Mennen v. J.P. Morgan & Co., Inc.

• Decision Date: 02 December 1997
• Citation: 91 N.Y.2d 13,689 N.E.2d 869,666 N.Y.S.2d 975
• Parties: , 689 N.E.2d 869, 34 UCC Rep.Serv.2d 162, 1997 N.Y. Slip Op. 10,222 Herbert MENNEN et al., Respondents, v. J.P. MORGAN & CO. INCORPORATED, Defendant, and Morgan Guaranty Trust Company of New York, Appellant.
• Court: New York Court of Appeals Court of Appeals

Page 975

666 N.Y.S.2d 975

91 N.Y.2d 13, 689 N.E.2d 869, 34 UCC

Rep.Serv.2d 162,

1997 N.Y. Slip Op. 10,222

Herbert MENNEN et al., Respondents, v. J.P. MORGAN & CO. INCORPORATED, Defendant and Morgan Guaranty Trust Company of New York, Appellant.

Court of Appeals of New York.

Dec. 2, 1997.

Levi & Lubarsky, New York City (Howard B. Levi, of counsel), and Hiscock & Barclay, L.L. P., Buffalo, for appellant.

Kavinoky & Cook, L.L.P., Buffalo (Marilyn A. Hochfield, Lauren D. Rachlin and Todd K. Card, of counsel), for respondents.

OPINION OF THE COURT

BELLACOSA, Judge.

This financial dispute occurs as the aftermath of payments made in precise compliance with letters of credit. Morgan Guaranty Trust Co., the defendant issuing bank, seeks to recover for alleged overpayments to the plaintiffs who are the beneficiaries of the subject letters of credit. Morgan had honored the drafts from the beneficiaries holding the irrevocable standby letters of credit, upon their presentation of conforming documentation. Months later, Morgan alleged some falsity in that respect.

Plaintiffs commenced this action seeking a declaration (1) that their beneficial draws on the subject letters of credit were correct in amount, and (2) that defendant Morgan may not assert claims against plaintiffs by reaching beyond the letters of credit themselves.

Supreme Court granted part of defendant Morgan's motion for summary judgment as to its counterclaims. The Appellate Division modified by denying Morgan's motion; instead, it granted plaintiffs' cross motion for summary judgment, dismissed Morgan's first five counterclaims and declared that Morgan has no claim against plaintiffs concerning the draws upon the letters of credit. This Court granted defendant Morgan leave to appeal. We affirm for reasons different from those expressed by the Appellate Division.

I.

This case arises from a 1991 stock buy-out of Mennen Medical, Inc., in which plaintiffs were major shareholders. Plaintiffs sold their shares to a group of investors including an entity named Odyssey Partners, L.P. To finance the transaction, Mennen executed and delivered a five-year promissory note to each plaintiff. The notes were identical except for the names of the shareholders and the amount of the note. Each note called for five equal annual payments of principal commencing September 1991, with monthly interest payments the first year, followed by annual interest payments on subsequent anniversary dates. The notes also contained an acceleration clause to cover defaults.

To secure the notes for payment to bought-out shareholders, Mennen obtained standby irrevocable letters of credit from defendant Morgan Guaranty Trust Company. Each letter of credit is identical in form except for the named beneficiary and face amounts. The letters of credit provide for payment within 10 days after presentation of a draft accompanied by a notarized statement that the draw represents an unpaid note installment or that the outstanding balance is due as a consequence of default. The letters of credit also include a standard merger clause to the effect that they reflect the full contractual undertaking and that "such undertaking shall not in any way be modified, amplified or amended by reference to any document, instrument, agreement or note referred to herein and any such reference shall not be deemed to be incorporated herein by reference to any such document, instrument, agreement or note." The letters of credit also expressly provide that they are subject to the Uniform Customs and Practice for Documentary Credits (UCP).

Mennen Medical, the obligor, timely paid the first two installments due under the promissory notes. Eventually, Odyssey took financial control of the group of investors who had purchased the Mennen stock. Prior to the third due payment, Odyssey defaulted on its obligations, and plaintiffs accelerated the notes and drew upon the maximum payment provided under the letters of credit.

Morgan promptly paid the respective draws to the beneficiaries of the letters of credit. Several months later, however, Morgan concluded that the amounts it had paid exceeded the amounts due under the promissory notes themselves. Morgan demanded reimbursement from plaintiffs for the alleged overpayments totaling approximately $230,000. Morgan alleged misstatements of the amounts declared to have been owing in the notarized draw statements. The beneficiaries retorted that the "overpayments" represented a premium above the face amounts of the notes, orally negotiated at the time of the purchase. They added that the premiums were designed to compensate them for increased tax liabilities upon acceleration and for the loss of future interest.

