Problem Set 18
18.1. Consider anew the facts of Problem 17.3, in
which FSB failed to make a timely response to a draft on a $12,000
letter of credit issued by FSB. As the facts of that problem indicate,
the draft did not comply with the requirements of the letter of credit.
(a) Assume that FSB received a $12,000 deposit from the applicant at the
time that FSB issued the letter of credit. If FSB is forced to pay
$12,000 to the beneficiary, can FSB keep the $12,000 to reimburse
itself? UCC §§ 4-407, 5-108(i)(1), 5-117(a), 5-117 comment 1.
(b) Same facts as question (a), but FSB did not take a deposit
from the applicant. Can FSB recover the $12,000 from the applicant? UCC § 5-117(a).
18.2. Jane Halley from Boatmen’s Bank (introduced in Problem Set
17) calls first thing one morning with another letter-of-credit problem
for you. This one involves a letter of credit that Boatmen’s issued for
$1 million to Riverfront Tools (RFT). Early last week (ten days ago),
she received a draft on the letter of credit, which appeared to contain
all of the requisite documents. For reasons that are not clear, her
office failed to process the draft in a timely manner. When she found
out about the problem this morning, she immediately contacted the
applicant to tell it that she had found the draft and was about to
process it. The applicant told her that the draft must be forged,
because the applicant had talked that morning to Carl Eben (the
president of RFT), who had told the applicant that RFT would be
submitting a draft tomorrow. Given Jane’s delay, must Boatmen’s honor
the draft? UCC § 5-108(b), (c) & (d); UCP Article 14(d) & (e). Would
your answer be different if the letter of credit were issued by a
Boatmen’s branch located outside the United States? UCC §§ 5-116(b).
18.3. At a meeting with Jodi Kay (back from Problem Set 17), Jodi
asks your advice about some of the risks she faces in letter-of-credit transactions. Specifically, she wants to know what her responsibility would be if she receives a presentation drawing on one of her letters of credit that is totally forged, fails to understand that the presentation is forged, and consequently honors it. Specifically, she wants to know if she will be able to obtain reimbursement from her customer and if she will be obligated to honor a later legitimate draft. (She wants to know whether she can be forced to pay twice.) What do you tell her? UCC §§ 5-108(a), 5-108(i)(1), 5-108(i)(5), 5-108 comment 12, 5-109(a)(2).
18.4. As you leave the office for the weekend, you get a
desperate call from Archie Moon. He tells you that he has just received
a shipment from Malay Ink Company of what should have been four barrels
of expensive indigo ink. Unfortunately, the barrels appear to contain
ordinary black printer’s ink, which has only one-fourth the value of the
ink that he ordered. Archie is concerned because he obtained a $75,000
letter of credit to pay the shipper, and is worried that his bank will
proceed to pay a draft on the letter of credit. He called his bank this
morning. The banker told Archie that she had received a draft on the
letter of credit and that the draft appeared to be in order. The banker
declined to defer her consideration of the draft and told Archie that in
the ordinary course of business the bank would honor the draft tomorrow
morning. What do you advise? UCC §§ 2-601, 2-711, 5-108(a) & (i)(1),
5-109(b), 5-109 comment 1, 5-111.
18.5. Same facts as Problem 18.4, but assume now that the
draft and supporting documents were presented to the issuer by the Bank
of Hong Kong and that nobody at that bank had any reason to doubt the
legitimacy of those documents or the underlying transaction. Does your
answer change? UCC §§ 5-108(i)(1), 5-109(a)(2), 5-109(b)(2).
18.6. When Jane Halley comes in at the end of the day to finish
up some paperwork associated with Problem 18.2, she mentions another
problem related to a letter of credit that she has issued with Toy
Manufacturing Company as the beneficiary. The letter of credit is in the
form set forth in Figure 17.1. Today she received a draft drawn on that
letter of credit by Hong Kong Toys. The draft included all the documents
specified by the letter of credit. Attached to the draft was the
original letter of credit, to which a single piece of paper was stapled.
The piece of paper appears to be signed by Sun Yat Toy as President of
Toy Manufacturing Company, and reads as follows: “The undersigned Toy
Manufacturing Company hereby transfers the attached letter of credit and
all rights under that letter of credit to Hong Kong Toys.”
(a). Is Jane obligated to honor the draft? Should she
honor the draft? UCC §§ 5-112(a), 5-114(d).
(b) Would your answer change if the draft also included a cover
letter explaining that Hong Kong Toys had acquired the letter of credit
in connection with a transaction in which it merged with Toy
Manufacturing Company? UCC § 5-113.
