Conditions Spelled Out in an Irrevocable Stand-By Letter of Credit Had Been Complied With by the Defendant—Plaintiff’s Fraud Cause of Action Dismissed

The Second Department determined the defendant had properly sought (and been paid by the bank) funds pursuant to an irrevocable standby letter of credit (LOC) which was executed by the plaintiff in favor of defendant because the conditions spelled out in the LOC had been complied with. The court explained the relevant analytical criteria:

“Letters of credit are commercial instruments that provide a seller or lender (the beneficiary) with a guaranteed means of payment from a creditworthy third party (the issuer) in lieu of relying solely on the financial status of a buyer or borrower (the applicant). Historically, letters of credit have been used to assure predictability and stability in mercantile transactions by diminishing a seller’s risk of nonpayment and a buyer’s risk of nondelivery due to insufficient funds” … . “By issuing a letter of credit, the [bank] undertakes an obligation to pay the beneficiary, or his [or her] transferee if the letter is negotiable, from the account of its customer” … . Generally, stand-by letters of credit are “meant to be drawn upon only in the event that its applicant fails to make a direct payment to the beneficiary . . . For this reason, to collect upon a stand-by [letter of credit], the beneficiary . . . must present to the issuing bank a default letter stating that the debt had not been satisfied as of a specified date” … . However, “letters of credit must be strictly construed and performed in compliance with their stated terms” … . The rationale for this rule is rooted in the purpose of letters of credit: ” [b]y conditioning payment solely upon the terms set forth in the letter of credit, the justifications for an issuing bank’s refusal to honor the credit are severely restricted, thereby assuring the reliability of letters of credit as a payment mechanism'” … . Accordingly, “to make an issuing bank’s payment obligation conditional, the parties must clearly and explicitly set forth that requirement on the face of the letter of credit” … .

The … defendants demonstrated their prima facie entitlement to judgment as a matter of law dismissing the cause of action to recover damages for fraud, since in [defendant’s] letter to [the bank], it accurately and truthfully represented to [the bank] that [defendant] was the beneficiary of the LOC, and satisfied the two conditions set forth in the LOC pursuant to which payment would be made to it, to wit, by (1) referencing the LOC number, and (2) attaching the LOC. Weiss v Benetton USA Corp, 2015 NY Slip Op 00360, 2nd Dept 1-14-15