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KOOLS v. CITIBANK

January 4, 1995

M.J.F.M. KOOLS, d/b/a KOOLS DE VISSER, Plaintiff, against CITIBANK, N.A., Defendant.


The opinion of the court was delivered by: MUKASEY

 MICHAEL B. MUKASEY, U.S.D.J.

 Plaintiff, M.J.F.M. Kools, a citizen of the Netherlands, brings this diversity action against Citibank, N.A. for alleged fraud and breach of contract arising out of Citibank's payment on a letter of credit to Jade-USA, Inc. Citibank has moved to dismiss for lack of standing, failure to plead fraud with particularity, pursuant to Fed. R. Civ. P. 9(b), and failure to state a claim, pursuant to Fed. R. Civ. P. 12(b)(6). For the reasons set forth below, defendant's motion is granted because Kools lacks standing to sue.

 I.

 The facts and allegations, construed in the manner most favorable to plaintiff, Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974), are as follows. Kools is the sole proprietor of Kools de Visser, a Dutch entity engaged in the wholesale and retail clothing industry. (Complt. P 1) On October 28, 1992, Kools, through his agent, Rudy Oei, applied for a commercial letter of credit with defendant Citibank in the amount of $ 1,004,400 to purchase "LEVI JEANS 501-0191, New, Originals, Made in USA" from Jade-USA, Inc. (Complt. P 7, Ex. A) In consideration for the letter of credit, Oei deposited $ 1,080,000 with Citibank. (Complt. P 8; Ex. I) The agreement was solely between Oei, "the Applicant," and Citibank, the issuer. (Complt. Ex. A) The terms of the letter of credit were amended on November 2, 1992 and November 4, 1992. (Complt. Ex. B)

 Under the amended agreement, Jade-USA, as beneficiary of the letter of credit, would obtain payment from Citibank when it presented the following documentation: (1) a sight draft bearing the identifying reference specified on the letter of credit; (2) an original and four copies of Jade-USA's commercial invoice for merchandise described as "LEVI JEANS 501-0191, NEW, ORIGINALS, MADE IN USA LABELS"; (3) an insurance policy and/or certificate; (4) all originals of a "MARINE/ON BOARD OCEAN BILL OF LADING OR CONTAINER BILL OF LADING OR BILL OF LADING BEARING CONTAINER ENDORSEMENT" issued to Kools de Visser marked "NOTIFY RUDY T. OEI" and "FREIGHT PAID"; (5) a packing list; (6) a certificate of compliance of quality and inspection by Lloyds of London; and (7) a statement that the merchandise had been shipped from Seattle, Washington and sold "CIF the Netherlands." (Complt. PP 10-11; Ex. B)

 On November 19, 1992, Jade-USA made its first effort to obtain payment under the letter of credit. The documents it presented, however, did not conform to the agreement. Instead of presenting an "on board" marine bill of lading, Jade-USA included a bill of lading issued by Eagle Freight Services, showing a shipment by truck from Seattle, Washington to Rotterdam, the Netherlands, of "900 boxes containing garments." (Complt. P 13; Ex. C) This discrepancy, along with others, was noted by Luis Castellanos, Citibank's document examiner. Castellanos apparently called Jade-USA's president, Diann Hart, to advise her of the discrepancies; Hart told him to "hold on" to the documents and that new ones would be issued. (Complt. P 14; Ex. D)

 On November 25, 1992, Jade-USA sent a new set of non-conforming documents to Citibank. Castellanos noted several discrepancies, including a faulty marine bill of lading, which, when read together with the earlier truck bill of lading, suggested that "the same goods were simultaneously being transported by truck and by ship from Seattle to Rotterdam." (Complt. P 17; Exs. E-F) Five days later, Jade-USA made its third effort to present the proper documents, and again sent non-conforming ones. The discrepancy report appears to state that the bill of lading and insurance forms failed to mention "jeans," and that an inspection certificate was missing. (Complt. Ex. H) Despite these identified irregularities, Citibank approved the documents and paid Jade-USA. Defendant argues that the discrepancy report "evidences that . . . Mr. Oei approved payment." (Def. Mem. at 9) The document, however, does not support defendant's assertion. Although the report does indicate clearly that the payment was approved on December 2, the explanation for the approval reads "OK to pay [illegible] Carlos 12/2." The telephone number listed below the notation has a Westchester, New York area code (914); Oei's address on the agreement is in Connecticut, which has a different area code (203). These facts weaken considerably defendant's claim that Oei waived any discrepancies and approved payment to Jade-USA.

