The opinion of the court was delivered by: MUKASEY
MICHAEL B. MUKASEY, U.S.D.J.
Plaintiffs, Rudy Oei and M.J.F.M. Kools, the sole proprietor of Kools de Visser, sue Citibank N.A. ("Citibank") and Citibank International ("Citibank Int'l"), for fraud and aiding and abetting fraud, and Citibank for wrongful honor and conversion, arising out of payment on a letter of credit issued by Citibank at Oei's direction as part of a transaction in which plaintiffs sought to purchase Levi jeans. Defendants move to dismiss pursuant to Fed. R. Civ. P. 12(b)(6), or in the alternative, for a summary judgment, dismissing all claims, and striking plaintiffs' demands for consequential and punitive damages and for a jury trial. Defendants move also to dismiss the fraud and aiding and abetting fraud claims pursuant to Fed. R. Civ. P. 9(b). Plaintiffs cross-move for summary judgment on the wrongful honor claim. For the reasons given below, defendants' motion to dismiss, or in the alternative for summary judgment, is granted as to plaintiffs' conversion claim and the fraud and aiding and abetting claims against Citibank, but denied as to the other claims. Defendants' motion to strike plaintiffs' demand for punitive damages on the fraud claim is denied, but their motions to strike plaintiffs' demands for consequential and punitive damages on the wrongful honor claim and for a jury trial are granted. Defendants' motion to dismiss pursuant to Rule 9(b) is denied. Plaintiffs' cross-motion for summary judgment on the wrongful honor claim is granted.
On January 5, 1995, I dismissed an action brought by M.J.F.M. Kools against Citibank, because Kools, as an undisclosed principal, lacked standing to sue for wrongful honor of a letter of credit issued by Citibank at Oei's application, allegedly as agent for Kools. Kools v. Citibank, 872 F. Supp. 67 (S.D.N.Y. 1995), certifying question to New York Court of Appeals, 73 F.3d 5 (2d Cir. 1995), opinion withdrawn, No. 95-7209, 1996 WL 450776 (2d Cir. Aug. 5, 1996). Kools appealed, but then withdrew that appeal and filed this action together with Oei.
Familiarity with my previous opinion is assumed. The following facts are drawn from the complaint, and the parties' affidavits, exhibits and Rule 3(g) statements: Oei is a resident of Connecticut and a retired IBM product manager. (Compl. P 1; Oei 9/9/96 Aff. P 2) Kools de Visser ("Kools") is a Netherlands sole proprietorship with its principal place of business in Bergen Op Zoom, the Netherlands, and is owned by M.J.F.M. Kools and managed by Wilhelmus Kools. (Compl. P 2; M.J.F.M. Kools 9/9/96 Aff. P 3) Kools sells clothing at wholesale and retail in the Netherlands. (Compl. P 2) In 1992, Kools retained Oei as a broker to purchase on its behalf Levi jeans made in the United States. (Compl. P 8; Pl. 3(g) P 1) Oei arranged a transaction with Jade-USA, Inc., which purported to be a supplier of such jeans and which agreed to supply 43,200 pairs of Levi jeans at $ 23.25 a pair, for a total cost of $ 1,004,400. (W. Kools 9/9/96 Aff. P 12)
To effect this transaction, Oei applied for a letter of credit from Citibank. (Pl. 3(g) P 2; Def. 3(g) P 1) The Application and Agreement for Commercial Letter of Credit ("Application Agreement"), dated October 28, 1992, provided that Citibank would issue a letter of credit in the amount of $ 1,004,400, with Jade designated as beneficiary, for the purchase of "LEVI JEANS 501-0191, New, Originals, Made in USA." (Compl. P 9 & Ex. A; Pl. 3(g) P 2) The Application Agreement provided that it was to be governed by the Uniform Customs and Practice ("U.C.P.") for Documentary Credits as most recently published by the International Chamber of Commerce, i.e., the 1983 version of the U.C.P. [hereinafter "U.C.P. 400"], and by the laws of the state of New York, except to the extent that such laws are inconsistent with the U.C.P. (Compl., Ex. A P 17) On October 20, 1992, Kools transferred $ 1,080,000 into Oei's and his wife's joint checking account at Citibank. (Def. 3(g) P 11) Then, on October 30, 1992, Oei deposited $ 1,004,400 (plus certain letter of credit fees for Citibank totalling approximately $ 8,000) from this account into a Citibank savings account in his name, in Totten trust for his wife, to secure Citibank's payments under the letter of credit. (Def. 3(g) P 12; Compl. P 11)
On October 30, 1992, Citibank actually issued the Letter of Credit, with Citibank International ("Citibank Int'l"), a Citibank affiliate located in Miami, acting as advising bank.
