 29, 1971 have never become effective. On August 2, 1972 DCA filed a petition in bankruptcy in the Southern District of New York and in its complaint in this case it alleges that it was forced to do this as a result, in part, of nonpayments by India under the Agreement.

Some time later DCA says it was informed that India had lost interest in the Peace Indigo Project and intended, among other things, to make demand for the Deposit under the terms of the first letter of credit. On September 25, 1972 DCA filed a complaint in this court seeking an injunction against the Bank and a declaration that the first letter of credit was null and void. DCA also sought a temporary restraining order pending a hearing on its application for injunctive relief. On September 25 this court signed a temporary restraining order enjoining the Bank from honoring letter of credit No. G-2076 or paying the Deposit to India.

On September 28, two days before the expiration of the letter of credit, India presented a sight draft drawn on the Bank in the amount of $410,472.60 and a certificate, executed "for and on behalf of the President of India" by M. P. Cariappa, Joint Secretary to the Government of India, which contained the requisite text⁴ stating that DCA had failed to carry out certain of its contractual obligations under the Agreement. The Bank, in compliance with this court's order, did not pay the draft. That same day a consent order was entered by this court which (a) allowed India to intervene as a party in interest for the purpose of preserving its alleged rights to the Deposit, (b) extended the temporary restraining order until further order, and (c) continued the hearing on DCA's application for a preliminary injunction until December 1, 1972. On November 8 India filed a petition in which it sought an order (a) dissolving the temporary restraining order, (b) directing the Bank to pay the sight draft, and (c) dismissing DCA's complaint.

As Judge Smith cogently explained in Venizelos, S.A. v. Chase Manhattan Bank, 425 F.2d 461, 464-465 (2d Cir. 1970), a letter of credit is designed to provide an assurance to the selling party of prompt payment upon presentation of documents. Ordinarily, three separate and distinct contracts are involved:

(1) The contract between a bank and its customer (usually the buyer) whereby the bank agrees to issue the letter of credit to the beneficiary (usually the seller);

(2) The contract of sale between the buyer and the seller whereby, among other things, the seller agrees to obtain payment under the letter of credit by drawing drafts thereunder and presenting them to the bank accompanied by documents specified by the buyer; and

(3) The letter of credit itself, which is a contract between the bank and the beneficiary (usually the seller) whereby the bank agrees to pay the drafts drawn under the letter of credit and presented to it by the beneficiary if they are accompanied by the requisite documents.

Long-standing decisional law, which has been codified in the Uniform Commercial Code, establishes that the sole interest of the bank in a letter of credit transaction is in the documents to be presented, unless the parties agree otherwise. Those documents must be exactly as stated in the letter of credit and the bank is obligated to pay only if the beneficiary has strictly complied with the terms of the letter. Sisalcords Do Brazil, Ltd. v. Fiacao Brasileira De Sisal, S.A., 450 F.2d 419 (5th Cir. 1971), cert. denied, 406 U.S. 919, 92 S. Ct. 1771, 32 L.Ed.2d 118 (1972); Venizelos, S.A. v. Chase Manhattan Bank, supra. If he has, the bank must honor his demand for payment regardless of whether the goods or the documents conform to the underlying contract of sale between the beneficiary and the bank's customer. Banco Espanol de Credito v. State Street Bank & Trust Co., 385 F.2d 230 (1st Cir. 1967), cert. denied 390 U. S. 1013, 88 S.Ct. 1263, 20 L.Ed.2d 163 (1968); Uniform Commercial Code § 5-114(1). The bank must honor a demand for payment made by innocent third parties such as a negotiating bank or a holder in due course even if the documents presented with the demand are forged or fraudulent or there is fraud in the transaction. Banco Espanol de Credito v. State Street Bank & Trust Co., 409 F.2d 711 (1st Cir. 1969); Uniform Commercial Code § 5-114(2)(a). If, however, presentment and demand is made by the beneficiary or his agent and there are no innocent third-party holders in due course involved, and prior to payment the bank is notified by its customer of fraud, forgery, or other defect not apparent on the face of the documents presented, the bank has the option of honoring or not honoring the demand, although a court of appropriate jurisdiction may enjoin honor in such a circumstance. Sztejn v. J. Henry Schroder Banking Corp., 177 Misc. 719, 31 N.Y.S.2d 631 (Sup.Ct. 1941); Uniform Commercial Code § 5-114(2)(b).

As may be seen, the present case is the reverse of the ordinary. Here, the seller—DCA—rather than the buyer —India—procured...