 On December 2, Citibank sent an "advice of payment" to Oei stating that payment had been made to Jade-USA. Attached to the letter were documents delivered by Jade-USA, which Citibank believed "to be in due form and regular in every respect." (Complt. Ex. I) Citibank assumed "no responsibility for the genuineness of the documents or for the quality or quantity of the merchandise represented thereby." (Id.) Each of the documents fails on its face to satisfy the terms of the letter of credit. The draft is not marked with the required identifying information; only one of the invoices contains the word "jeans"; the three alleged originals of the replacement bill of lading are inconsistent with one another, and all omit the word "jeans"; the insurance document is neither a policy nor a certificate, fails to meet the standards set under Article 37b of the Uniform Customs and Practice for Documentary Credits (1983) ("UCP"), and fails also to include the word "jeans"; the inspection report is from an "agent" of Lloyds of London, apparently covers only half the shipment, identifies the wrong carrier, and incorrectly describes the merchandise; finally, the packing list misdates the shipment, and refers inconsistently to the quantity of the merchandise. (Complt. PP 22-28; Ex. I)

 Kools alleges that Citibank altered some of the documents after receiving them from Jade-USA. For example, the word "jeans" appears to have been added to both the packing list, and the original invoice. (Complt. P 30) Kools claims that Jade-USA never shipped any merchandise to Kools, that the replacement bill of lading, insurance document, inspection report, truck bill of lading and marine bill of lading were all forgeries, and that the draft, invoice and packing list "all fraudulently purported to relate to a shipment of merchandise which had not occurred." (Complt. P 32)

 Kools's first claim alleges that Citibank paid Jade-USA "knowing, or recklessly disregarding the fact" that the presented documents were "forgeries, fraudulent and nonconforming." (Complt. P 33) Kools alleges also that Citibank fraudulently hid the discrepancies, and aided and abetted Jade-USA in its fraudulent scheme. Because of Citibank's alleged fraudulent concealment and material misrepresentations, Kools asserts it did not learn of Citibank's actions until it obtained third-party discovery from the bank in litigation commenced by Kools against Jade-USA and its president in a Florida state court.

 Kools's second claim alleges that Citibank breached its contract with Kools "to examine all documents . . . with reasonable care to ascertain that such documents appeared on their face" to comply with the terms of the letter of credit. (Complt. P 44) Kools alleges damages of $ 1,262,338.

 III.

 The threshold question is whether Kools, as Oei's undisclosed principal, has standing to maintain this action against Citibank. Although it is undisputed that under New York law a "contract not under seal made in the name of an agent as ostensible principal, may be sued on by the real principal at the latter's election," Interbras Cayman Co. v. Orient Victory Shipping Co., S.A., 509 F. Supp. 1067, 1069 (S.D.N.Y.) (quoting Kelly Asphalt Block Co. v. The Barber Asphalt Paving Co., 211 N.Y. 68, 70, 105 N.E. 88 (1914)), rev'd on other grounds, 663 F.2d 4 (2d Cir. 1981), the law is far from settled on whether this tenet of general agency law applies to letters of credit, which are a singular form of contract. Mutual Export Corp. v. Westpac Banking Corp., 983 F.2d 420, 423 (2d Cir. 1993) ("Letters of credit are unique commercial instruments" and "traditional contract rules apply 'only to the extent that contract principles do not interfere with the unique nature of credits.'") (quoting John F. Dolan, The Law of Letters of Credit § 2.02 at 2-5 (2d ed. 1990)); In re Coral Petroleum, Inc., 878 F.2d 830, 832 (5th Cir. 1989) ("a letter of credit is not an ordinary contract but instead a unique device developed to meet the specific needs of the marketplace") (applying New York law); Bank of Cochin Ltd. v. Manufacturers Hanover Trust Co., 612 F. Supp. 1533, 1537 (S.D.N.Y. 1985) (describing the letter of credit as "a relationship with no perfect analogies but nevertheless a well defined set of rights and obligations") (quotation omitted), aff'd, 808 F.2d 209 (2d Cir. 1986); J. White & R. Summers, Handbook of the Law Under the Uniform Commercial Code § 18-2, at 711 (2d ed. 1980) ("it was one of the prime purposes of the drafters of Article Five [pertaining to ...


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