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Sztejn v. J. Henry Schroder Banking Corp. - 177 Misc. 719, 31 N.Y.S.2d 631 (Sup. Ct. 1941)

Rule:

When the issuer of a letter of credit knows that a document, although correct in form, is, in point of fact, false or illegal, he cannot be called upon to recognize such a document as complying with the terms of a letter of credit.

Facts:

On January 7, 1941, the plaintiff Sztejn and his co-venturer, Schwarz, contracted to purchase a quantity of bristles from the defendant Transea Traders, Ltd. In order to pay for the bristles, the plaintiff and Schwarz contracted with the defendant J. Henry Schroder Banking Corporation (Schroder Banking), a domestic corporation, for the issuance of an irrevocable letter of credit (LOC) to Transea Traders, which provided that drafts by the latter for a specified portion of the purchase price of the bristles would be paid by Schroder Banking upon shipment of the described merchandise and presentation of an invoice and a bill of lading covering the shipment, made out to the order of Schroder. Banking The LOC was delivered to Transea by Schroder Banking's correspondent bank in India, defendant The Chartered Bank of India, Australia and China. Transea Traders placed 50 cases of material on board a steamship, procured a bill of lading from the steamship company and obtained the customary invoices. These documents described the bristles called for by the LOC. Alleging that Transea Traders filled the 50 crates with worthless material to simulate genuine merchandise and defraud plaintiff Sztejn and Schwarz, Sztejn brought the present complaint to restrain payment or presentment for payment of drafts under a letter of credit issued to secure the purchase price of the merchandise. The Chartered Bank filed a motion to dismiss, arguing that it was only concerned with the documents, and on its face, they conformed to the requirements of the LOC.

Issue:

Should a bank recognize defendant seller’s letter of credit, notwithstanding the fact that the letter of credit’s alleged illegality had been called to the bank’s attention?

Answer:

No.

Conclusion:

The court denied defendant's motion to dismiss, holding that The Chartered Bank was not a holder in due course, but was a mere agent for collection for the account of the seller charged with fraud. According to the court, where the seller's fraud had been called to a bank's attention, before the drafts and documents had been presented for payment, the principle of the independence of the bank's obligation under the letter of credit should not be extended to protect an unscrupulous seller. The court averred that when the issuer of a letter of credit knew that a document, although correct in form, was false or illegal, it could not be called upon to recognize such a document as complying with the terms of a letter of credit. A bank should be vitally interested in assuring itself that there were some goods represented by the documents.

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