(Compl. P 4 & Ex. A) Citibank Int'l functioned as advising bank for the amendments to the letter of credit and also collected the documents from the beneficiary for shipment to the issuer, Citibank, although its other roles in the transaction are disputed.
The letter of credit, as amended on November 2 and 4, 1992, required that to redeem the funds, Jade was to submit specified documents to Citibank conforming to certain requirements, including those set forth in the U.C.P. 400. (Compl., Ex. B) These documents included: 1) a sight draft bearing the identifying reference specified in 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 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, to be marked "NOTIFY RUDY T. OEI" and "FREIGHT PAID"; 5) a packing list; and 6) a certificate of compliance of quality and inspection by Lloyds of London. (Compl., Ex. B)
Defendants claim that plaintiffs were aware that Jade would submit false documents. Although the letter of credit required "on board" bills of lading and the goods were to be described as "genuine" Levi jeans, defendants claim that plaintiffs were aware that the beneficiary, Jade, would be paid before the goods were loaded on board a ship (Sharrow 7/10/96 Decl., Exs. 17-18; Id., Ex. 5 at 85), and that the jeans that would be shipped would be counterfeit. Plaintiffs deny both allegations.
On November 18, 1992, Jade presented Citibank Int'l with documents requesting payment under the letter of credit. (Def. 3(g) P 21; Pl. 3(g) P 5) These documents did not conform to the letter of credit requirements. They included a truck bill of lading, rather than a marine bill of lading, issued by Eagle Freight Services, purporting to show shipment by truck from Seattle, Washington, to Rotterdam, the Netherlands. (Pl. 3(g) P 5; Compl., Ex. C) In addition, the bill of lading contained several other discrepancies: it was dated five days later than the date on which Citibank Int'l received it; it failed to identify the goods; and it named Jade, rather than Kools, as consignor. (Compl. PP 16-17) As a result of these and other discrepancies (Compl., Ex. D), Citibank Int'l notified Jade that it would not accept the documents. (Def. 3(g) P 23) The discrepancy report created by Citibank Int'l employee Luis Castellanos states that Diann Hart, Jade's president, told him to "hold on" to the documents, and that Jade would submit new ones. (Compl. P 19, Ex. D; Def. 3(g) P 24) Plaintiffs claim that Citibank Int'l should have known that the documents were fraudulent, rather than merely discrepant, both because of the above discrepancies and because Jade's request that Citibank Int'l hold the documents was unusual as bills of lading are negotiable and a shipping company would not issue a corrected bill of lading without return of the original. (Compl. P 20; Colleran 9/7/96 Aff. P 33)
On or about November 24, 1992, Jade presented new documents requesting payment under the letter of credit, including a marine bill of lading issued by Sea-Land Services, Inc. (Compl. P 22; Def. 3(g) P 25) Once again, these documents contained discrepancies, and once again, Citibank Int'l's discrepancy report stated that Jade would "fix" the problem and that the bank would hold the documents. (Compl. P 24, Ex. F; Def. 3(g) P 28) Plaintiff alleges that Citibank Int'l should have been aware that these documents were fraudulent because it was now in possession of two different bills of lading for the same goods, which showed that two shippers had received the same goods for shipment. In addition, the method of shipment in each bill of lading was different, one by land and one by sea. (Compl. P 25; Pl. 3(g) P 16)
