Far Eastern Textile, Ltd. v. City Nat. Bank & Trust Co.

• Decision Date: 20 April 1977
• Docket Number: No. C-2-75-603.,C-2-75-603.
• Parties: FAR EASTERN TEXTILE, LTD., et al., Plaintiffs, v. CITY NATIONAL BANK AND TRUST COMPANY et al., Defendants.
• Court: U.S. District Court — Southern District of Ohio

430 F. Supp. 193

FAR EASTERN TEXTILE, LTD., et al., Plaintiffs, v. CITY NATIONAL BANK AND TRUST COMPANY et al., Defendants.

No. C-2-75-603.

United States District Court, S. D. Ohio, E. D.

April 20, 1977.

Alan Kay, Bregman, Abell, Solter & Kay, Washington, D.C., Robert Shamansky, Feibel, Feibel, Shamansky & Rogovin, Columbus, Ohio, for plaintiffs.

Bruce G. Lynn, Bricker, Evatt, Barton & Eckler, Columbus, Ohio, for defendant City Nat. Bank & Trust Co.

John D. Holschuh, Alexander, Ebinger, Holschuh, Fisher & McAlister, Columbus, Ohio, for defendants Nu-Look Fashions Menswear, Inc., Larry Fannin, and R. Paul Thomas.

OPINION AND ORDER

KINNEARY, District Judge.

This matter is before the Court on the motion of defendant City National Bank and Trust Company CNB for summary judgment. The affidavit of one of CNB's officers as well as certain exhibits have been filed with the motion. Plaintiffs have submitted a memorandum in opposition but no accompanying affidavits, and CNB has replied to that memorandum. Plaintiffs' Washington D.C. counsel requested the opportunity to present oral argument on this motion, but that request was denied by order of this Court entered March 1, 1977.

CNB's motion turns on a very narrow issue of commercial law. One of the defendants in this case, Nu-Look Fashions Menswear, Inc., n/k/a Nu-Look Fashions, Inc. Nu-Look, had entered into a contract with plaintiff Far Eastern Textile, Ltd. Far Eastern to purchase a quantity of men's clothing to be manufactured by Far Eastern. To facilitate this transaction, Nu-Look had at the same time caused CNB to issue a letter of credit in favor of Far Eastern for $339,192.00. Among the documents required by the terms of the letter of credit were an "Original Purchase Order Signed by Larry Fannin and Accepted by Seller," and an "Inspection Certificate Signed by Larry Fannin and Harry Le Beau." This letter of credit was amended twice, with the December amendment changing the terms of the inspection certificate requirement to read "Inspection Certificate may be Signed by either Larry Fannin, or Paul Thomas, or Harry Le Beau." Fannin and Thomas are the two individual defendants in this action. Fannin has been the president, and Thomas the national sales director, of Nu-Look during all times relevant to this proceeding.

In December 1973 Fannin and Thomas traveled to Taiwan to inspect the first one thousand pairs of trousers manufactured by Far Eastern. They found this sample unacceptable and rejected the goods. An accommodation was reached, however, and the initial purchase order rewritten. A subsequent trip was made in February 1974, this time without Fannin. There is some dispute over whether Thomas again found plaintiff's product unsatisfactory, and consented to a partial shipment on the representation that improvements would be made, or whether he approved the product and an initial shipment of 384 pairs of pants. In any event, plaintiff shipped 384 pairs of pants to Nu-Look.

On Far Eastern's behalf, the corresponding documents of title were presented to CNB for payment against the outstanding letter of credit. CNB, however, discovered "certain discrepancies" and refused to honor the draft until requisite assurances could be obtained from Fannin. Permission was obtained and, on March 22, 1974, the draft was paid. One of these discrepancies was an original purchase order signed "Larry Fannin by Paul Thomas" rather than simply "Larry Fannin." Plaintiffs, however, vigorously assert that this particular discrepancy did not contribute to CNB's decision to seek assurances.

Meanwhile, on March 10, 1974, Far Eastern had shipped nearly 4000 dozen pairs of men's pants to Nu-Look. The draft against the letter of credit was presented for payment on March 19, 1974, and on March 20 CNB discovered two discrepancies in the documents. One of these, as before, was that the purchase order had been signed "Larry Fannin by Paul Thomas" rather than simply "Larry Fannin." CNB again sought permission to pay, but this time such permission was refused.

