ALI-ABA Course of Study Commercial Real Estate Defaults ...

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3.13.2 Non-Documentary Conditions.
The proposed revision of U.C.C. Article 5 broadens the definition of
"Document" to include "other record, statement or representation of fact"
to recognize the use of letters of credit other than in trade related
transactions. Non-documentary conditions must be disregarded by the
issuer.
3.13.3 Subrogation.
Section 5-117 of the revisions to U.C.C. Article 5 as proposed in June
1995 subrogates an issuer that honors a presentation to the rights of the
beneficiary as if such issuer were a secondary obligor of the underlying
obligation. 75 This section endorses the holding in Tudor Development
Group, Inc. v. U.S.F.&G. 76
3.13.4 Independence Doctrine. 77
The basic principal of letter of credit law is the so called "Independence
Doctrine" that the letter of credit transaction is intended to be independent
of the underlying transaction with respect to which the letter of credit has
been issued. 78
3.13.5 Fraud in the Transaction.
Courts are not consistent as to whether particular circumstances amount to
fraud such that a court may enjoin presentment or honoring of a letter of
credit. 79 Sections §5-114 of the U.C.C. 80 is considered to be a codification
of the Stzejn case "Fraud in the Transaction" exception in providing that
75 See Restatement of the Law Third, Suretyship §1 (1995).
76 968 F.2d 357 (3rd Cir. Pa. 1992).
77 See Note, The Independence Rule in Standby Letters of Credit, 52 Univ. of Chicago L.R. 218 (1985).
78 In the classic case of Stzejn v Henry Schroeder Banking Corp., 177 Misc 719, 31 N.Y.S. 2d 631 (N.Y. Sup., 1941)
an exception was carved out of the common law rule of absolute independence of the credit and underlying transaction
by holding that the issuer is not required to honor the beneficiaries demand for payment if there has been "fraud in the
transaction". In that case the fraud was in the beneficiary shipping junk under a bill of lading for bristles. Article 5 of
the Uniform Commercial Code deals with Letters of Credit.
79 For references to cases that have permitted an injunction on various grounds see Grounds Air Transfer v. Westgate
Airlines, 899 F.2d 1269, 1273 (1st Cir. 1990).
80 See footnote immediately above.
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DSC:767996.2
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