On November 30, 1992, Jade presented a third set of documents requesting payment under the letter of credit for the third time. (Compl. P 27 & Ex. H) Plaintiff alleges that these documents were also discrepant and inconsistent in many ways and were fraudulent on their face. (Compl. P 29) Citibank Int'l forwarded the documents to Citibank without paying Jade, mistakenly omitting the inspection document from the package of documents. (Def. 3(g) PP 30-31) Plaintiffs, in reliance on testimony given by Hart in a previous action (Compl. P 36; Sharrow 7/10/96 Decl., Ex. 10), claim that Luis Castellanos, the Citibank Int'l employee who checked the documents submitted by Jade, altered them by typing "Levi JEANS 501 0191 NEW ORLEANS, MADE IN USA LABELS" onto the face of the inspection document. (Compl. P 36) They allege further that some Citibank or Citibank Int'l employee altered the packing list and the original invoice by typing the word "JEANS" onto those documents. (Compl. P 37) To support this allegation, plaintiffs assert that the packing list included in the documents Jade submitted did not include the word "JEANS", but that the packing list honored by Citibank contained the word "JEANS." (Pl. 3(g) PP 50-51; W. Kools 9/9/96 Decl. P 34, Exs. F, G) Castellanos and Citibank deny these allegations and cite contrary evidence. (Castellanos 7/8/96 Aff. P 3; Sharrow 7/10/96 Decl., Ex. 10 at 122-23; Sharrow 12/4/96 Aff., Ex. 17)
When these documents arrived at Citibank, its Trade Service Representative Rose Williams found several discrepancies which she detailed in a discrepancy report, including that the bills of lading and insurance did not mention "JEANS," the packing list did not name the beneficiary, and the inspection certificate was missing. (Compl., Ex. I; Def. 3(g) P 32) As will be shown below, the documents also contained other discrepancies and inconsistencies that Citibank did not note.
On December 2, 1992, despite these discrepancies, Citibank paid Jade $ 1,004,400 by crediting Citibank Int'l's account. (Def. 3(g) P 35) Defendants claim that they contacted Oei by telephone on December 2 and that he waived these discrepancies. (Def. 3(g) PP 33-34) The discrepancy report, compiled by Williams, does indicate that someone named "Carlos" approved payment on December 2, 1992 at approximately noon. (Compl., Ex. I) Iris Carlo, an Assistant Vice President at Citibank's Tarrytown, N.Y. branch, states that she received a call from Williams on December 2, 1992, advising her of several discrepancies in the documents submitted by Jade. (Carlo 7/9/96 Aff. PP 1-2) Carlo claims she informed Wade Walker, a Citibank Vice President and the "Relationship Manager" assigned to Oei, of these discrepancies. (Carlo 7/9/96 Aff. P 3) Walker states that he called Oei and told him that the bills of lading omitted the word "Jeans," that the packing list left out the beneficiary's name, and that the original inspection certificate was missing. Walker claims that Oei approved payment despite these deficiencies. (Walker 10/28/96 Aff. P 22) Walker claims that he told Carlo that "payment approval had been received." (Walker 7/3/96 Aff. P 3) Carlo states that she then telephoned Williams stating "that approval to pay had been received." (Carlo 7/9/96 Aff. P 3) Williams confirms that she received this call at 12:10 p.m. on December 2 and then authorized payment to Jade. (Williams 7/2/96 Aff. P 4)
Plaintiffs claim that Walker did not inform Oei during their telephone conversation on December 2 of any discrepancies in the documents other than that the original inspection certificate was missing; Oei states that he approved payment based upon a copy of the inspection certificate. (Pl. 3(g) PP 30-33; Def. Response to Pl. 3(g) P 15)
Immediately after paying Jade, Citibank debited Oei's account by $ 1,004,400. (Def. 3(g) P 36; Pl. 3(g) P 28) The same day, Oei picked up the documents from Citibank's office. (Pl. 3(g) P 35; Def. 3(g) PP 37-38) Citibank attached to the documents a "payment advice", which stated that "we believe the attached documents to be in due form and regular in every respect. However, we assume no responsibility for the genuineness of the documents or for the quality or quantity of the merchandise represented thereby." (Compl., Ex. J)
