Societe Anonyme Marocain De L’Industrie Du Raffinage v. Bank of Am. N.A., Index No. 653329/15, 2/8/16 (Ramos, J.)

Choice of Law; CPLR § 3213; Uniform Commercial Code (UCC); Independence Doctrine; Fraud

By: Gregory Brown, Jr. | Staff Writer

Societe Anonyme Marocain De L’Industrie Du Raffinage (“SAMIR”) entered into an agreement with Plaintiff to purchase one million barrels of crude oil. Pursuant to the agreement, SAMIR was required to pay Plaintiff in two separate installments: one for thirty (30%) percent of the quantity of oil sold to SAMIR and the other for seventy (70) percent of the quantity of oil sold to SAMIR. Additionally, SAMIR was required to obtain a standby letter of credit (“SLC”) from a bank as security for the seventy (70%) percent quantity of oil payment. The remaining thirty (30%) percent was unsecured. SAMIR then obtained the SLC from Defendant, which provided that any payment made by Defendant in favor of Plaintiff referring to the SLC would reduce the payable amount of the SLC. Later, Plaintiff completed the entire shipment and issued two separate invoices to SAMIR: one for thirty (30%) percent of the quantity of oil and the other for seventy (70%) percent of the quantity of oil. To satisfy the secured invoice of seventy (70%) percent, SAMIR authorized Defendant to make a wire transfer to Petraco in the full amount of the invoice. SAMIR, however, failed to pay the unsecured invoice for the thirty (30%) percent quantity. Although Plaintiff accepted the payment for the secured invoice, Plaintiff attempted to receive payment for the unsecured invoice from the SLC by making three separate presentations to Defendant. The presentations were needed to verify that Plaintiff met the requirements to receive payment from the SLC.

Defendant, however, refused all three presentations. In response to Defendant’s third refusal, Plaintiff brought suit against Defendant seeking the amount of the unsecured invoice. In response, SAMIR brought an action to enjoin Defendant from making any further payments on the SLC on the basis that the secured invoice was already paid in full. Later, Plaintiff moved for summary judgment in lieu of complaint pursuant to CPLR § 3213, on the grounds that Plaintiff was entitled to judgment due to its presentation of documents that satisfied the SLC requirements. Plaintiff argued that, under applicable English law, it was permitted to allocate part of the money from SAMIR’s payment in order to satisfy the past-due unsecured invoice; thus, the unpaid balance would apply to the secured invoice.

The Court denied Plaintiff’s motion for summary judgment. First, the Court rejected the assertion that English law applies to the issue of Defendant’s liability under the SLC, and instead the Uniform Commercial Code, as interpreted by the Pennsylvania Supreme Court, applied. Where a letter of credit requires a demand for payment, in absence of a choice of law provision indicating otherwise, the liability of the issuing bank is governed by the law of the place of issuance. Here, the SLC did not contain a choice of law provision and was issued in Pennsylvania. Therefore, Pennsylvania law would apply.

Second, the Court ruled that Defendant properly dishonored the third Plaintiff presentation. Defendant must dishonor a presentation that does not satisfy the specific terms of the SLC; dishonoring a presentation precludes Plaintiff from receiving any payment from the SLC. The Court focused on three key facts to make this determination. The first fact focused on was Plaintiff’s documents for the third presentation that stated that Plaintiff sought payment for seventy (70%) percent of the quantity of oil and referenced the same invoice number as the secured invoice that SAMIR paid. Since the secured invoice was already paid, it would be impossible for Defendant to honor Plaintiff’s third presentation. The second fact the Court focused on was the SLC’s terms that any payment by Defendant would reduce the amount available for further payments from the SLC, so Plaintiff’s third presentation was an attempt to overdraw the SLC. The third fact the Court focused on was the use of extrinsic facts about SAMIR and Plaintiff’s underlying agreement. Doing so would violate the independence doctrine, which states that an issuing bank must honor a letter of credit only when the documents presented, on their face, appear to comply with the terms of the letter of credit. Had the bank looked beyond the SLC to SAMIR and Plaintiff’s underlying agreement, the purpose of the SLC would have been undermined. Thus, the Court found that Defendant properly dishonored the third presentation, so Plaintiff failed to demonstrate that it was entitled to summary judgment pursuant to CPLR § 3213.

Accordingly, the Court denied Plaintiff’s motion for summary judgment. The Court noted that Petraco’s conduct of trying to draw down on the SLC three times based on an invoice that was already paid was fraudulent.

Societe Anonyme Marocain De L’Industrie Du Raffinage v. Bank of Am. N.A., Index No. 653329/15, 2/8/16 (Ramos, J.).

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