Ross Bicycles, Inc. v. Citibank, N.A.

• Decision Date: 25 May 1994
• Citation: 161 Misc.2d 351,613 N.Y.S.2d 538
• Parties: , 24 UCC Rep.Serv.2d 196 ROSS BICYCLES, INC., Plaintiff, v. CITIBANK, N.A., Defendant.
• Court: New York Supreme Court

Page 538

613 N.Y.S.2d 538

161 Misc.2d 351, 24 UCC Rep.Serv.2d 196

ROSS BICYCLES, INC., Plaintiff, v. CITIBANK, N.A., Defendant.

Supreme Court, New York County Part 31.

May 25, 1994.

Arthur Gerwin, New York City (Frederick Sohn, of counsel), for plaintiff.

Varet & Fink, James Carroll and William Coons, New York City, for defendant.

BEVERLY S. COHEN, Justice.

This action to recover under an unsecured irrevocable letter of credit issued by defendant for its customer, the infamous Wedtech Corporation, has had a long and tortured history through the courts. The trial held before me on April 19th, 1994 brings it close to conclusion.

Prior Proceedings

Plaintiff, the beneficiary under an irrevocable letter of credit issued by defendant Citibank for its customer, Wedtech, initially commenced this action by moving for summary judgment in lieu of complaint under CPLR 3213, to recover $189,056.00 due on four dishonored drafts which were presented for payment between May 13 and May 20, 1987. Although a default was entered (see, Ross v. Citibank, 134 A.D.2d 181, 520 N.Y.S.2d 769), defendant's default was opened (Ross v. Citibank, 149 A.D.2d 330, 539 N.Y.S.2d 906) and summary disposition was denied as defendant raised a defense of fraud in the letter of credit transaction (see, Ross v. Citibank, 161 A.D.2d 473, 555 N.Y.S.2d 740).

When forced to commence a plenary action, plaintiff sued to recover $590,000, the balance secured by the letter of credit which remained unpaid. The defendant successfully avoided payment by raising a myriad of defenses, all of which were ultimately stricken (see, Ross v. Citibank, 178 A.D.2d 388, 577 N.Y.S.2d 826).

Decision Directing Trial

Thereafter, by decision dated October 23rd, 1992, the defendant's motion for summary judgment was denied and plaintiff was awarded summary judgment on the four dishonored drafts totalling $189,056.

This Court held that after Citibank had dishonored those four drafts requesting payment, plaintiff Ross Bicycles was not obliged to continue futilely presenting drafts and could recover for the anticipatory breach of the balance of the letter of credit. The Court went on to hold that to establish its right to recovery, however, Ross Bicycles was required to show that it would have been in a position to ship goods (i.e., U.S. Postal Service Mail Containers) and present drafts for the amount of the balance of the letter of credit.

This decision was affirmed by the Appellate Division stating that this Court "properly determined" that to establish damages plaintiff must show "but for Citibank's wrongful repudiation, it would have been ready, willing and able to fulfill its obligations under the contract" (Ross v. Citibank, 200 A.D.2d 379, 380, 606 N.Y.S.2d 192).

The Trial

The only issue remaining to establish liability on plaintiff's claim of anticipatory breach on the balance of the letter of credit tried by the Court in the trial held on April 19th, 1994, was whether plaintiff was ready, willing and able to comply with its obligations under the underlying contract which would have entitled it to present further drafts to defendant for payment under the letter of credit.

Plaintiff clearly established that it could easily have fulfilled the remainder of the contract and satisfy the terms of the letter of credit through testimony of its principal Sherwood Ross.

Defendant was precluded from introducing evidence that plaintiff suffered no damages under the underlying contract with Wedtech because it delivered mail containers to the Postal Service under a separate subsequent contract.