Notably, Morgan had contractually relinquished the right to seek reimbursement from its customer Odyssey through a defeasance agreement between those two parties. Under the defeasance device, Morgan, in exchange for an up-front, lump-sum payment, released Odyssey from any subsequent obligation to reimburse Morgan for any amounts Morgan paid to the beneficiaries pursuant to the letters of credit.

The beneficiaries preemptively sued for a declaration that their draws under the letters of credit were correct in amount and that Morgan enjoyed no separate rights over against them. Morgan counterclaimed for alleged overpayments under theories of money had and received, breach of contract, payment by mistake, unjust enrichment, negligent misrepresentation, and fraud. It moved for summary judgment and plaintiffs cross-moved for similar relief and for dismissal of the counterclaims.

Supreme Court dismissed Morgan's fraud counterclaim, but granted it summary judgment on the other counterclaims. The court determined that the letters of credit payments exceeded the amounts due on the underlying promissory notes secured by the letters of credit. With regard to Morgan's fraud counterclaim, however, the court reasoned that dismissal was necessitated by the fact that Morgan had not submitted any admissible evidentiary proof evoking a disputed issue of material fact which would require a trial on the issue of fraud. On the contrary, the court determined that plaintiffs had established a legal basis for their entitlement to the later-disputed premium amounts.

The Appellate Division modified, holding that Morgan has no claim against plaintiffs concerning their draws upon their letters of credit (229 A.D.2d 237, 653 N.Y.S.2d 1010). It gave full relief to plaintiffs and none to defendant. The Court reasoned that Supreme Court's in-part favorable ruling for Morgan "violates the principle that a letter of credit is independent of other contracts associated with it" (id., at 238, 653 N.Y.S.2d 1010). The Court stated that "[t]he only relationship between Morgan Guaranty and each plaintiff was the letter of credit, an instrument separate and distinct from either of the two underlying contracts" (id., at 240, 653 N.Y.S.2d 1010). Additionally, the Court declared that "[t]he fact that Morgan Guaranty terminated its contract with its customer [Odyssey] does not give any new or additional rights to Morgan Guaranty against the beneficiaries of the independent letters of credit. All parties chose to allocate risks when they entered into the letter of credit arrangement, and the courts should not reallocate those risks" (id., at 241, 653 N.Y.S.2d 1010).

On this appeal, appellant Morgan argues that it should be entitled to recover overpayments made to plaintiffs on the UCP-governed letters of credit pursuant to pre-Uniform Commercial Code common law, notwithstanding that plaintiffs' allegedly false documentation facially complied with the terms of the instrument. Morgan contends that it did not learn until after making payments that the documents fraudulently (as it perceives and alleges the circumstance) specified the amounts owing and, as such, it should be permitted to assert a claim against the payee beneficiaries subsequent to satisfaction pursuant to the letters of credit.

II.

"The purpose of a letter of credit is to substitute for, and therefore support, an engagement to pay money" (First Commercial Bank v. Gotham Originals, 64 N.Y.2d 287, 294, 486 N.Y.S.2d 715, 475 N.E.2d 1255; see, Dolan, Letters of Credit: Commercial and Standby Credits p 2.02, at 2-4 [2d ed] ). "By issuing a letter of credit, the issuer undertakes an obligation to pay the beneficiary * * * from the account of its customer" (First Commercial Bank v. Gotham Originals, supra, 64 N.Y.2d, at 294, 486 N.Y.S.2d 715, 475 N.E.2d 1255).

Letters of credit typically involve three separate contractual relationships and undertakings: the underlying contract between the customer and the beneficiary; the agreement between the bank and its customer, by which the letter of credit is issued in exchange for the customer's promise to reimburse the bank; and, the letter of credit itself, which represents the financial institution's commitment to honor drafts presented by the intended beneficiary upon compliance with the terms and conditions specified in the instrument (First Commercial Bank v. Gotham Originals, supra, 64 N.Y.2d, at 294, 486 N.Y.S.2d 715, 475 N.E.2d 1255 [citing United Bank v. Cambridge Sporting Goods Corp., 41 N.Y.2d 254, 258-259, 392 N.Y.S.2d 265, 360 N.E.2d 943]; see, All Serv. Exportacao, Importacao Comercio v. Banco Bamerindus, 921 F.2d 32, 34 (2nd Cir.1990)).

"[A] fundamental principle governing these transactions is the doctrine of independent contracts," which "provides that the issuing bank's obligation to honor drafts drawn on a letter of credit by the beneficiary is separate and independent from any obligation of its customer to the beneficiary under the * * * contract and separate as well from any obligation of the issuer to its customer under their agreement" (First Commercial Bank v. Gotham Originals, supra, 64 N.Y.2d, at 294, 486 N.Y.S.2d 715, 475 N.E.2d 1255 [citing UCC 5-114(1) ] ). "Stated...