Banco Del Estado v. Navistar Int'l Transp. Corp. and Navistar Int'l Export Corp.

No. 95c-5889, 1996 U.S. Dist. LEXIS 14108 (N.D. Ill. Sept. 24, 1996)

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To purchase public transportation buses, applicant procured an L/C for US $1,722,000 issued in favor of the seller/beneficiary. Upon shipment of the buses, beneficiary presented documents representing that it had shipped "new 1993 buses" for import into Columbia. Issuer honored the documents and paid seller beneficiary prior to the arrival of the buses in Columbia. Upon their arrival, the buses were seized by Colombian authorities since Colombian law prohibits the importation of vehicles not newly manufactured and they were actually model year 1990. The applicant/buyer assigned its rights under the contract to the issuer which brought this action against the beneficiary on various theories related to the L/C (including breach of prior U.C.C. - 5-111 presentment warranty) and the underlying transaction. The beneficiary moved to dismiss for failure to state a cause of action. No indication is given as to why the issuer did not seek reimbursement from the applicant.

Briefing:

1. Breach of Presentment Warranty, Prior UCC - 5-111: One theory on which the issuer sought relief was that, by presenting documents which misrepresented the new character of the vehicles, the beneficiary had breached a presentment warranty as to the truth of the statements contained in the documents. Consistent with the cases which have refused to allow issues of truthfulness to enter the L/C transaction, the court ruled that the warranty of prior U.C.C. - 5-111 only went to the truthfulness of the documents, and granted the beneficiary's Motion to Dismiss.

It noted that the documents complied with the terms of the L/C and that the VIN numbers listed revealed that the buses were used (an interpretation the court noted which the bank required to make and on which it could not have justified dishonor). It indicated that the issuer's recourse with respect to complying documents was against the applicant and not based on L/C theories.

2. Fraud: The court also dismissed the portion of the Complaint based on the Beneficiary's L/C fraud. It did so on the ground that the fraud was not stated with sufficient particularity (the failure to state the time, place, and content of the alleged fraudulent communication) and granted leave to amend this allegation. In doing so, it did not reach the issue of whether an issuer had a right to rely on the representatives, an element of an action for fraud.

3. Negligent Misrepresentation: Claim for negligent misrepresentation (claiming damage to its reputation and widespread criticism for honoring this credit). The court stated that, negligent misrepresentation based on an economic injury is only available in Illinois where the defendant is in the business of supplying information for the guidance of others in their business transactions. An issuer whose complaint is rooted in disappointed contractual or commercial expectations does not fall within this category as was indicated in a case which declined to apply negligent misrepresentation to a dispute between an issuer and a confirming bank - Instituto Nacional De Commericialization Agricola v. Continental Illinois National Bank& Trust Co., 858 F.2d 1264, 1268-69 (7th Cir. 1988). Noting that the issuer's tort is best resolved under Article 5 of the UCC and contract law rather than tort law, it dismissed this claim.

4. Assignment of Buyer/Applicant's Right Under the Sale Contract: The court also dismissed the portion of the Complaint with leave to amend based on an assignment of the buyer/applicant's rights under the sales contract. Although it did mention the L/C, it did not refer to the model year. Although it did mention the L/C, it did not indicate this term. The Complaint, however, failed to allege that the L/ Cs were part of the sales agreement.

Views:

1. In this case the court correctly recognized the relevance of the L/C to the nature of the sales agreement without the misplaced emphasis on independence present in Success Universal Ltd., v. CWJ International Trading, Inc.

"QUOTE TO NOTE"

The current dispute arises from disappointed commercial expectations. Such disputes are best resolved under Article 5 of the Uniform Commercial Code and contract law rather than tort law. Thus, the negligent misrepresentation claim is dismissed.

2. The outstanding issue of L/C fraud -- whether an issuer which has honored may seek recourse against the beneficiary for fraud -- suggests perhaps one relevant scope for a Section 5-111 beneficiary's presentment warranty: a warranty that there has been no fraud. While fraud is actionable on its own and presumably the issuer should be able to state a separate cause of action, the commercial interest in discouraging L/C fraud is furthered in this instance by overlapping remedies. Nor does such a remedy run afoul of the principal objection to L/C warranties -- that they undermine the finality of the payment under the credit. As is the case with enjoining payment against conforming documents, the presence of L/C fraud undoes everything and warrants an exception to the rule of finality.