The Milky Whey, Inc. v. HSBC Bank USA, N.A. [2024]

Factual Summary:

To support unpaid amounts for goods purchased from the Milky Whey, Inc. (Seller/Beneficiary), the Winning Combination, Inc. (Buyer/Applicant) applied for and caused HSBC Bank Canada (Issuer) to issue a USD 800,000 standby letter of credit in favor of Seller/Beneficiary. HSBC Bank USA, N.A. (Confirming Bank) added its confirmation. The confirmed credit was subject to ISP98 and New York law. Among other documents, Seller/Beneficiary was required to present “ORIGINAL OF [THE] IRREVOCABLE STANDBY LETTER OF CREDIT AND ITS AMENDMENT(S) IF ANY OR REMITTING BANK’S ATTESTATION STATING THAT THE ORIGINAL IRREVOCABLE STANDBY LETTER OF CREDIT HAS BEEN ENDORSED FOR THE AMOUNT CLAIMED.” The value was reduced by amendment to USD 790,000 (the First Amendment). The standby expiration date was also extended three times by amendment with a final expiry of March 9, 2022. As the Judgment notes, the First Amendment required authorized signatures by both Seller/Beneficiary and Confirming Bank.

When Buyer/Applicant purchased goods from Seller/Beneficiary in early 2022, Buyer/Applicant carried an outstanding balance of more than USD 790,000. Seller/Beneficiary presented documents to Confirming Bank “on or about March 9, 2022”, the standby’s expiry date; Confirming Bank dishonored “because a copy of the First Amendment, rather than the original, was presented.” Issuer refused to waive this discrepancy when requested by Confirming Bank.  Accordingly, Seller/Beneficiary sued Confirming Bank and Issuer for wrongful dishonor and breach of contract in New York state court. After the banks removed the action to federal court and Seller/Beneficiary amended its complaint, the banks moved to dismiss. The U.S. District Court for the Southern District of New York, Swain, J., granted the motion to dismiss.

Analysis:

After reciting the general principles regarding a motion to dismiss under U.S. Fed. Rules of Civil Procedure 12(b)(6), the Judge noted that a reviewing court will generally only look to the “four corners” of the complaint to determine whether a plausible claim has been stated. In circumstances where documents have been attached or incorporated by reference, however, the court will consider those documents (such as an attached contract) integral and consider them essential to the complaint. In the instant action the Judge viewed the standby letter of credit, the ISP98 Rules, and notably, “the Official Commentary to ISP98 [as] likewise integral to the determination of the sufficiency of the Amended Complaint to state a viable claim.”

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Following a brief review of standby letter of credit law in New York, the Judge gave considerable attention to the proper standard for review of documents. In the context of a confirming bank making its own irrevocable undertaking to honor a complying presentation, the Judge observed that a confirming bank “inspects the documents rigorously to determine that they comply exactly with the requirements of the letter of credit – for the documents are its only protection.” (citation omitted). Honoring against non-complying documents could expose a confirmer to a wrongful honor suit by the issuing bank. Citing N.Y. UCC Rev. Section 5-108 (and its Official Comment 1), the Judge noted the codified standard in N.Y. is “strict compliance”; that standard contemplates the “ministerial” role of banks in standby LC transactions, and requiring banks to “determine the substantiality of discrepancies would be inconsistent with [their] function.” Strict compliance, however, does not mean “slavish conformity” to the LC terms as minor typographical errors may be excused in limited circumstances.

The key point of dispute was whether Seller/Beneficiary plausibly alleged that Confirming Bank wrongfully dishonored the presentation such that the motion to dismiss should be denied. Seller/Beneficiary claimed its failure to present the original First Amendment “was a formality of no practical consequence.” Accordingly, was “provision” of the copy Amendment “a sufficiently conforming presentation” as a matter of law? At this point, the Judge drew attention to the standby being issued subject to ISP98:

Despite the adoption of ISP98 by the International Chamber of Commerce nearly twenty years ago, few courts appear to have opined on the meaning of its provisions and its interactions with the relevant forum’s body of laws where a standby letter of credit adopts the ISP98 Rules. Much of the Court’s analysis therefore turns on the language of the UCC, the ISP98 Rules, the Official Comments to the UCC, and the Official Commentary to ISP98.

While N.Y. UCC Rev. Article 5 governs letters of credit, Section 5-103 allows for variation by agreement. Citing UCC Section 5-116 (and Official Comment 3), the Judge noted how Revised Article 5 differs from the prior non-uniform N.Y. adoption (prior Section 5-102(4)) which stated that LCs subject to the UCP displaced Article 5. Under Revised Article 5, practice rules cannot override the non-variable terms of Article 5 and where there is no conflict between Article 5 and ISP98, for example, both apply. Turning to the ISP98 Official Commentary, Comment 5 to ISP98 Rule 1.02 provides that ISP98 Rules apply insofar as the “applicable law may be derogated from or varied”. The Judge said the “ISP98 Rules therefore govern the instant dispute, subject to the exceptions laid out in the UCC and the terms of the HSBC SBLC.” The standard for document examination is covered by ISP98 Rule 4 (further explained in the Official Commentary, Comment 1) which notably does not adopt the term “strict compliance.” Critical to the instant case is ISP98 Rule 4.15(a) which provides that presented documents must be originals. Unless a standby provides otherwise, requiring originals is implicit in standard practice (citing Official Commentary ISP98 Rule 4.15, Comment 2). Seller/Beneficiary acknowledged not presenting the original First Amendment nor an alternate remitting bank attestation.

Seller/Beneficiary sought to rely on the decision in Ladenburg Thalmann & Co. v. Signature Bank, 128 A.D.3d 36 (N.Y. App. Div., 1st Dep’t 2015) to argue the motion to dismiss should be denied. The court in Ladenburg found the LC text arguably did not require presentation of original amendments and concluded that the missing original amendment in that case had been superseded by others. Moreover, Confirming Bank noted that Ladenburg dealt entirely with the UCC whereas the instant action involved ISP98. The Judge agreed, concluding that “the undisputed failure by [Seller/Beneficiary] to provide an original of the First Amendment proves fatal to the … claim for wrongful dishonor”, i.e. no timely presentation of complying documents.

Provided Standby Text:

[Documents Required] ORIGINAL OF [THE] IRREVOCABLE STANDBY LETTER OF CREDIT AND ITS AMENDMENT(S) IF ANY OR REMITTING BANK’S ATTESTATION STATING THAT THE ORIGINAL IRREVOCABLE STANDBY LETTER OF CREDIT HAS BEEN ENDORSED FOR THE AMOUNT CLAIMED.

…

EXCEPT SO FAR AS OTHERWISE EXPRESSLY STATED, THIS IRREVOCABLE STANDBY LETTER OF CREDIT IS SUBJECT TO THE INTERNATIONAL STANDBY PRACTICES – ISP 98, INTERNATIONAL CHAMBER OF COMMERCE PUBLICATION NUMBER 590 (“ISP 98”) AND, FOR MATTERS NOT COVERED BY ISP 98, SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

Comment:

The posture and result of this action resembles recent decisions in Windsor Township v. Tompkins Financial Corp., No. 592 C.D. 2021 (Pa. Commw. Ct. Oct. 18, 2022), summarized in Feb. 2023 DCW at 16, and ProQuip Ltd. v. Northmark Bank, 103 Mass. App. Ct. 133 (2023), summarized in Sept. 2023 DCW at 14.