It is undisputed that Citibank never informed plaintiffs of the first two presentments, although it remains disputed whether Citibank Int'l ever informed Citibank of these presentments, or whether Citibank, even if it was not told of them, should be charged with such knowledge as a result of its relationship with Citibank Int'l. (Williams 1/4/96 Aff. P 2 n.3; Castellanos 10/21/96 Aff. P 7)
On December 2, 1992, Oei recognized some discrepancies and inconsistencies in the documents, and on December 3 he informed Kools of these discrepancies. (Def. 3(g) PP 40-41; Sharrow 7/10/96 Decl., Exs. 19-21) Between December 3 and 10, plaintiffs tried to get Jade to explain some of these discrepancies. It is undisputed that by December 10, 1992, Kools and Oei were aware that Jade had submitted documents that contained discrepancies and were fraudulent. (Def. 3(g) P 42; Sharrow 7/10/96 Decl., Ex. 29; W. Kools 9/9/96 Aff. P 29) Although W. Kools advised Jade on December 11, 1992, that Kools was terminating its attempted purchase from Jade, the documents reveal that Kools continued to try to obtain conforming jeans from Jade. The documents show also that Hart strung Kools along, giving explanations and excuses for delay. (Sharrow 7/10/96 Decl., Exs. 31-33, 35-45) On January 25, 1993, Kools notified Citibank Int'l that the documents Jade submitted were fraudulent. (Sharrow 7/10/96 Decl., Ex. 46) However, as late as January 28, 1993, plaintiffs were sending mixed signals to Jade as to whether they wanted the goods or a refund. (Sharrow 7/10/96 Decl., Ex. 47) Only on January 30, 1993 did Kools unequivocally state that it wanted a refund. (Sharrow 7/10/96 Aff., Ex. 48)
The parties dispute the fate of the goods that were the subject of this transaction. Defendants claim that Jade eventually shipped two containers of jeans to Kools in December, 1992 and January, 1993. (Def. 3(g) P 50) Defendants claim that these jeans arrived in the Netherlands on January 30, 1993, and on March 30, 1993, were seized by Dutch customs officials as counterfeit. (Def. 3(g) P 51; Sharrow 12/4/96 Aff., Ex. 10) Plaintiffs claim that the confiscated goods were not intended for them and that no goods were shipped under the subject letter of credit. (Pl. 3(g) PP 38, 45-46; M.J.F.M. Kools 9/9/96 Aff. P 8) It is undisputed that Kools never received conforming goods. (M.J.F.M. Kools 9/9/96 Aff. P 8)
In 1993, Kools commenced an action against Jade in Florida, Kools de Visser v. Jade-USA, Inc., No. 93-956 C116 (Fla. Cir. Ct.). According to the complaint, on February 6, 1993, Jade gave Kools a promissory note payable in 30 days, for $ 1,004,400, as a refund on the transaction. (Sharrow 7/10/96 Decl., Ex. 9) The settlement agreement between Kools and Jade, signed at the time Jade gave Kools the note, stated that,
Jade-USA has advised Kools de Visser that the goods shipped in fulfillment of the contract between Kools de Visser and Jade-USA are nonconforming to the contract . . . . [and] Kools de Visser has rejected the nonconforming goods and Kools de Visser's rejection of the nonconforming goods has been accepted by Jade-USA.
(Sharrow 7/10/96 Decl., Ex. 13) Kools alleged that Jade failed to pay the note and that Hart failed to honor a personal guarantee on the note. (Id.) Kools obtained a default judgment against Jade, which remains unsatisfied. (Pl. 3(g) P 44) In March 1996, Hart pleaded guilty in United States District Court for the Middle District of Florida to supplying Citibank with fraudulent documents. (Def. 3(g) P 54; Pl. 3(g) P 47)
Here, plaintiffs assert four claims, including: fraud and aiding and abetting Jade's fraud, against Citibank and Citibank Int'l; and wrongful honor of the letter of credit and conversion, against Citibank. Defendants move to dismiss pursuant to Rule 12(b)(6), or in the alternative for summary judgment, on all four claims. They move also to dismiss the fraud and aiding and abetting fraud claims under Rule 9(b). Plaintiffs oppose these motions and cross-move for summary judgment on the wrongful honor claim. Further, defendants claim that Kools lacks standing under the doctrine of res judicata. They move also to strike plaintiffs' demand for consequential and punitive damages, and for a jury trial.
