Bank of Cochin, 612 F. Supp. at 1538 ("the ultimate customer . . . may be barred from a direct action against the confirming bank because of the absence of privity"); Dulien Steel Prods., Inc. v. Bankers Trust Co., 189 F. Supp. 922, 929 (S.D.N.Y. 1960) (lack of privity argument "may have some merit"), aff'd, 298 F.2d 836 (2d Cir. 1962).
Courts in other circuits have emphasized that in letter-of-credit transactions, banks have no liability to persons with whom they have had no direct contact. In Confeccoes Texteis de Vouzela v. Riggs Nat'l Bank, 301 U.S. App. D.C. 304, 994 F.2d 851, 853-854 (D.C. Cir. 1993), the Court disallowed plaintiffs' claim that a confirming bank owed them a duty. The Court emphasized that under the UCC, the "only duty owed by a confirming bank is to its customer, the issuing bank." Id. at 853 (emphasis in original). In Sound of Market Street, Inc. v. Continental Bank Int'l, 819 F.2d 384, 394 (3rd Cir. 1987), the Third Circuit interpreted New York law to hold that an advising bank owed no statutory or tort duty to a mere potential beneficiary. The Tenth Circuit held in Arbest Constr. Co. v. First Nat'l Bank & Trust Co. of Oklahoma City, 777 F.2d 581, 584 (10th Cir. 1985), that nonassignee third parties to a letter of credit had no rights against the issuing bank. The Court found that this limiting rule was "grounded in policy." Id. It is to this policy that I now turn.
A fundamental principle of letter-of-credit law provides that the issuer remains immune from all "responsibilities to police the underlying transaction." Id. Holding an issuing bank liable to third parties would not only defeat this principle of separation, but also would inhibit the willingness of a bank to extend credit. The issuing bank concerns itself only with the applicant's financial reliability, and it is on this basis alone that the bank becomes involved in a transaction. For a bank to be liable even potentially to undisclosed principals would force it to investigate the background of other entities or persons. Forcing an issuing bank into this investigative role would conflict with the goals of increasing the efficiency of commercial transactions, and limiting the liability of issuing banks. As the Fifth Circuit noted, "the exchange function of the letter of credit rests upon objective predictable standards with defined expectations and risks." Auto Servicio San Ignacio, S.R.L. v. Compania Anonima Venezolana de Navegacion, 765 F.2d 1306, 1308 (5th Cir. 1985). Permitting an undisclosed principal to sue the issuing bank would disrupt the "defined expectations and risks" involved in a letter-of-credit transaction.
Allowing such suits would disrupt established expectations and complicate letter-of-credit law in other ways as well. Customers often waive discrepancies in the documents presented to the issuing bank. If an undisclosed principal shared this power, an issuing bank would have to determine whether the author of the waiver was, in fact, the principal of its customer. Even if the bank found that the third party was the principal, the bank could be placed in a difficult position if the agent and principal disagreed on whether to approve non-conforming documents. Similar problems could arise if an undisclosed principal had power to amend the terms of its agent's letter of credit. The bank not only would be forced into a new investigative role, but also would have to seek approval from the undisclosed principal for any amendments offered by the agent, or risk possible suit from the principal. Such involvement would destroy the carefully constructed protection issuing banks enjoy under both the UCC and the UCP.
Mindful that it would be a "cold court indeed that attempts to weather the storm of credit analysis with nothing more than general contract principles for warmth," Dolan, Law of Letters of Credit § 2.02 at 2-5, I am compelled to depart from the holding of the Second Department in Taub, and to conclude instead that undisclosed principals do not have standing to sue issuing banks. Kools, however, should note that the merits of its claim have not been decided, and that there is no apparent reason why Oei, as the applicant, may not bring suit against Citibank for the bank's alleged derelictions.
Because Kools lacks standing to sue, the complaint is dismissed.
Michael B. Mukasey
U.S. District Judge
Dated: New York, New York
January 4, 1995