ALL SEASON IND. v. TRESFJORD BOATS A/S

SULLIVAN, Judge.

All Season Industries, Inc. (All Season) appeals from the grant of partial summary judgment in favor of Tresfjord Boats A/S (Tresfjord). The order granting summary judgment dissolved a previously entered preliminary injunction against Summit Bank, restraining payment under a letter of credit in favor of Tresfjord.

We affirm.

All Season entered into an agreement with Tresfjord, a Norwegian company, to reproduce and manufacture in the United States a boat designed and manufactured by Tresfjord in Norway. To facilitate the agreement, All Season applied for an irrevocable, commercial letter of credit through Summit Bank. On July 9, 1987, Summit Bank issued a letter of credit in favor of Tresfjord. The letter of credit called for Tresfjord to make two shipments. Shipment "A" was to include one "Tresfjord Ultra" boat (Record at 107) and a complete set of patterns for the production of moulds for the boat's hull, deck and inner liner. Shipment "B" was to include a complete set of patterns for the production of moulds for the boat's flybridge, sunbridge, bridge liners, cabin liner, bowspit, swimplatform, hatches and engine mounts, all available technical drawings and diagrams and all available documentation on jigs and fixtures.

The letter of credit also authorized Forretningsbanken A/S, the advising bank in Norway, to pay a total of $271,050.00 upon presentment by Tresfjord of three drafts. The first two drafts were presented and paid. The third draft, which is the subject of this litigation, was to be paid August 15, 1988.

Prior to the payment of the third draft, All Season filed suit against Tresfjord seeking injunctive relief and damages for breach of contract. All Season also sought and obtained a preliminary injunction restraining Summit Bank from paying the third draft. All Season moved for partial summary judgment seeking permanent injunctive relief, and Tresfjord moved for summary judgment to dissolve the preliminary injunction. The court sustained Tresfjord's motion, dissolved the preliminary injunction, and denied permanent injunctive relief to All Season.1

Simply stated, the issue presented upon appeal is whether the trial court erred in finding as a matter of law that All Season was not entitled to injunctive relief, thereby permitting Summit Bank to pay Tresfjord pursuant to the letter of credit.

A letter of credit is an engagement by a bank or other issuer whereby the bank agrees at the request of a customer to honor demands for payment which comply with the terms specified in the letter of credit. Uniform Customs and Practice for Documentary Credits (1983 Revision), International Chamber of Commerce, Publication No. 400 (UCP), art. 2; I.C. 26-1-5-103(1)(a) (Burns Code Ed. Supp. 1990).2 There are three parties to a letter of credit: (1) the "customer", the party requesting that the credit be issued, in this case All Season; (2) the "issuer", the party issuing the credit, in this case Summit Bank; and (3) the "beneficiary", the party authorized under the terms of the credit to draw or demand payment, here Tresfjord. UCP, art. 2; I.C. 26-1-5-103. The present case also involves a fourth party. A Norway bank, Forretningsbanken, acted as an "advising bank", a neutral party which advises the beneficiary of the issuance of a credit by another bank. UCP, art. 8; I.C. 26-1-5-103(e).

Letters of credit are unique financing arrangements often employed in international sales of goods because the letter of credit contract is independent of the underlying contract. See, Pringle Associated Mortgage Corp. v. Southern Nat'l Bank (5th Cir.1978) 571 F.2d 871. Under a letter of credit, the issuing bank must pay drafts or demands for payment which comply with the terms of the credit, regardless of any breach of the underlying contract between the customer and the beneficiary. I.C. 26-1-5-114(1); White & Summers, 2 Uniform Commercial Code § 19-2 at 8 (3d Ed. 1988); Dolan, The Law of Letters of Credit, para. 2.01, para. 4.03[6][a] (1984). In keeping with the goal of facilitating international trade, this principle of independence assures the beneficiary of prompt payment from a solvent party and minimizes the risk of judicial interference and litigation in a foreign jurisdiction. See Banque Worms v. Banque Commerciale Privee (S.D.N.Y. 1988) 679 F.Supp. 1173, aff'd (2nd Cir.), 849 F.2d 787.

Indiana Code 26-1-5-114 sets forth a limited exception to the issuer's duty to honor drafts or demands for payment which comply with the terms of the credit.3 That statute provides, in relevant part:

Therefore, when a document appears on its face to conform with the terms of the credit, but the document does not in fact conform to the necessary warranties or is forged or fraudulent or there is fraud in the transaction, an issuer acting in good faith, may, without liability to the customer, honor the draft, or a customer may seek to enjoin the issuer from paying the draft.

In the present case, All Season, the customer, does not argue that the documents do not comply with the necessary warranties or that the documents are forged or fraudulent. All Season attempts to inject an issue of "fraud in the transaction" by reference to the trial court's original findings. When the trial court issued the preliminary injunction, the court made findings of fact which included findings that the transaction between All Season and Tresfjord was "infected with fraud". Record at 157. Upon appeal, All Season asserts that these findings and the evidence presented at the preliminary injunction hearing, create a genuine issue of material fact rendering summary judgment inappropriate. Ind.Rules of Trial Procedure, Trial Rule 56.

However, fraud was not alleged in All Season's complaint nor was it an issue until the court, being of the correct view that fraud was a condition precedent to the issuance of an injunction under these circumstances, read a fraud allegation into All Season's complaint for an injunction.