A motion to dismiss pursuant to Rule 12(b)(6) may be granted only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957). On such a motion, the court must take all facts alleged in the complaint as true and draw all reasonable inferences in plaintiff's favor. See Jackson Nat'l Life Ins. Co. v. Merrill Lynch & Co., 32 F.3d 697, 699-700 (2d Cir. 1994).
Both plaintiff and defendant have submitted material outside the pleadings and treated this motion as one for summary judgment. Accordingly, I have considered all the documents and affidavits submitted and apply the summary judgment standard in the alternative to the motion to dismiss. See Fed. R. Civ. P. 12(b), (c); Kennedy v. Empire Blue Cross and Blue Shield, 989 F.2d 588, 592 (2d Cir. 1993); Franklin H. Williams Ins. Trust v. Travelers Ins. Co., 847 F. Supp. 23, 24 (S.D.N.Y. 1994), rev'd on other grounds, 50 F.3d 144 (2d Cir. 1995). The standard for summary judgment is well-settled. On a motion for summary judgment, the moving party must prove the absence of material factual issues and that the law requires judgment in the moving party's favor. Fed. R. Civ. P. 56(c). When evaluating cross-motions for summary judgment, the court considers each motion separately, and on each views the facts in the light most favorable to the nonmovant. Heublein, Inc. v. United States, 996 F.2d 1455, 1461 (2d Cir. 1993). Actions on letters of credit are "well suited to determination by motion for summary judgment because they normally present solely legal issues relating to an exchange of documents." Banque Worms v. Banque Commerciale Privee, 679 F. Supp. 1173, 1178 (S.D.N.Y.), aff'd, 849 F.2d 787 (2d Cir. 1988).
Again, Citibank moves to dismiss, or in the alternative, for summary judgment dismissing the wrongful honor claim. Plaintiffs cross-move for summary judgment granting this claim. Plaintiffs argue that before Citibank was permitted to honor the letter of credit, it was required to receive from Jade strictly conforming documents, that Jade presented Citibank with documents that did not strictly comply with the letter of credit's requirements, that Citibank paid anyway and then reimbursed itself from Oei's account, and that as a result of Citibank's breach, plaintiffs suffered damages because they lost the money and never received the goods. In opposition, Citibank argues that issues of fact remain as to whether: 1) the documents complied with the letter of credit requirements; and 2) plaintiffs waived expressly any discrepancies on the face of the documents. In addition, in support of its own motion for summary judgment, Citibank argues that plaintiffs, by failing to promptly notify it of the facial discrepancies in Jade's documents and return the documents to it, waived their objections to the discrepancies by operation of law and cannot sue for wrongful honor.
The following principles govern letters of credit.
In its classic form, the letter of credit is only one of three distinct relationships between three different parties: (1) the underlying contract for the purchase and sale of goods between the buyer ("account party" [or applicant]) and the seller ("beneficiary"), with payment to be made through a letter of credit to be issued by the buyer's bank in favor of the seller; (2) the application agreement between the bank and the buyer, describing the terms the issuer must incorporate into the credit and establishing how the bank is to be reimbursed when it pays the seller under the letter of credit; and (3) the actual letter of credit which is the bank's irrevocable promise to pay the seller-beneficiary when the latter presents certain documents . . . that conform with the terms of the credit.
