91 N.Y.2d 13 (1997)
An issuing bank that honors a letter of credit by making payment based on facially compliant documents may subsequently bring a claim against the beneficiary for recovery of overpayments if the documents are later found to be fraudulent, provided there is no contractual language (such as a merger clause) barring such action and sustainable fraud allegations exist.
Summary
This case concerns a dispute over alleged overpayments made by Morgan Guaranty Trust Co. (Morgan), the issuing bank, to the beneficiaries (Mennen et al.) of letters of credit. These letters of credit secured promissory notes issued in a stock buy-out. After Morgan honored the drafts presented by the beneficiaries, it claimed overpayment due to alleged misstatements in the draw statements. The New York Court of Appeals held that while the independence principle generally protects beneficiaries of letters of credit, it does not bar an issuer’s claim against a beneficiary after payment if fraud is alleged and can be proven, so long as the contract does not bar such action. However, the court ultimately affirmed the lower court’s decision dismissing Morgan’s counterclaims because the merger clause and lack of sustainable fraud allegations prevented recovery.
Facts
In 1991, Mennen Medical, Inc. was bought out, and the plaintiffs, major shareholders, sold their shares. Mennen executed promissory notes to the plaintiffs, secured by standby irrevocable letters of credit issued by Morgan. These letters of credit allowed for payment upon presentation of a draft and a notarized statement confirming an unpaid note installment or default. The letters contained a merger clause stating the letters reflected the full undertaking and were not modified by reference to any other document. After Odyssey Partners, which took financial control, defaulted, the plaintiffs accelerated the notes and drew on the letters of credit. Morgan promptly paid but later claimed overpayments due to alleged misstatements in the beneficiaries’ notarized statements regarding the amount due.
Procedural History
The plaintiffs sued for a declaration that their draws were correct and that Morgan had no claims against them. Morgan counterclaimed for overpayments under various theories, including money had and received and fraud. The Supreme Court dismissed Morgan’s fraud counterclaim but granted summary judgment on the other counterclaims. The Appellate Division modified, granting summary judgment to the plaintiffs and dismissing Morgan’s counterclaims, holding the initial ruling violated the principle that a letter of credit is independent of other contracts. The Court of Appeals granted Morgan leave to appeal.
Issue(s)
Whether an issuing bank that has honored a letter of credit by making payment based on facially compliant documents may subsequently bring a claim against the beneficiary for recovery of overpayments if the documents are later found to be fraudulent, despite the independence principle.
Holding
No, not in this case, because the letters of credit contained a merger clause and Morgan failed to provide sustainable fraud allegations. The court held that while the independence principle does not prevent an issuer from pursuing recovery based on fraud after payment, the merger clause and the lack of factual issues regarding fraud blocked Morgan’s claims in this specific instance.
Court’s Reasoning
The court reasoned that the independence principle, fundamental to letter of credit transactions, ensures prompt payment by requiring the issuer to pay upon presentation of conforming documents without resolving underlying contractual disputes. However, the court also acknowledged a