Merchants Bank of New York v. Credit Suisse Bank

• Decision Date: 20 April 1984
• Docket Number: No. 83 Civ. 6277 (RLC).,83 Civ. 6277 (RLC).
• Citation: 585 F. Supp. 304
• Parties: The MERCHANTS BANK OF NEW YORK, Plaintiff, v. CREDIT SUISSE BANK, Defendant.
• Court: U.S. District Court — Southern District of New York

585 F. Supp. 304

The MERCHANTS BANK OF NEW YORK, Plaintiff, v. CREDIT SUISSE BANK, Defendant.

No. 83 Civ. 6277 (RLC).

United States District Court, S.D. New York.

April 20, 1984.

COPYRIGHT MATERIAL OMITTED

Simon, Meyrowitz & Meyrowitz, New York City, for plaintiff; Paul Meyrowitz, New York City, of counsel.

Milbank, Tweed, Hadley & McCloy, New York City, for defendant; Andrew J. Connick, Sarah C. Lichtenstein, New York City, of counsel.

OPINION

ROBERT L. CARTER, District Judge.

Defendant Credit Suisse Bank ("Credit Suisse") brings this motion to dismiss the complaint against it pursuant to Rule 12(b)(6), F.R.Civ.P., for failure to state a claim on which relief can be granted. Credit Suisse was sued by the Merchants Bank of New York ("Merchants") for damages which Merchants claims it sustained in consequence of Credit Suisse's wrongful dishonor of an irrevocable letter of credit. Merchants, which acted as the advising bank in the letter of credit transaction, also claims that Credit Suisse breached certain duties with respect to it, which exposed Merchants to liability to Continental Time Corp. ("Continental"), the beneficiary of the letter of credit. Continental was never paid under the letter of credit and consequently sued Merchants. The latter paid Continental $150,000 in settlement of that suit.

Merchants has set forth four claims in its complaint against Credit Suisse based upon contract, fraud and bad faith, contribution and indemnification. For the reasons discussed below, Credit Suisse's motion to dismiss is granted with respect to the contract and contribution claims. Merchants has stated a valid cause of action with respect to the remaining two.

Background

1. The Letter of Credit

At the request of Credit Suisse's customer, George Bloch, Credit Suisse issued an irrevocable letter of credit in the amount of $236,961.90, in favor of Continental, which was a customer of Merchants. The money was payable against the delivery of certain documents enumerated in the letter with respect to a shipment of watches from Continental in the United States to Bloch in Switzerland. Merchants advised Continental of the issuance of the letter of credit and of its terms and conditions.

On January 23, on behalf of Continental, Merchants presented documents to Credit Suisse for the purpose of collecting payment under the letter of credit arrangement. Alleging certain discrepancies in the documents, Credit Suisse refused them. By telex dated January 29, it requested authorization from Merchants to present the documents on a collection basis.¹ By return telex the same day, Merchants advised Credit Suisse that it could present the documents on a collection basis. Credit Suisse accordingly presented the documents to Bloch. Bloch refused to pay, claiming a set-off based upon an alleged debt of Continental to a third party, which had, Bloch maintained, been assigned to him prior to the issuance of the letter of credit. On February 13, two days after the letter of credit expired, Merchants demanded by telex immediate payment from Credit Suisse. Credit Suisse did not honor the demand. The irrevocability of the letter of credit had been destroyed once it became a collection item.

2. Other Litigation

In January, 1980, Continental assigned 83.3% of the $236,961.90 proceeds of the letter of credit to S. Frederick and Co. ("Frederick"), and in January, 1981, it assigned the remainder (16.6%) of the proceeds to Arlington Distributing Co., Inc. ("Arlington"). In May, 1980, both assignees brought separate actions, which were later consolidated, against Credit Suisse in the Civil Court of the Canton of Vaud, Switzerland to recover proceeds based on Credit Suisse's alleged wrongful dishonor.² In November, 1981, Continental sued Credit Suisse in this court to recover under the letter of credit on grounds that Credit Suisse wrongfully refused to pay. (In March, 1982, Frederick had assigned back to Continental 75% of its share (62.5% of the entire proceeds)). Judge Lasker dismissed the action in favor of the action pending in Switzerland on condition that Credit Suisse not oppose the intervention of Continental there. Continental Time Corp. v. Swiss Credit Bank, 543 F.Supp. 408 (S.D.N.Y.1982). Credit Suisse brought Bloch into that suit.