Alaska Textile Co. v. Chase Manhattan Bank, N.A., 982 F.2d 813, 815 (2d Cir. 1992). The relationship between the applicant and the issuer is a separate contract, independent of the letter of credit relationship between the beneficiary and the issuer. See N.Y. U.C.C. § 5-109, cmt. 1 (McKinney 1991) ("The extent of the issuer's obligation to its customer is based upon the agreement between the two."); John F. Dolan, The Law of Letters of Credit P 2.08, at 2-33-2-34 (rev. ed. 1996) [hereinafter "Dolan I"] ("This contractual or statutory relationship [between issuer and applicant] is not a letter of credit, and parties to it may have no rights under the credit engagement."); see also Burton V. McCullough, Letters of Credit § 3.04, at 3-117 (1996). Unlike the issuer-beneficiary relationship, where special letter of credit rules apply, usual contractual principles govern the issuer-applicant relationship. See Dibrell Bros. Int'l S.A. v. Banca Nazionale del Lavoro, 38 F.3d 1571, 1579 (11th Cir. 1994) ("The relationship between the issuer and customer is of a contractual nature governed by the reimbursement agreement rather than the letter of credit."); see also Indu Craft, Inc. v. Bank of Baroda, 47 F.3d 490, 494-96 (2d Cir. 1995); Dolan I, supra, P 2.09, at 2-45. As one commentator has noted:
When the applicant disputes the issuer's conduct, that dispute generally involves the respective rights and duties of the two parties under the reimbursement agreement, an ordinary contract. In that context, the independence principle and Code rules fashioned for the letter of credit do not apply. . . . Those actions are normal contract actions governed by the law of contracts.
Dolan I, supra, P 2.09, at 2-60-2-61; see also Nutro Prods. Corp. v. NCNB Texas Nat'l Bank, 35 F.3d 1021, 1023 (5th Cir. 1994). Here, plaintiffs' action is an applicant-issuer suit based on the Application Agreement.
A. Strict vs. Substantial Compliance
To determine whether Citibank breached its contract and is liable for wrongful honor, we must look to the contract. The Application Agreement provides that "The Applicant will pay you [Citibank] on demand . . . the amount of each draft or other request for payment . . . drawn under the Credit." (Compl., Ex. A P 1) However, it provides also that:
Any action, inaction or omission taken or suffered by you or by any of your correspondents under or in connection with the Credit or any relative drafts, documents or property, if in good faith and in conformity with foreign or U.S. laws, regulations or customs applicable thereto, shall be binding upon the Applicant and shall not place you or any of your correspondents under any resulting liability to the Applicant.
(Compl., Ex. A P 4)
Under the Application Agreement, therefore, Citibank is in breach if it does not properly carry out its responsibilities as a letter of credit issuer in conformity with laws, regulations, or customs applicable to the transaction.
Under the U.C.P. and New York law, the issuer must ensure before paying that the documents submitted by the beneficiary strictly comply with the letter of credit. See United Bank v. Cambridge Sporting Goods, 41 N.Y.2d 254, 258-59, 392 N.Y.S.2d 265, 270, 360 N.E.2d 943 (1976) ("The beneficiary must meet the terms of the credit -- and precisely -- if it is to exact performance of the issuer. . . . There is no room for documents which are almost the same, or which will do just as well."); see also Alaska Textile Co. v. Chase Manhattan Bank, 982 F.2d 813, 816 (2d Cir. 1992). This rule ensures that an issuer -- a third party ignorant as to the specifics of the transaction -- can decide quickly and reliably whether to pay by simply looking at the documents and determining whether they comply with the letter of credit's requirements, without the need to judge the significance of any discrepancies. See John F. Dolan, Letter of Credit Disputes Between the Issuer and Its Customer: The Issuer's Rights Under the Misnamed "Bifurcated Standard", 105 Banking L.J. 380, 386 (1988); see also Todi Exports v. Amrav Sportswear Inc., 1997 U.S. Dist. LEXIS 1425, No. 95 Civ. 6701, 1997 WL 61063, *4 (S.D.N.Y. Feb. 13, 1997). This standard applies to the issuer-beneficiary relationship, at least under New York law. See United Bank, 41 N.Y.2d at 258-59, 392 N.Y.S.2d at 270.
