UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK
July 23, 1982
TRANSAMERICA DELAVAL INC., Plaintiff,
CITIBANK, N.A., Defendant
The opinion of the court was delivered by: WERKER
HENRY F. WERKER, D.J.
Plaintiff, Transamerica Delaval Inc. ("Delaval"), commenced this action to recover from defendant, Citibank, N.A. ("Citibank"), $2,809,333.00 deducted from its account to cover a payment by Citibank pursuant to the letter of credit
agreement between the parties entitled Clean Sight Credit Application and Agreement (the "Credit Agreement"). The parties have cross-moved for summary judgment pursuant to Fed. R. Civ. P. 56. For the reasons that follow, plaintiff's motion is denied and defendant's motion is granted.
While differing as to their legal significance, the parties are in essential agreement as to the salient facts, which may be stated briefly as follows. On December 9, 1975 Delaval entered into a contract (the "Contract") with Electrical Work and Maintenance ("EWM") for the sale of diesel-powered electrical generators to be constructed by Delaval. In order to secure Delaval's performance, the contract provided that Delaval would establish with Citibank's Saudi Arabian Branch in Jeddah ("FNCB Jeddah") an irrevocable letter of guarantee for $2,809,833.00 in favor of EWM payable through Banque du Caire.
In accordance with the Credit Agreement between the parties, Citibank's predecessor, First National City Bank, on November 13, 1975 issued a letter of credit in favor of FNCB Jeddah to support the letter of guarantee issued by FNCB Jeddah. Thereafter, Saudi American Bank ("Samba"), succeeded to the rights and liabilities of FNCB Jeddah under the letter of credit and letter of guarantee. The letter of credit, in relevant part, provided:
EFFECTIVE IMMEDIATELY EXPIRING YOUR OFFICE JULY 31, 1978 UNDER WHICH CASE NEED YOU MAY DRAW ON US MENTIONING OUR CREDIT NO. K-312184 ACCOMPANYING YOUR DRAWING WITH YOUR STATEMENT THAT YOU WERE REQUIRED TO DISBURSE THE AMOUNT THEREOF UNDER YOUR UNDERTAKING.
The letter of credit and the letter of guarantee were later extended. The letter of credit was extended with Delaval's consent to September 30, 1981 and accordingly has since expired.
The letter of guarantee was extended with Delaval's consent to August 31, 1981, and apparently by Samba to August 31, 1982 without Delaval's consent.
A dispute between Delaval and EWM arose respecting Delaval's performance under the Contract. On or about July 21, 1981, EWM wrote to Banque du Caire stating that Delaval had failed to fulfill its contractual obligations and instructed Banque du Caire to obtain an extension of the letter of guarantee up to August 31, 1982. On September 1, 1981 Samba sent to Citibank the third in a series of similar telexes requesting either an extension of the guarantee or payment of the full value of the guarantee. Samba's September 1, 1981 telex in part stated:
BENE [EWM] HAS REFUSED REFUSED TO ACCEPT GTEE EXTENSION OF 6 MONTHS STP THEY HAVE GIVEN US TILL THURSDAY I.E. SEPT. 03.81 EITHER TO EXTEND GTEE TO ONE YEAR OR PAY THEM USDLR 2,809,333.00 STP WE WILL AWAIT YOUR INSTRUCTIONS TILL THEN IF WE DO NOT HEAR FROM YOU FUNDS WILL BE PAID THEREFORE EITHER ARRANGE EXTENSION OR CREDIT OUR ACCOUNT FOR VALUE OF UR LC STP ANY DELAY FROM SEPT 03.81 ONWARD WILL BE PAID WITH INTEREST STP HOPE TO RECEIVE A POSITIVE REPLY STP
Upon being informed by Delaval that it would not consent to an extension of the letter of guarantee, on September 2, 1982 Citibank honored Samba's demand for payment under the letter of credit and accordingly paid to Samba $2,809,333.00.
After being informed that the funds in Delaval's Citibank account were insufficient to cover the amount paid by Citibank to Samba under the letter of credit, Delaval transferred to its Citibank account $2,500,000.00 on September 2, 1981. Citibank obtained full reimbursement of its payment to Samba by debiting this deposit accordingly. Apparently, Samba is currently in possession of the funds paid by Citibank under the letter of credit.
I am mindful that in passing upon a motion for summary judgment, "the court cannot try issues of fact; it can only determine whether there are issues to be tried." American Manufacturers Mutual Insurance Co. v. American Broadcasting-Paramount Theatres, Inc., 388 F.2d 272 (2d Cir. 1967), and that the affidavits and exhibits submitted by the parties "must be viewed in the light most favorable to the party opposing the motion." Quinn v. Syracuse Model Neighborhood Corp., 613 F.2d 438, 444-45 (2d Cir. 1980).
However, although summary judgment is never lightly granted, it has been recognized that letter of credit disputes are frequently appropriate for final adjudication upon submission of papers and affidavits. Data General Corp. v. Citizens National Bank of Fairfield, 502 F. Supp. 776, 779 (D. Conn. 1980). This is so undoubtedly because these disputes usually present legal issues relating to an exchange of documents rather than questions of fact. Id. Thus, in view of the fact that the parties here merely "dispute the significance of the events." Data General Corp. v. Citizens National Bank of Fairfield, supra, 502 F. Supp. at 779 (D. Conn. 1980) but do not dispute which events actually occurred, I believe that summary resolution of this controversy is appropriate.
