First Commercial Bank v. Gotham Originals, Inc. (1985)

Bank of Nova Scotia v. Angelica-Whitewear Ltd., 36 D.L.R.4th 161, 166 (Sup.Ct.Can.1987), quoted in John F. Dolan, Documentary Credit Fundamentals: Comparative Aspects, 3 Bank. & Fin.L.Rev. 121, 127 (1989); see also Marino Ind. Corp. v. Chase Manhattan Bank, N.A., 686 F.2d 112, 115 (2d Cir.1982) (“It is the complete separation between the underlying commercial transaction and the letter of credit that gives the letter its utility in financing transactions.”); First Commercial…

Cf. First Commercial Bank v. Gotham Originals, Inc., 64 N.Y.2d 287 , 486 N.Y.S.2d 715 , 475 N.E.2d 1255, 1260 (N.Y.1985) (negotiating bank acquired rights “ ‘to the same extent as if it were named as beneficiary of the credit.’ ” (quoting H.

Branch, 921 F.2d 32, 34 (2d Cir.1990) (“Generally, letters of credit are designed to substitute for, and therefore support, an obligation to pay.”); First Commercial Bank v. Gotham Originals, Inc., 64 N.Y.2d 287 , 486 N.Y.S.2d 715 , 475 N.E.2d 1255, 1258 (1985) (“[T]he credit subsumes a separate agreement by a buyer to pay money to a seller.”).

“A letter of credit is an efficacious arrangement which assures payment for completion of an obligation by placing the duty to pay on an issuer of good financial reputation.” Banco Nacional De Desarrollo v. Mellon Bank, N.A., 726 F.2d 87, 91 (3d Cir.1984); see Voest-Alpine Int’l Corp. v. Chase Manhattan Bank, N.A., 707 F.2d 680 , 682-83 (2d Cir.1983); Venizelos, S.A. v. Chase Manhattan Bank, 425 F.2d 461, 464-65 (2d Cir.1970); First Commercial Bank v. Gotham Originals, Inc.,…

U.C.C. § 5 — 108(f)(1); Gotham Originals, 486 N.Y.S.2d 715 , 475 N.E.2d at 1259 (“[The issuer] is not required to resolve disputes or questions of fact concerning the underlying transaction.”).

This fundamental tenet is not only the source of the "independence principle,” but is also the root of the corollary proposition that the " 'parties [to a letter of credit transaction] deal in documents’ ” (First Commercial Bank v Gotham Originals, supra, at 294-295, quoting Harfield, Letters of Credit, at 76 [ALI-ABA Uniform Commercial Code Practice Handbook 1979]; see, United Bank v Cambridge Sporting Goods Corp., supra, at 259).

Bank v. Gotham Originals, Inc., 475 N.E.2d 1255, 1259 (N.Y. 1985) (“The fundamental principle governing [letters of credit] is the doctrine of independent contracts.”).

In turn, there are three corresponding agreements: the agreement between the applicant and the beneficiary, which creates the basis for the SLC; the agreement between the issuer and the applicant; and the SLC itself (see Nissho, 99 NY2d at 120 ). “[A] fundamental principle governing these transactions is the doctrine of independent contracts [,] [which] provides that the issuing bank’s obligation to honor drafts drawn on a letter of credit by the beneficiary is separate and …

In turn, there are three corresponding agreements: the agreement between the applicant and the beneficiary, which creates the basis for the SLC; the agreement between the issuer and the applicant; and the SLC itself (see Nissho, 99 NY2d at 120 ). “[A] fundamental principle governing these transactions is the doctrine of independent contracts [,] [which] provides that the issuing bank’s obligation to honor drafts drawn on a letter of credit by the beneficiary is separate and …

In turn, there are three corresponding agreements: the agreement between the applicant and the beneficiary, which creates the basis for the SLC; the agreement between the issuer and the applicant; and the SLC itself (see Nissho, 99 NY2d at 120 ). “[A] fundamental principle governing these transactions is the doctrine of independent contracts [,] [which] provides that the issuing bank’s obligation to honor drafts drawn on a letter of credit by the beneficiary is separate and …

It is not required to resolve disputes or questions of fact concerning the underlying transaction” (First Commercial Bank v Gotham Originals, supra, at 295).

In addition, plaintiff's right to collect under the Standby Letter of Credit is completely independent and separate from any issues related to the underlying purchase contract between plaintiff and C&C ( First Commercial Bank v Gotham Originals , 64 NY2d 287, 294 [1985]; see also UCC 5-103[d]; Banco Nacional De Mexico, S.A., Integrante Del Grupo Financiero Banamex v Societe Generale , 34 AD3d 124, 128-129 [1st Dept 2006]).