However, there is disagreement as to the standard applicable when an applicant sues an issuer for wrongful honor. Some courts hold that an applicant need demonstrate only that the documents did not strictly comply to recover against the issuer for wrongful honor. See, e.g., Bank of Cochin Ltd. v. Manufacturers Hanover Trust Co., 612 F. Supp. 1533, 1539 & n.8 (S.D.N.Y. 1985) (dictum), aff'd, 808 F.2d 209 (2d Cir. 1986). Other courts and commentators, however, have held that an applicant must show that the documents did not substantially comply with the letter of credit requirements in order to recover. See Transamerica Delaval, Inc. v. Citibank, 545 F. Supp. 200, 203-04 (S.D.N.Y. 1982); Data General Corp. v. Citizens Nat'l Bank, 502 F. Supp. 776, 781 n.5 (D. Conn. 1980); McCullough, § 3.04[d], at 3-121-22. They reason that because the applicant's action against the issuer is based on a contract, general contract principles apply, including that a party may avoid performance, here reimbursement by the applicant, only if the breach is material -- i.e., if the issuer honors documents that do not substantially comply with the letter of credit's requirements. See, e.g., Ocean Bank v. La Esquina Presidencial, Inc., 623 So. 2d 520, 520 (Fla. Dist. Ct. App. 1993) (dissenting opinion); Dolan I, supra, P 7.05, at 7-108. Moreover, some courts have required -- as in all breach of contract cases -- that the issuer's payment despite substantial noncompliance prejudice the applicant or result in loss. See, e.g., National Bank of North America v. Alizio, 103 A.D.2d 690, 691, 477 N.Y.S.2d 356, 357-58 (1st Dep't 1984), aff'd, 65 N.Y.2d 788, 790, 493 N.Y.S.2d 111, 112, 482 N.E.2d 907 (1985); Chairmasters, Inc. v. Public Nat'l Bank & Trust Co., 283 A.D. 704, 127 N.Y.S.2d 806, 807 (1st Dep't 1954); Bank of New York & Trust Co. v. Atterbury Bros., Inc., 226 A.D. 117, 234 N.Y.S. 442, 449 (1st Dep't 1929); see also Dolan, supra, 105 Banking L.J. at 400-04.
Even if the substantial compliance standard -- the less demanding standard from the bank's point of view -- applies, and even if plaintiffs must show that Citibank's payment despite substantial noncompliance prejudiced them, Citibank is liable for breach of the Application Agreement here because the documents Jade submitted in its final presentment did not substantially comply and Citibank's payment prejudiced plaintiffs.
In general, article 15 of U.C.P. 400 provides:
Banks must examine all documents with reasonable care to ascertain that they appear, on their face, to be in accordance with the terms and conditions of the credit. Documents that appear, on their face, to be inconsistent with one another will be considered as not appearing, on their face, to be in accordance with the terms and conditions of the credit.
U.C.P. 400, art. 15. Therefore, documents inconsistent on their face are not in accordance with the letter of credit requirements. In addition, although banks are not responsible if documents that are facially compliant are fraudulent, they must know and observe banking industry practice, and act in good faith. See U.C.P. 400 art. 17; 29 N.Y. Jur.2d, Credit Cards, § 35 (1983); see also Resolution Trust Corp. v. Kimball, 963 F.2d 820, 826-27 (5th Cir. 1992) (noting importance of accepted banking industry standard in determining document compliance with letter of credit requirements); S.B. Int'l, Inc. v. Union Bank of India, 783 S.W.2d 225, 227 (Tex. App. 1989) ("In making this document consistency determination, the issuer is charged with knowledge of banking industry practices . . . ."). Here, the letter of credit required six documents, with certain specific requirements for each, including: a draft, a commercial invoice, bills of lading, an inspection document, an insurance document, and a packing list. Plaintiffs claim that each of these documents contained facial discrepancies and inconsistencies.
The letter of credit required that Jade submit a sight draft marked, "drawn under irrevocable letter of credit no. CCD6-1150-90019085 of Citibank N.A., New York, New York." (Compl., Ex. B) Plaintiffs argue that the draft Jade submitted contained several facial discrepancies, including: 1) it was not marked as drawn under this letter of credit (Colleran 9/7/96 Aff. P 26); 2) it did not indicate that it was drawn at sight (Id. P 27); and 3) it was not signed by the drawer, dated, and drawn payable to the order of a named party, as is required of all drafts (Id. P 28). Defendant's expert, Alan L. Bloodgood, contends that these defects were not significant because the purpose of referring to the particular letter of credit -- identifying it so that the bank can examine the documents against its requirements -- was obviously fulfilled. (Bloodgood Aff. P 56) Although Bloodgood may be correct that these ...