84-5-109. Fraud and forgery. (a) If a presentation is made that appears on its face strictly to comply with the terms and conditions of the letter of credit, but a required document is forged or materially fraudulent, or honor of the presentation would facilitate a material fraud by the beneficiary on the issuer or applicant:
(1) The issuer shall honor the presentation, if honor is demanded by (i) a nominated person who has given value in good faith and without notice of forgery or material fraud, (ii) a confirmer who has honored its confirmation in good faith, (iii) a holder in due course of a draft drawn under the letter of credit which was taken after acceptance by the issuer or nominated person, or (iv) an assignee of the issuer's or nominated person's deferred obligation that was taken for value and without notice of forgery or material fraud after the obligation was incurred by the issuer or nominated person; and
(2) the issuer, acting in good faith, may honor or dishonor the presentation in any other case.
(b) If an applicant claims that a required document is forged or materially fraudulent or that honor of the presentation would facilitate a material fraud by the beneficiary on the issuer or applicant, a court of competent jurisdiction may temporarily or permanently enjoin the issuer from honoring a presentation or grant similar relief against the issuer or other persons only if the court finds that:
(1) The relief is not prohibited under the law applicable to an accepted draft or deferred obligation incurred by the issuer;
(2) a beneficiary, issuer or nominated person who may be adversely affected is adequately protected against loss that it may suffer because the relief is granted;
(3) all of the conditions to entitle a person to relief under the law of this state have been met; and
(4) on the basis of the information submitted to the court, the applicant is more likely than not to succeed under its claim of forgery or material fraud and the person demanding honor does not qualify for protection under subsection (a)(1).
History: L. 1996, ch. 202, § 9; July 1.
KANSAS COMMENT, 1996
Subsection (a) is derived from the former 84-5-114(2), and subsection (b), restricting the ability of an applicant to enjoin honoring a presentment, is new. The text is identical to the 1995 Official Text.
Subsection (a)(2) permits the issuer to honor or dishonor if a document is forged, is "materially fraudulent" or honor would aid a "material fraud" by the beneficiary, except that certain bona fide purchasers for value listed in subsection (a)(1) must be paid. Subsection (b) allows an applicant to enjoin honoring a presentment only if a document is forged, "materially fraudulent" or would facilitate a "material fraud" by the beneficiary. These subsections are intended to allow a breach the independence principal only in extreme cases since a major function of the letter of credit is to assure the beneficiary a status close to that of a cash seller not dependent on the applicant's satisfaction with the underlying transaction. "Material" and "materially" are not defined, but Official Comment 1 describes it as a situation in which the beneficiary has no right to expect honor and no factual basis to claim it. "Material" fraud would thus be that which is fraudulent and so material it deprives the applicant of the substantial benefit of the bargain. Either fraud or lack of materiality, standing alone in the underlying transaction, would not permit a dishonor of a proper presentation.
Paragraph 84-5-109(a)(1) requires the issuer to honor even a forged or materially fraudulent document if a nominated person, confirmer or holder in due course has incurred the obligation for value, without notice, in good faith. An assignee of an issuer's or nominated person's deferred obligation which took the obligation after the issuer incurred the obligation, and who took for value, in good faith and without notice, may also demand that the issuer honor the presentation. Thus a bona fide purchaser for value will prevail over even the defenses of forgery or material fraud.
Paragraph (a)(2) permits the issuer to honor or dishonor a forged or materially fraudulent document as to other persons. If the issuer dishonors, based on the applicant's representations of forgery or material fraud, the issuer will have the burden of proving the requisite level of fraud under 84-5-111(a), and thus would be liable to the beneficiary if the court finds a lesser degree of wrongdoing. On the other hand, where there is a known material fraud, "the standard practice of financial institutions that regularly issue letters of credit" (84-5-108(e)) may not permit honoring the presentation.
An applicant may be able to enjoin the issuer's honoring the presentation under subsection (b) if it can meet the high standard of proof required. This will require proof that the issuer is not obligated to honor, the other parties are protected and the evidence indicates that the applicant will prevail.
Revisor's Note:
Former section 84-5-109 was repealed by L. 1996, ch. 202, § 91 and the number reassigned to the current text.
Law Review and Bar Journal References:
"The Role of the Judiciary in Advancing Public Policy to Promote Ethical Business Practices: Comparing Gray Market Tires and Tiffany Silver Jewelry," Catherine S. Neal, 19 Kan. J. L. & Pub Pol'y, No. 2, 171 (2010).
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