That is, “the issuing bank’s obligation to honor drafts drawn on a letter of credit by the beneficiary is separate and independent from any obligation of its customer to the beneficiary under the sale of goods contract and separate as well from any obligation of the issuer to its customer under the agreement.” 3Com Corp. v. Banco do Brasil, S.A., 171 F.3d 739, 741 (2d Cir.1999) (quoting First Commercial Bank v. Gotham Originals, Inc., 64 N.Y.2d 287 , 486 N.Y.S.2d 715 , 475 N…

However, the letter of credit created a distinct contractual relationship between the plaintiffs as beneficiaries and the Bank as issuer, which was independent of the Bankruptcy Court order authorizing the Elemco parties to obtain the letter of credit to provide security for the Elemco parties’ obligations under the collective bargaining agreement (see UCC 5-103 [d]; Nissho Iwai Europe v Korea First Bank, 99 NY2d at 120 ; First Commercial Bank v Gotham Originals, 64 NY2d 287…

However, the letter of credit created a distinct contractual relationship between the plaintiffs as beneficiaries and the Bank as issuer, which was independent of the Bankruptcy Court order authorizing the Elemco parties to obtain the letter of credit to provide security for the Elemco parties’ obligations under the collective bargaining agreement (see UCC 5-103 [d]; Nissho Iwai Europe v Korea First Bank, 99 NY2d at 120 ; First Commercial Bank v Gotham Originals, 64 NY2d 287…

A commercial letter of credit transaction involves three separate contractual relationships and undertakings: first, the underlying contract between the bank customer, in this case JCA, and the beneficiary, in this case the landlord; second, the agreement between the issuing bank and its customer, here JCA; and third, the issuance of the letter of credit itself, whereby the issuer agrees to pay the beneficiary or transferee beneficiary in accordance with the terms of the let…

By way of background, the typical letter-of-credit transaction involves three legal relationships: (1) an underlying contractual relationship between the party that obtains the letter of credit (the “applicant”) and the party entitled to draw on it (the “beneficiary”); (2) a relationship between the party that issues the letter of credit (the “issuer”) and the applicant concerning the terms and amount of the credit; and (3) a relationship between the issuer and the beneficia…

The Court of Appeals has explained the doctrine thus: “[T]he issuing bank’s obligation to honor drafts drawn on a letter of credit by the beneficiary is separate and independent from any obligation of its customer to the beneficiary under the sale of goods contract and separate as well from any obligation of the issuer to its customer under their agreement.” (First Commercial Bank v Gotham Originals, 64 NY2d 287, 294 [1985]; see also Gillman v Chase Manhattan Bank, 73 NY2d 1…

It deals in documents and is not required to resolve disputes or questions of fact concerning the underlying transaction (see First Commercial Bank v Gotham Originals, 64 NY2d 287, 294-295 [1985]).

In First Commercial Bank v Gotham Originals (supra at 297), the Court of Appeals held that “it was improper for the lower court to restrain the issuing bank from paying cashier’s checks it had previously issued to the beneficiary following presentment of a draft and necessary documents under a letter of credit” citing Key Intl.

Three distinct contractual relationships are usually present when a letter of credit is issued (see First Commercial Bank v Gotham Originals, 64 NY2d 287, 294 [1985]).

“The purpose of a letter of credit its to substitute for, and therefore support, an *158 engagement to pay money.” First Commercial Bank v. Gotham Originals, Inc., 64 N.Y.2d 287 , 486 N.Y.S.2d 715 , 475 N.E.2d 1255, 1258 (1985).

See also Voest-Alpine Int’l Corp., 707 F.2d at 686; 3Com Corp., 2 F.Supp.2d at 460; Semetex Corp., 853 F.Supp. at 773 ; First Commercial Bank v. Gotham Originals, Inc., 64 N.Y.2d 287, 295 , 486 N.Y.S.2d 715, 719 , 475 N.E.2d 1255, 1259 (1985).

First Commercial Bank v. Gotham Originals, Inc., 64 N.Y.2d 287, 294-95 , 486 N.Y.S.2d 715, 718-19 , 475 N.E.2d 1255, 1258-59 (1985).