Far Eastern has made CNB a defendant in this action primarily on the basis of its failure to pay in accordance with the terms of its irrevocable letter of credit. Other claims have been made that CNB perpetrated fraud and participated in a scheme to defraud Far Eastern and the International Commercial Bank of China. It appears from the complaint that the only possible participation of CNB in the alleged fraud lay in its refusal to pay according to the terms of its letter of credit (this is the only particular which is specifically alleged in plaintiff's complaint, as required by Rule 9(b), Federal Rules of Civil Procedure). That allegation will be briefly considered following the Court's analysis of the main claim. Thus, the narrow issue presently before this Court for resolution is whether an agent's signature on behalf of his principal may constitute a signature of the principal, when that is required by the terms of a letter of credit.

Preliminarily, it is necessary to indicate certain factors which must govern this Court's decision and boundaries which must be placed on its application. As all parties to this litigation recognize, a letter of credit transaction usually comprises three contracts: the contract between the issuing bank and its customer, the contract between the bank's customer and the beneficiary of the letter of credit, and the contract between the issuing bank and the beneficiary. The contract between the bank and the beneficiary, which is the letter of credit itself, is entirely independent of the other two contracts. As a result, defenses which might be available in actions brought under the main contracts are often not available to a party breaching a bank-beneficiary letter of credit agreement. See Venizelos, S. A. v. Chase Manhattan Bank, 425 F.2d 461, 464-65 (2d Cir. 1970). That agreement is determined solely by the letter of credit itself. If the beneficiary's demand for payment conforms to the terms of the letter, then the issuer is obligated to pay irrespective of any nonconformity in goods shipped and irrespective of most defenses which the bank's customer can separately raise against the beneficiary. Ohio Rev.Code § 1305.13 (Page 1962). See also Sisalcords do Brazil, Ltd. v. Fiacao Brasileira de Sisal, S. A., 450 F.2d 419, 422 (5th Cir. 1971), cert. denied, 406 U.S. 919, 92 S.Ct. 1771, 32 L.Ed.2d 118 (1972). On the present motion then, this Court is concerned strictly with CNB's nonconforming signature defense. A decision in CNB's favor would mean that CNB was not obligated under the letter of credit to pay upon presentment of the draft by the International Commercial Bank of China. It would not affect the liability, if any, of the other defendants in this action. Any question involving the underlying agreement, including the alleged fraudulent signature of Harry LeBeau on the inspection certificate, is not relevant and has not been considered by the Court.

This Court of course recognizes that in ruling on a motion for summary judgment, "the inferences to be drawn from the underlying facts contained in such materials must be viewed in the light most favorable to the party opposing the motion." United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 994, 8 L.Ed.2d 176 (1962). The Court will assume, for the purposes of this motion only, that Thomas had the authority to act as Fannin's agent and that his authority was known to CNB. The Court will further assume that CNB did not have the signature discrepancy in mind when it contacted Fannin for permission to pay the first draft.

In deciding this motion, the Court finds itself forced to navigate between the Scylla of overly strict construction of letters of credit and the concomitant stranglehold which that could place on international commerce, and the Charybdis of loose construction with the accompanying loss of protection to the party obtaining the letter of credit. The course is largely uncharted. The Uniform Commercial Code failed to specify "whether strict compliance with the terms of the letter is necessary or whether `substantial performance' will do," although it "should have" done so. J. White & R. Summers, Uniform Commercial Code § 18-6 at 620 (1972). Pre-Code law sheds little additional light. Due in large part to regulation by the banks themselves, "there has been astonishingly little litigation on the subject of letters of credit." Mead Corp. v. Farmers and Citizens Bank, 14 Ohio Misc. 163, 232 N.E.2d 431, 433 (C.P. 1967).

New York, which supplies most of the case law in this area, would apply a bifurcated standard. It would require strict compliance with the terms of the letter when the bank is being sued by the beneficiary for refusing to honor drafts on presentment. On the other hand, it would apply a substantial compliance test when...