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WEYERHAEUSER CO. v. ISRAEL DISCOUNT BANK OF NEW YO

August 15, 1995

WEYERHAEUSER COMPANY, Plaintiff, against ISRAEL DISCOUNT BANK OF NEW YORK and CRESTMANOR HOMES, INC., Defendants.

John G. Koeltl, United States District Judge


The opinion of the court was delivered by: JOHN G. KOELTL

JOHN G. KOELTL, District Judge:

 This diversity case was brought by the plaintiff Weyerhaeuser Company ("Weyerhaeuser") alleging that the defendant Israel Discount Bank of New York ("IDB"), as advising bank under a letter of credit ("Letter of Credit" or "Credit") from non-party Bank Leumi Le-Israel ("Leumi"), failed to honor a partial assignment of proceeds to Weyerhaeuser made by defendant Crestmanor Homes, Inc. ("CHI"), the beneficiary of the Letter of Credit, despite having notice of the partial assignment.

 The issue in this case is whether Weyerhaeuser had an effective assignment of and a perfected security interest in the partial proceeds of the Letter of Credit and was, therefore, entitled to receive payment of such partial proceeds directly from IDB, the advising bank. Weyerhaeuser has brought a claim under the New York Uniform Commercial Code as well as claims for intentional and tortious interference with contract and prima facie tort. Weyerhaeuser seeks a declaratory judgment that it holds a valid irrevocable assignment of a perfected security interest in, and the right to receipt of, 48.75 percent of all drawings made under the Letter of Credit *fn1" and the entry of a judgment in its favor and against IDB in the amount of 48.75 percent of all drawings made under the 'Letter of Credit, or $ 501,506.36, plus interest at the statutory rate of nine percent. Weyerhaeuser also seeks punitive damages and attorneys' fees. IDB alleges that the partial assignment of the proceeds of the Credit to Weyerhaeuser, even if made by CHI, was never either effective or perfected and that IDB properly disbursed all of the proceeds of the Credit to CHI, rather than to Weyerhaeuser.

 Following a bench trial and after reviewing all of the submissions of the parties and having assessed the credibility of all of the witnesses, the Court makes the following findings of fact and conclusions of law:

 I. FINDINGS OF FACT

 A. The Parties and the Basis for Jurisdiction

 1. Plaintiff Weyerhaeuser is a corporation incorporated under the laws of the state of Washington, having a principal place of business in Tacoma, Washington. (JPO P 1.) *fn2"

 2. Defendant IDB is a New York banking corporation, having a principal place of business at 511 Fifth Ave., New York, NY. (JPO P 2.)

 3. CHI, which began operation in 1988 and was engaged in the business of manufacturing and operating prefabricated homes, is a corporation incorporated under the laws of the State of West Virginia, having formerly maintained a principal place of business in Martinsburg, West Virginia. CHI filed a petition for reorganization under Chapter 11 of the Bankruptcy Code in November, 1992, which since has been converted to a Chapter 7 liquidation. The proceedings against CHI have been stayed pursuant to 11 U.S.C. § 362, as recognized by the Court's order dated December 15, 1992 signed by Judge Keenan. *fn3" (JPO P 3.)

 4. The amount in controversy exceeds $ 50,000.00, exclusive of interest and costs.

 B. The Letter of Credit the Advice of Credit and IDB's Policies, Procedures and Routine Practice

 5. In October, 1991, Leumi issued Letter of Credit No. 90191234703241, the Credit that is at issue in this case, to CHI, as beneficiary, in the sum of $ 1,613,040.00, to secure the payment of modular homes sold by CHI in Israel. (JPO P 5.)