Although Continental has not yet intervened in the Swiss suit, in August, 1982, it sued Merchants in the New York State Supreme Court for negligence, misfeasance and/or nonfeasance, and for breach of Merchants' contractual duties under the Uniform Commercial Code ("UCC").³ Continental's motion for summary judgment was granted on February 10, 1983, Continental Time Corp. v. Merchants Bank of New York, 117 Misc.2d 907, 459 N.Y.S.2d 396 (Sup.Ct. New York County, 1983). Merchants moved for leave to renew its opposition to Continental's motion for summary judgment upon submission of additional affidavits. The state court granted this motion and upon renewal denied the motion for summary judgment. (Merchants' Exh. M). The material issue raised by Merchants was whether or not it had requested and received instructions from Continental directing Merchants to authorize Credit Suisse to place the letter of credit on a collection basis. Merchants settled the state court action for $150,000, which is the amount it now seeks to recover from Credit Suisse.

Discussion

1. The Contract Claim

Merchants' contract claim rests mainly upon the proposition that its settlement with Continental entitles it to "step into the shoes" of Continental with regard to the latter's right to the proceeds of the letter of credit up to the amount of the settlement payment.⁴ Combined with this argument is Merchants' vague assertion of an implied contract, quasi-contract, or unjust enrichment theory that would entitle Merchants to reimbursement of the settlement amount based on the existence of a duty between itself and Credit Suisse under the letter of credit agreement. These claims can be evaluated only by sorting through the parties' obligations to one another in the context of the letter of credit.

A letter of credit transaction⁵ involves three separate and independent relationships: 1) an underlying sale of goods contract between buyer (Bloch) and seller (Continental); 2) an agreement between a bank (Credit Suisse) and its customer (the buyer, Bloch) in which the bank assents to issue a letter of credit; and 3) the bank's (Credit Suisse's) resulting engagement to pay the beneficiary (the seller, Continental) on the condition that certain documents presented to the bank conform with the terms of the credit issued on its customer's behalf. Voest-Alpine Int'l Corp. v. Chase Manhattan Bank, N.A., 707 F.2d 680, 682 (2d Cir.1983); Cf. International Leather Distributors Inc. v. Chase Manhattan Bank, N.A., 464 F.Supp. 1197, 1201 n. 9 (S.D.N.Y.) (Werker, J.), aff'd, 607 F.2d 996 (2d Cir.1979). An advising bank, the part filled by Merchants, assumes no, or very limited responsibilities under the letter of credit arrangement. It is considered a neutral party, important in forging some connection between the issuing bank and the beneficiary, parties which generally have no prior link. The advising bank is confined to transmitting information and authenticating the information transmitted, and therefore assumes no liability to the party addressed, except liability for accurate transmission. RSB Mfg. Corp. v. Bank of Baroda, 15 B.R. 650, 654 (S.D.N. Y.1981) (Sand, J.); H. Harfield, supra at 10-11.⁶

Because the advising bank has no contractual obligation to the beneficiary under the letter of credit, the settlement between Merchants and Continental did not implicate either of their rights pursuant to the letter. Rather, the suit brought by Continental against Merchants was based upon what the New York State court termed "the documentary draft aspect" of the transaction. Continental Time Corp. v. Merchants Bank, supra, 459 N.Y.S.2d at 397. It concerned Merchants' liability to Continental based solely upon obligations imposed by UCC article 4 on Merchants in its capacity as a collecting bank.⁷ The obligations existed independent of any imposed under the letter of credit agreement which was governed not by UCC article 4, but by the Uniform Commercial Practices ("UCP"). The settlement paid by Merchants redressed only the former obligations.⁸ Nothing in the settlement agreement —explicitly or implicitly—gives to Merchants Continental's right to proceed against Credit Suisse for the latter's alleged wrongful dishonor of the letter of credit agreement. Merchants' attempted leap into Continental's shoes makes no sense against this background.

Merchants asserts, however, that at least one case has recognized its rights to proceed against Credit Suisse based apparently on some theory of implied or quasi-contract. In Banco Nacional de Desarrolla v. Mellon Bank, N.A. ("Banco Nacional"), 558 F.Supp. 1265 (W.D.Pa.1983), rev'd, 726 F.2d 87 (3d Cir.1984), an advising bank did bring suit against an issuing bank under a letter of credit to recover the face amount of the beneficiary's draft, which it had paid, but which the issuing bank had refused to honor. The district court ruled that Banco, the advising bank, had not wrongfully honored the draft under the terms of an amendment approved by the court as part of the letter of credit. Therefore, the advising bank was entitled to reimbursement from Mellon, the issuing bank, which was still responsible for payment. Id. at 1270. On appeal, the third circuit reversed on the ground that the draft at issue had not been presented as part of the letter of credit agreement, and therefore, both the seller (beneficiary) and the advising bank acted at their peril. Consequently, the court held that the issuing bank had no obligation to honor the draft and the advising bank was not entitled to reimbursement for payment on that draft.

Neither the district nor the circuit court opinion provides Merchants with support...