It is well established in New York and under the UCP that the issuer’s (i.e., Pamukbank) obligation to pay under a letter of credit is separate and independent from any underlying contractual obligations of the customer (i.e., Metalsac) and the beneficiary (i.e., Taylor) as well as from any obligation of the issuer to its customer under the agreement (First Commercial Bank v Gotham Originals, supra, at 294-295; Ross Bicycles v Citibank, supra).

First, the issuing bank can assume no liability for the performance of the underlying contract because it has no control over making the underlying contract or over selection of the beneficiary (see, First Com mercial Bank v Gotham Originals, supra, at 294).

Thus, according to the Court of Appeals in First Commercial Bank v Gotham Originals (supra, at 295): "Under the general rule the issuer must honor the draft when the documents presented comply with the terms of the letter of credit (Uniform Commercial Code § 5-114 [1]).

Co. v Chemical Bank, 70 NY2d 344, 350-352 ; First Commercial Bank v Gotham Originals, 64 NY2d 287, 294, 295 ; UCC 5-114; Harfield, Practice Commentary, McKinney’s Cons Laws of NY, Book 62½, UCC 5-114, at 686; Official Comment, McKinney’s Cons Laws of NY, Book 6 2½, UCC 5-114, at 688).

See Chase Manhattan Bank v. Equibank, 550 F.2d 882, 886 (3d Cir.1977); Data General Corp. v. Citizens National Bank, 502 F.Supp. 776, 788 (D.Conn.1980); First Commercial Bank v. Gotham Originals, Inc., 64 N.Y.2d 287, 294 , 486 N.Y.S.2d 715, 719 , 475 N.E.2d 1255, 1259 (1985).

See First Commercial Bank v. Gotham Originals, Inc., 64 N.Y.2d 287, 294 , 486 N.Y.S.2d 715, 718 , 475 N.E.2d 1255 (1985).

See First Commercial Bank v. Gotham Originals, Inc., 64 N.Y.2d 287, 294 , 486 N.Y.S.2d 715, 718 , 475 N.E.2d 1255 (1985). 12 The issuing bank's obligation to honor drafts drawn by the beneficiary on a letter of credit is distinct from any duty owed by the buyer, its customer, under the sale of goods contract.

See First Commercial Bank v. Gotham Originals, Inc., 64 N.Y.2d 287, 295 , 486 N.Y.S.2d 715 , 475 N.E.2d 1255 (1985); Southern Indus. v. Fame Trading Registered, No. 89 Civ. 247(MBM), 1989 WL 82411 , at *2 (S.D.N.Y.

See Bouzo v. Citibank, N.A., 96 F.3d 51, 57 (2d Cir.1996), Marino, 686 F.2d at 115 ; Venizelos, 425 F.2d at 466 (“[A]s between the beneficiary of a letter of credit and the issuer ... if ambiguity exists, the words are taken as strongly against the issuer as a reasonable reading will justify.”). .The policies of strict compliance and strict construction in letter of credit law (as opposed to the more relaxed “substantial compliance” standard of general contract law) “reflect…

See First Commercial Bank v. Gotham Originals, Inc., 64 N.Y.2d 287 , 486 N.Y.S.2d 715 , 475 N.E.2d 1255 (1985); Tenn.Code Ann. § 47-5-103(l)(a); J.

See First Commercial Bank v. Gotham, 64 N.Y.2d 287 , 295 & n. 4, 475 N.E.2d 1255 , 1259 & n. 4, 486 N.Y.S.2d 715 , 719 n. 4 (1985); United Bank Ltd. v. Cambridge Sporting Goods Corp., 41 N.Y.2d 254 , 258 n. 2, 360 N.E.2d 943 , 947 n. 2, 392 N.Y.S.2d 265 , 269 n. 2 (1976); Eljay Jrs., Inc. v. Rahda Exports, 99 A.D.2d 408, 409 , 470 N.Y.S.2d 12, 14 (1st Dep’t 1984).

See UCP arts. 13 a & 14 b; see also Gotham Originals, 64 N.Y.2d at 294 ; Barclay Knitwear v. King’ swear Enterprises Ltd., 141 A.D.2d 241 , 533 N.Y.S.2d 724, 727 (1st Dept.1988) (“The plain meaning of the language in the requirement for the [LOC] must control its interpretation”).

Thus, the issuer must honor the draft irrespective of whether the underlying contract has been properly performed” (Gillman v Chase Manhattan, supra, at 12; see, First Commercial Bank v Gotham Originals, 64 NY2d 287, 294 ; United Bank v Cambridge Sporting Goods Corp., 41 NY2d 254 , 259; Phibro Distribs.