 6. IDB acted as the advising bank under the Letter of Credit. (JPO P 6.) In this capacity, IDB would receive the documents required to be presented by CHI under the terms of the Letter of Credit, forward those documents to Leumi, await instructions from Leumi as to whether it would make payment to CHI under the Letter of Credit, receive from Leumi or its agent the funds to be paid by Leumi to CHI pursuant to the Letter of Credit and disburse such funds to CHI. (Fisher Aff. P 3.) *fn4"

 7. As advising bank, IDB had no claim to, or interest in, the proceeds to be paid under the Letter of Credit. (JPO P 7.)

 8. IDB's policies and procedures require that all documents presented in connection with a request for payment be checked against the particular credit by two different documentary examiners who complete a work or instruction sheet noting the date upon which they performed their check. Following the checks, the documents are forwarded to the appropriate party, usually the issuer, with a covering letter from IDB which, if appropriate, sets forth any discrepancies and requests that the party to whom the documents are sent do some specified act, such as accept the documents, waive the discrepancies or provide instructions to IDB. (Marin Aff. P 4; Serrano Aff. P 4; Tedeschi Aff. P 3.)

 9. Once IDB has received authority from the issuer to make payment, but before payment is made, the documents in the file are checked by two different documentary examiners who usually note their work on a separate work or instruction sheet. IDB then makes the appropriate payment, the documentary examiner handling the payment notes the date, the payment and his or her initials on the binder liability sheet, (see, e.g., Def.'s Exh. LLL), and the documentary examiner endorses down or notes the payment on the original letter of credit. (Marin Aff. P 5; Serrano Aff. P 5; Tedeschi Aff. P 4.)

 10. IDB's policies, procedures and routine practice then require that the original letter of credit be returned to the beneficiary by regular mail unless the beneficiary directs that it be returned by a different manner or unless payment is made by express mail, in which case the original letter of credit is returned with the payment. Employees known as "splitters," who are in the "typing section" or "mailing section," are responsible for "breaking down" the work sheets and the instructions, typing the advices and the necessary tickets, checking the amounts to ensure that they add up and actually mailing the original letter of credit back to the beneficiary. (Marin Aff. P 5; Serrano Aff. P 5; Tedeschi Aff. P 4; Trial Tr. 258-62.)

 11. IDB acts as advising bank on approximately five hundred credits per year, IDB's Letter of Credit Department handles the issuance of approximately five thousand credits per year and the documentary examination area of the Letter of Credit Department handles approximately twenty to twenty-two thousand draw requests per year in connection with letters of credit for which IDB acts as either issuing bank, or advising or confirming bank, or both. (Zorn Aff. P 6.)

 12. On October 15, 1991, prior to advising the Letter of Credit, IDB received a telex transmission ("Telex") from Leumi which set forth the terms, conditions and instructions for the Letter of Credit to be issued by Leumi to CHI. (JPO P 8.) In accordance with IDB's standard practice, the Telex was given to the issuance area of the Letter of Credit Department where it was logged in, assigned a reference number and reviewed. The original Telex was retained in IDB's files. (JPO P 9.)

 13. After authenticating the Telex, on October 23, 1991, the issuance area of the Letter of Credit Department at IDB prepared an advice of credit ("Advice of Credit"). (JPO P 10.)

 14. The original Advice of Credit, bearing the original signature of one IDB officer, together with an attached copy of the Telex, constitutes the original credit ("Original Credit"). (Fisher Aff. P 13; Rosenwasser Aff. P 9; Zorn Aff. P 17.)

 15. It is IDB's policy, procedure and routine practice that the Original Credit, which is required to be presented by the beneficiary prior to each payment, is not retained by IDB in its files, but is forwarded to the beneficiary. A copy of the Original Credit is maintained by IDB in its files. (Fisher Aff. P 13; Marin Aff. P 7; Tedeschi Aff. P 15; Zorn Aff. PP 17, 21.) IDB does not, as part of its established practice and procedure, attach a cover letter to the original credit or maintain any particular notation in its files when it forwards the original credit to the beneficiary. (Trial Tr. at 154-55.)

 16. Weyerhaeuser never took physical possession of the Original Credit. (JPO P 13.)

 C. Shipments, Authorizations and Drawings on the Credit

 17. Consistent with IDB's policies, procedures and routine practice, CHI, as beneficiary, was required to present to IDB the Original Credit prior to receiving each payment under the Credit. (Fisher Aff. P 3; Tedeschi Aff. P 15; Zorn Aff. P 21.)

