A. The Underlying Transaction

Figure 17.1 - Irrevocable Commercial Letter of Credit

B. Advising and Confirming Banks

Figure 17.2 - Issuing the Letter of Credit

C. The Terms of the Credit

D. Drawing on the Credit

Samuel Rappaport Family Partnership v. Meridian Bank
Carter Petroleum Products, Inc. v. Brotherhood Bank & Trust Co.

E. Reimbursement

Figure 17.3 - Payment with a Letter of Credit

Problem Set 17

Figure 17.1
Irrevocable Commercial Letter of Credit
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Figure 17.2
Issuing the Letter of Credit
EPS | GIF | WMF

Figure 17.3
Payment with a Letter of Credit
EPS | GIF | WMF

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Problem Set 17

17.1. Jodi Kay at CountryBank (most recently encountered in Problem Set 16) calls the first thing this morning to ask you about a minor letter-of-credit problem. Her problem arises from a letter of credit that her bank has issued, which states that it will provide payment for goods shipped “from the end of February 1998.” She received a draft this morning including an invoice for goods shipped on February 21, 1998. She tells you that the letter of credit incorporates the UCP by reference. Can it be possible that the draft complies? UCP Articles 47(a) & (d).

17.2. Right after you get off the phone with Jodi, your assistant tells you that you have a call holding from Cliff Janeway (your book-dealer friend). Cliff is frustrated because he is having trouble collecting on a letter of credit for a large shipment of books that he just sent overseas. When he submitted a draft on the letter of credit, the confirming bank (SecondBank) told him that it was not obligated to pay Cliff because the issuing bank (FirstBank) had closed. Thus, the officer explained to Cliff, SecondBank would not be able to obtain any reimbursement if it paid Cliff. Accordingly, the officer argued, SecondBank’s confirmation of Cliff’s letter of credit was unenforceable for lack of consideration. Cliff wants to know what he can do to obtain payment. UCC § 5-105 & comment.

17.3. Ben Darrow (your banker client from FSB, most recently from Problem Set 16) has an appointment this morning to discuss two letter-of-credit problems with you. The first arises from a situation where FSB misfiled a draft presented on a letter of credit and thus failed to respond to it. In the case in question, the beneficiary presented a draft on January 5, 1998. Ben’s bank did absolutely nothing until the beneficiary wrote in early February and repeated its demand for payment. Upon review of the letter of credit, Ben saw that the letter of credit called for payment based on documents covering a shipment of 100 cases of Llano Estacado wine at a price of “around $140 per case.” The draft seeks payment of $120 per case. Ben wants to know if he is obligated to pay on the credit. What do you say? UCP Articles 13(b), 14(d) & (e), 39(a); UCC §§ 5-108(c), 5-108 comment 3.

17.4. Ben’s second question involves a letter of credit that FSB received initially by an authenticated electronic-mail message from Portland State Bank (PSB). The message requested that FSB advise the beneficiary of the issuance of the credit and, if willing, also serve as a confirming bank. Always trying to follow procedures, Ben started by making sure that the message satisfied FSB’s security procedure for transmissions from PSB. When it appeared to comply, Ben printed out the letter of credit, added an indication that FSB confirmed the letter of credit, and had the original confirmed letter of credit delivered to the beneficiary by messenger. Last week, Ben honored a draft on the letter of credit in the amount of $500,000 (the stated face amount of the credit that Ben delivered).

That’s where things started to break down. When Ben sought reimbursement from PSB, Ben learned that the letter of credit should have been for $50,000, not $500,000. The $500,000 figure appears to have been a typographical error by PSB in the electronic-mail message. Moreover, on looking through his file, Ben sees that he received a written copy of the letter of credit, with the correct amount, in the mail the day after Ben delivered the letter of credit to the beneficiary. Does PSB have to reimburse FSB for the funds that FSB disbursed on PSB’s letter of credit? UCP Article 11(a)(i); UCC §§ 5-107(a), 5-108(a) & (i)(1).

17.5. You return from lunch to an appointment with Jane Halley from Boatmen’s Bank. She has a customer, Toy Importing Company (TIC), for whom she has issued a letter of credit in the form set forth in Figure 17.1. The letter of credit was to pay for a shipment of toys from Toy Manufacturing Company (TMC) in Hong Kong. Because TIC is dissatisfied with the toys, TIC wants Boatmen’s to reject the draft that has been presented to Boatmen’s under the letter of credit. Jane wants to be as accommodating as possible, but does not want the bank to dishonor a proper draft.
Acting under that letter of credit, TMC on September 21, 1996, submitted a draft with the appropriate documents to its main bank, Bank of Hong Kong. Bank of Hong Kong processed those documents, paid TMC on the letter of credit, and submitted the draft to Boatmen’s on September 24, 1996. Jane wants to know if she can reject the draft because it was presented to her after the letter of credit had expired. She says she could understand if she was obligated to accept a draft presented to Hang Seng Bank (the advising bank) in a timely manner, but how can she possibly be obligated to respect a draft presented to some bank with which she has not had any prior dealings. What do you tell her? UCC §§ 5-102(a)(11), 5-102 comment 7, 5-108 comment 1; UCP Article 10(b)(i) & (d).

17.6. Before Jane leaves your office, she raises one other situation with you. One of her department’s largest customers is the April Company, a department store that has a large volume of imported shipments. As part of a master letter-of-credit agreement with Boatmen’s, the April Company and Boatmen’s established special procedures for drafts submitted under letters of credit issued to some of April’s regular suppliers. April and Boatmen’s agreed that Boatmen’s would provide same-day service on drafts for less than $25,000 submitted on designated “Express Draft” letters of credit. As part of that arrangement, April agreed that Boatmen’s would not be obligated to review any of the documents submitted with such drafts, and Boatmen’s agreed to reduce its normal processing fees by 50% for those drafts.

Jane’s problem comes from a $20,000 draft submitted last week on one of the “Express Draft” letters of credit. Following its normal practice, Jane’s department honored the draft in a few hours, without even looking at the underlying documents. When the documents got to April, April noticed that the documents did not include the bill of lading called for by the letter of credit. On further inquiry, April has discovered that the supplier/beneficiary (a small Indonesian company) in fact did not ship the goods in question; indeed, that company has become insolvent and stopped operations. April’s shipping clerk called Jane yesterday and said that under the circumstances April did not want to reimburse Boatmen’s for that draft. Jane tells you that she is not sure she wants to make an issue of the matter, but she wants to know whether she has a right to payment from April. What do you say? UCC §§ 4-103(a), 5-103(c), 5-103 comment 2, 5-108(a) & (i)(1), 5-108 comment 1 paragraph 6.

Assignment Update

No update is needed at this time.