Measure of Damages

A review of the record of the proceedings in this action does not support plaintiff's contention that the amount of plaintiff's damages is already established as the law of the case. Although defendant in the context of its summary judgment motion had unsuccessfully raised the argument that plaintiff suffered no damages, that does not establish as the law of the case that plaintiff is entitled to the balance of the face amount of the letter of credit. In denying defendant summary judgment, the issue of the measure of damages was not reached and not specifically addressed either by this Court or by the Appellate Division. Now that the record is fully developed, the Court will address the measure of plaintiff's damages.

The letter of credit issued by defendant in favor of plaintiff incorporated by its terms the Uniform Customs and Practice for Commercial Documentary Credits ["UCP"], promulgated by the International Chamber of Commerce ["ICC"]. Although not having the force of legislation, the UCP is an internationally accepted codification of banking practice and custom regarding letters of credit. When a letter of credit expressly incorporates the UCP, it becomes a part of the undertaking of the parties and its provisions have binding force.

Plaintiff in claiming the face amount of the draft relies on those provisions which state that the letter of credit is separate from the underlying contract. UCP Article 3 provides that "credits, by their nature are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the credit". UCP Article 4 restates the independence principle that "[i]n credit operations all parties concerned deal in documents, not in goods, services and/or other performances to which the documents may relate". UCP Article 10 provides that "[a]n irrevocable credit constitutes a definite undertaking of the issuing bank, provided that the stipulated documents are presented ...". (Uniform Customs and Practice for Commercial Documentary Credits, ICC pub. No. 400 [1983 Revision].

The independence doctrine is best understood when looked at in the context of the contracts and parties typically involved:

(1) The contract of the bank (Citibank) with its customer (Wedtech) by which the bank agrees to issue the letter of credit to the beneficiary (Ross Bicycles)

(2) The underlying contract between the bank's customer and the beneficiary which results in the letter of credit issuance.

(3) The letter of credit itself, which is a contract between the issuing bank and the beneficiary by which 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.

The New York courts have recognized that the doctrine of independent contracts 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 sale of goods contract and separate as well from any obligation of the issuer to its customer under their agreement (First Commercial Bank v. Gotham, 64 N.Y.2d 287, 486 N.Y.S.2d 715, 475 N.E.2d 1255; Shanghai Commercial Bank v. Bank of Boston Int'l., 53 A.D.2d 830, 385 N.Y.S.2d 548). The rule of the independence of the letter of credit from the underlying transaction is based on two policy considerations. First, the issuing bank can assume no liability for the performance of the underlying contract because it has no control over making the underlying contract or over selection of the beneficiary (see, First Commercial Bank v. Gotham, supra 64 N.Y.2d at 294, 486 N.Y.S.2d 715, 475 N.E.2d 1255). Second, the letter of credit would lose its commercial vitality if, before honoring drafts, the issuing bank were obliged to look beyond the terms of the letter of credit to the underlying contractual controversy between its customer and the beneficiary (see, Bank of Newport v. First National Bank, 687 F.2d 1257, 1261 [8th Cir.1982]. Whatever the bank pays upon the letter of credit it can recover from its customer ordinarily. If the customer feels that the beneficiary was not entitled to that amount, then these parties can litigate under their contract (see, Shanghai Commercial Bank, Ltd. v. Bank of Boston, Int'l., 53 A.D.2d 830, 385 N.Y.S.2d 548). In fact, one of the main purposes of the letter of credit is to place the seller in this stronger position of having the funds while the parties litigate their underlying contract disputes (see, Andreas Lowenfeld, International Private Trade [2nd Ed.] § 5.3 "The Letter of Credit"--["Disputes between the buyer and seller ... do not concern the bank; the irrevocable letter of credit is not subject to a 'stop payment' order"].

Where the issuer of the letter of credit dishonors a proper demand for payment, as defendant Citibank did in this case and therefore further presentation of documents is excused, it is consistent with the independence principle to regard the damages question as beyond the purview of the bank's inquiry rights, that is, as independent of any proof that the beneficiary suffered a loss on the underlying agreement. If...