Key International Manufacturing, Inc. v. Stillman, 66 N.Y.2d 924 (1985)

A bank that complies with a judicial restraining order preventing it from honoring letters of credit is not liable for damages exceeding the actual amounts due under the letters of credit plus interest.

Summary

Key International Manufacturing sued Irwin Stillman, and Manufacturers Hanover Trust Company was also a party due to letters of credit. Stillman cross-claimed against Manufacturers Hanover Trust, alleging damages from the bank’s refusal to honor cashier’s checks issued as payment for the letters of credit. The bank’s refusal stemmed from a judicial restraining order. The Court of Appeals held that the bank’s liability was limited to the actual amounts due under the letters of credit plus interest. Holding the bank liable for a greater sum for complying with a court order would create an untenable dilemma.

Facts

Key International Manufacturing, Inc. initiated a lawsuit against Irwin Stillman. Manufacturers Hanover Trust Company was involved because of letters of credit it had issued. The bank issued cashier’s checks to pay the letters of credit. However, a judicial restraining order was issued, preventing Manufacturers Hanover Trust from honoring these checks.

Procedural History

The lower court ruled on the cross-claim filed by Stillman against Manufacturers Hanover Trust. The Court of Appeals reviewed that decision. The appellate division decision is not explicitly mentioned, but the Court of Appeals affirmed the dismissal of part of Stillman’s cross-claim against the Key International Manufacturing, and modified the order related to the cross-claim against the bank.

Issue(s)

Whether a bank, complying with a judicial restraining order that prevents it from honoring letters of credit, can be held liable for damages exceeding the actual amounts due under those letters plus interest.

Holding

No, because to hold the bank liable for more than the actual amounts due under the letters of credit plus interest as a result of complying with a judicial restraining order would place it in an unacceptable dilemma.

Court’s Reasoning

The Court of Appeals reasoned that holding Manufacturers Hanover Trust liable for more than the actual amounts due under the letters of credit, plus interest, would be unfair. The bank was acting under the compulsion of a court order. To penalize the bank for following a judicial mandate would create an untenable situation where banks would be forced to choose between violating a court order and incurring potentially unlimited liability. This would undermine the integrity of the judicial process and create uncertainty in commercial transactions involving letters of credit. The court emphasized the importance of banks being able to rely on court orders without fear of excessive liability. The court found that the proper remedy for Stillman was to challenge the restraining order directly, not to seek damages from the bank for complying with it. As the court stated, “To hold the bank liable for such sum as a result of compliance with a judicial restraining order would be to place it on the horns of an unacceptable dilemma.”