At the preliminary injunction hearing, the court engaged in the following discussion with counsel for All Season:

We note that some authorities have argued that the "fraud in the transaction" exception should be limited to cases of fraud in the credit transaction and not the underlying transaction. Dolan, The Law of Letters of Credit, para. 7.04[3][b]; Harfield, Enjoining Letter of Credit Transactions, 95 Banking L.J. 596 (1978). These authorities maintain that a limited approach more closely serves the independent nature of letter of credit transactions. We agree with this approach but need not do so to resolve the issues here.

Even if "fraud in the transaction" were held to encompass the underlying transaction, findings of fact made upon issuance of a preliminary injunction, as required by Ind.Rules of Trial Procedure, Trial Rule 65(D), are not binding upon the trial court. Cement Masonry Workers Union, Local No. 101 v. Ralph M. Williams Enterprises (1976) 3d Dist., 169 Ind.App. 647, 350 N.E.2d 656, 657. Moreover, the evidence presented at the preliminary injunction hearing does not support a finding of "fraud in the transaction". No genuine issue of material fact is present with respect to fraud in the transaction.

All Season's primary contention is that it is entitled to an injunction because the documents relating to Shipment B do not conform to the terms of the letter of credit. The letter of credit specifies precisely what Tresfjord was to include in Shipment B:

The commercial invoice and bill of lading from Shipment B disclose only the shipment of "moulds for production of plastic boat parts." Record at 153, 154. Therefore, the bill of lading and commercial invoice for shipment B do not conform to the letter of credit.

However, the present litigation involves Summit Bank's duty to pay the third draft called for by the letter of credit. All Season erroneously presumes that the third draft is a "documentary" draft. A letter of credit may call for a documentary draft, meaning that honor of the letter of credit is conditioned upon the presentation of a document or documents which comply with the terms of the credit. UCP art. 2; I.C. 26-1-5-103(b).5 In this case, the letter of credit specifically informs Forretningsbanken, the advising bank, how to handle the drafts. The first draft of $171,050.00 is "PAYABLE AT SIGHT AGAINST PRESENTATION OF DOCUMENTS." (Emphasis supplied.) Record at 107. Therefore, the letter of credit clearly requires the first draft to be documentary. However, the credit states that the second and third drafts are payable, as follows:

Record at 107.

The letter of credit does not require the presentation of any documents with the second or third drafts. Therefore the letter of credit is "clean" with respect to the second and third drafts. See, Professional Modular Surface, Inc. v. Uniroyal, Inc. (1982), 108 Ill.App.3d 1046, 64 Ill.Dec. 625, 440 N.E.2d 177; Baker v. Nat'l Blvd. Bank of Chicago (1975) N.D.Ill., 399 F.Supp. 1021. See also, 8 Indiana Practice, Uniform Commercial Code Forms, art. 5, at 309 (1986); Uniform Commercial Code § 5-102, official comment. A clean letter of credit requires only that the beneficiary present a draft and no other documents. In the case of a clean letter of credit, the issuer's only obligation is to carefully inspect the draft presented by the beneficiary to ensure that the draft is not a fraud or forgery. See, Baker, supra, 399 F. Supp. at 1024. There can be no issue as to whether documents conform to the letter.

Even if it were otherwise, it is our considered opinion that a customer may not enjoin an issuer from payment on a documentary letter of credit solely upon grounds that documents do not conform to the letters of credit absent a showing (1) that the documents do not conform to the warranties made on negotiation or transfer of a document of title or of a certificated security; (2) that the documents are forged or fraudulent; and (3) that there is fraud in the transaction.6 I.C. 26-1-5-114(2). See, Dolan, The Law of Letters of Credit, para. 7.04[3]. The first sentence of § 5-114(2) states:

If the documents do not appear on their face to comply with the terms of the credit, then § 5-114(2) is inapplicable and injunctive relief is not the appropriate remedy.

In Peoples State Bank of Clay County v. Gulf Oil Corp. (1983) 1st Dist. Ind. App., 446 N.E.2d 1358, the customer sought to enjoin the issuer from paying the beneficiary under an irrevocable, documentary letter of credit on the basis that the documents presented did not conform to the terms of the letter of credit. There was no allegation of forged or fraudulent documents, fraud in the transaction, or a breach of warranties as specified in § 5-114(2).

It is our analysis of the law that in an injunction proceeding a trial court may not substitute its own determination as to conformance of documents for that of the issuer. The trial court in Peoples did not do so. Rather, the court made a determination in the absence of a conformance decision by the issuer. There, the issuer refused to make a determination regarding the conformity of the documents until the temporary restraining order was dissolved. The trial court, however, found that the documents sufficiently conformed to the credit's requirements. Without addressing the issue whether injunctive relief is available upon the sole ground that the documents presented do not comply with the letter of credit, our First District upheld the trial court's conformity determination7 and held that there was no error in the trial court's refusal to enjoin payment. Because the Peoples case did not squarely address the issue of whether and under what circumstances an injunction is available in a letter of credit transaction, we do not state a holding contrary to the holding in that case. We merely clarify that injunctive relief is only available in the three instances specifically enumerated in the statute.8

We therefore hold that, as a matter of law, All Season was not entitled to injunctive relief and the court did not err in granting summary judgment in favor of Tresfjord.

The judgment is affirmed and the State Treasurer's Office is directed to release the funds on deposit as a result of the posting of appellant's injunction bond, together with accumulated interest, to the Clerk of this Court for further disbursement.

BAKER and HOFFMAN, JJ., concur.