 18. At the time the Original Credit was prepared by IDB on about October 23, 1991, CHI already had shipped the first three shipments of modular homes to Israel and CHI already had forwarded to IDB the documents necessary to be presented by CHI to obtain the first three payments under the Letter of Credit. Therefore, rather then forward the Original Credit to CHI, in accordance with its policies, procedures and routine practice, IDB maintained the Original Credit in its possession until November 7, 1991, the date the first payment ("First Payment") was sent by IDB to CHI. (JPO PP 11, 12; Fisher Aff. P 14; Rosenwasser Aff. PP 5, 6, 10, 13; Serrano Aff. P 14; Tedeschi Aff. P 10.)

 19. CHI made the first shipment of modular homes to Israel on September 4, 1991. IDB wrote to Leumi to request a reimbursement for the first shipment on October 29, 1991. (JPO PP 14-16.)

 20. On November 7, 1991, CHI directed IDB in writing that the First Payment, when authorized by Leumi and forwarded to IDB, be paid to CHI by check sent to CHI's West Virginia office. There was no mention in these instructions of either Weyerhaeuser or an assignment. (JPO P 26; Def.'s Exh. AA.)

 21. On November 7, 1991, the First Payment, in the amount of $ 342,451.07, authorized by Leumi, was sent by Federal Express from IDB to CHI in the form of an official IDB check. (JPO P 27.) Upon disbursement of the First Payment on November 7, 1991, IDB endorsed down the amount of the payment on the Original Credit. IDB then forwarded the Original Credit by Federal Express on November 7, 1991, together with the First Payment, to CHI at CHI's address in Martinsburg, West Virginia as set forth in the Credit and the written instructions received from CHI. (Serrano Aff. P 12.)

 22. CHI made the second shipment of modular homes to Israel on September 29, 1991. IDB wrote to Leumi to request a reimbursement for the second shipment on November 1, 1991. (JPO PP 17, 18.)

 23. By facsimile dated November 28, 1991, CHI directed IDB in writing that the second payment ("Second Payment") be made by check sent to CHI by Federal Express. There was no mention in this facsimile of either Weyerhaeuser or an assignment. (JPO P 40; Def.'s Exh. CC.)

 24. Thereafter, by facsimile dated December 3, 1991, CHI directed IDB that the Second Payment be made by electronic transfer to CHI's account at Old National Bank ("ONB"). There was no mention in this facsimile of either Weyerhaeuser or an assignment. (JPO P 41; Pl.'s Exh. 59.)

 25. On December 3, 1991, the full amount of the Second Payment, in the amount of $ 343,180.00, approved by Leumi and disbursed through IDB, was sent by wire transfer by IDB to CHI's account at ONB. (JPO P 42.) Consistent with IDB's policies, procedures and routine practice, the Original Credit was presented by CHI to IDB prior to the disbursement of the Second Payment. (Marin Aff. P 19; Serrano Aff. P 9.)

 26. Subsequent to its receipt of the Second Payment, CHI paid Weyerhaeuser, from the proceeds of the Second Payment, the sum of $ 138,861.56. (Def.'s Exh. JJ.)

 27. According to CHI's checking account statements for December, 1991 maintained by ONB, on December 3, 1991, CHI received the proceeds of the Second Payment and, by check number 8474, which cleared on December 18, 1991, the sum of $ 138,861.56 was disbursed by CHI to Weyerhaeuser. Weyerhaeuser admitted in its original complaint that "in December, 1991, [Weyerhaeuser] did obtain a payment of $ 138,861.56 directly from CHI, which claimed that these funds came from a December 7, 1991 drawing under the Letter of Credit." (See Complaint P 18; Def.'s Exhs. AAA, JJ.)

 28. Consistent with IDB's policies, procedures and routine practice, upon making the Second Payment, IDB endorsed down the amount of the payment on the Original Credit. The Original Credit then was returned by IDB, by first class mail, to CHI to at CHI's Martinsburg, West Virginia address set forth in the Credit and the written instructions received from CHI. (Marin Aff. P 19.)

 29. CHI made the third shipment of modular homes to Israel on October 16, 1991. IDB wrote to Leumi to request a reimbursement for the third shipment ...


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