The central issue presented by this case is whether Samba's demand upon Citibank for payment, contained in its telexes of August 6, 1981, August 31, 1981 and September 1, 1981, was in compliance with the conditions specified in the letter of credit issued by Citibank. If the demand for payment complied with the letter of credit, Citibank's payment pursuant to that demand was proper. However, if the demand did not comply with the terms of the letter of credit, Citibank's payment was wrongful and it thereby breached its contract with Delaval. For such a breach, Citibank would be liable for damages in the amount charged to Delaval's account as a result of the wrongful payment. Interco, Inc. v. First National Bank of Boston, 560 F.2d 480, 485 (1st Cir. 1977).
U.C.C. § 5-103(1)(a) defines a letter of credit as follows:
. . . an engagement by a bank or other person made at the request of a customer and of a kind within the scope of this Article . . . that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit.
The parties disagree as to the standard that should be applied in judging whether Samba's demand was in "compliance with the conditions specified in the credit." Delaval, while arguing that the demand failed to comply under any standard, contends that a demand must strictly comply with the terms of the letter of credit. Chase Manhattan Bank v. Equibank, 550 F.2d 882 (3d Cir. 1977); International Leather Distributors, Inc., v. Chase Manhattan Bank, 464 F. Supp. 1197, 1201 (S.D.N.Y.), aff'd, 607 F.2d 996 (2d Cir. 1979).
Citibank, on the other hand, argues that a strict standard should only apply when suit is brought against the issuer by the beneficiary of the letter of credit. Where suit is brought against the issuing bank by its customer, however, Citibank contends that "the demand need only substantially comply with the material requirements of the letter of credit." This is a so-called "bifurcated standard", which turns upon the party bringing suit. Far Eastern Textile, Ltd. v. City Nat'l Bank and Trust, 430 F. Supp. 193, 196 (S.D. Ohio 1977).
The commentators and the courts have noted that 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." Far Eastern Textile, Ltd. v. City Nat'l Bank and Trust, supra, 430 F. Supp. at 196 (quoting J. White & R. Summers, Uniform Commercial Code § 18-6 at 620 (1972)). Whether a "strict compliance" or a less stringent "substantial performance" standard is employed here is of particular moment, since I am of the opinion that Samba's demand while not literally or strictly in accordance with the language of the letter of credit, did substantially comply with the terms of the letter of credit such that Citibank's payment pursuant to that demand was reasonable and proper under the circumstances. I conclude that application of a substantial compliance test in the context present here is a better view for the following reasons.
Delaval's cause of action rests upon its Credit Agreement with Citibank, not the letter of credit issued by Citibank to FNCB Jeddah (later succeeded by Samba). While the letter of credit was clearly contemplated by the Credit Agreement, it is an independent contract. Foreign Venture v. Chemical Bank, 59 A.D.2d 352, 355-56, 399 N.Y.S.2d 114, 116 (1st Dep't 1977).
In the Credit Agreement, Delaval did not insist upon or even specify particular language which would constitute a proper demand for payment by the beneficiary under the letter of credit. By failing to set forth specific language, Delaval necessarily relied upon Citibank to establish the language which would constitute a proper demand for payment by the beneficiary. Citibank assumed the responsibility for establishing the required demand in its letter of November 13, 1975 and telex of December 1, 1975, which set forth the terms of the letter of credit between FNCB Jeddah (succeeded by Samba) and Citibank.
Having failed to specify the language to be contained in the demand pursuant to the letter of credit, it is unreasonable for Delaval to insist upon strict compliance with the language which Citibank selected and determined in good faith had been substantially complied with. If Delaval sought precise compliance with particular language, it was incumbent upon Delaval to set forth the precise language it desired. This it could have done in the space contained in the Credit Agreement which allowed for "Remarks".
The letter of credit stated that the demand must include a statement that "YOU [Samba] WERE REQUIRED TO DISBURSE THE AMOUNT THEREOF UNDER YOUR UNDERTAKING." Samba's August 6, 1981 telex stated: "WE ARE REQUESTED BY THE BENEFICIARIES TO EXTEND THE SUBJECT GUARANTEE FOR FURTHER ONE YEAR . . . PLS TELEX US YOUR COUNTER GUARANTEE APPROVAL FOR THE REQUESTED EXTENSION OR CONSIDER THIS OUR DEMAND FOR FULL VALUE OF THE GUARANTEE". The September 1, 1981, telex,
from Samba stated "BENF HAS REFUSED TO ACCEPT GTEE EXTENSION FOR 6 MONTHS STP THEY HAVE GIVEN US TILL THURSDAY I.E. SEPT 03, 81 EITHER TO EXTEND GTEE TO ONE YEAR OR PAY THEM . . . STP WE WILL AWAIT UR INSTRUCTIONS TILL THEN IF WE DO NOT HEAR FROM YOU FUNDS WILL BE PAID THEREFORE EITHER ARRANGE EXTENSION OR CREDIT OUR ACCOUNT FOR VALUE OF UR LC STP ANY DELAY FROM SEPT 03, 81 ONWARD WILL BE PAID WITH INTEREST" There can be little doubt that by virtue of these telexes Samba was indicating to Citibank in no uncertain terms that it would pay the guarantee by September 3 and that it was demanding that if Citibank did not obtain an extension of the letter of credit then Citibank was to pay the letter of credit.
In the face of Samba's demand, I cannot find that Citibank's payment was wrongful. In the course of normal banking practices, Citibank cannot be held responsible for Samba's failure to disburse the funds under its letter of guarantee after representing on September 1 that if the extension was not obtained "FUNDS WILL BE PAID". Though not named as a party here, it is clear to this court that, based on the facts before it, the wrongdoer in this transaction, if there is one, is Samba for failing to follow through on its representation to pay funds pursuant to the letter of guarantee.
Accordingly, Delaval's motion for summary judgment is denied and Citibank's cross-motion for summary judgment is granted. There being no just cause for delay, defendant is directed to submit an appropriate judgment on notice within 10 days from entry of this order