European American Bank v. Three Park Avenue Building Co., L.P.
(Sup. Ct. N.Y. Cty. 10/3/00)
We represented: Defendant
Herman Cahn, J.
DECISION and ORDER Motion Sequence Numbers 002 and 003 are consolidated for disposition.
In Motion Sequence 002, defendant Three Park Avenue Building Co., LP ("TPA") moves for (1) dismissal of the complaint on the ground of a defense founded upon documentary evidence, CPLR 3211 (a)(1)(a), and failure to state a cause of action, CPLR 3211 (a)(7) and for summary judgment, CPLR 3212 and (2) an award of costs, disbursements and attorney's fees on the ground that the action is frivolous. In Motion Sequence 003, defendant The Seavey Organization, Inc. moves for summary judgment dismissing the complaint, CPLR 3112. Plaintiff cross-moves for summary judgment, CPLR 3212, and for dismissal of defendants' affirmative defenses, CPLR 3211(b). For the reasons discussed below, defendants' motions for dismissal of the complaint are granted and plaintiff's cross motion is denied. TPA's request for an award of attorney's fees is denied.
Factual Allegations
Plaintiff European American Bank commenced this action to recover a portion of a payment that it made to TPA pursuant to a letter of credit. In March 1994, TPA leased certain premises at 3 Park Avenue, New York, New York, to the law firm of Blutrich, Herman & Miller LLP ("BHM").1 Pursuant to a ten-year lease (the "Lease"),2 BHM obtained an irrevocable standby letter of credit (the "LOC") payable to TPA, from plaintiff, in the sum of $253,820.00 as security for the BHM's performance of its obligations under the Lease. The LOC expressly stated that it was subject to the Uniform Customs and Practice for Documentary Credits, 1993 Revision, International Chamber of Commerce publication 500, and required the presentation of certain documents as a prerequisite for payment. BHM provided plaintiff with negotiable securities as collateral in order to obtain the LOC.
BHM took possession of the premises. On July 29, 1997, plaintiff received notice from TPA that BHM was in default under the Lease and TPA was calling in the LOC with notice to BHM. Plaintiff paid TPA $253,820.00 upon TPA's submission to plaintiff of a sight-draft. After deducting BHM's arrears. TPA deposited the remaining balance into its tenant security account.
On December 1, 1997, defendant Seavey, which had been a subtenant of BHM of a portion of the premises, entered into a direct lease for the portion of the premises it occupied, with TPA. Defendant Herman entered into a lease, as successor in interest to BHM, to occupy that portion of the premises originally leased to BHM and not occupied by Seavey. The balance of BHM's security was applied as security for the leases of Seavey and Herman.
Plaintiff alleges that TPA is using the excess proceeds of the LOC as a security deposit for its own benefit and thus wrongfully possesses the monies. Plaintiff demanded return of the balance of the money, but TPA refused. This action ensued.
Plaintiff seeks the return of $172,147.58, which represents the proceeds of the LOC paid by plaintiff to TPA, less the collateral security held by plaintiff. The complaint contains three causes of action against TPA: for conversion, unjust enrichment, and imposition of a constructive trust. It also contains causes of action for conversion and unjust enrichment against Herman and Seavey. TPA and Seavey now move for summary judgment dismissing the complaint, costs, disbursements, and attorney's fees. Plaintiff cross-moves for a summary judgment in its favor and dismissal of defendants' affirmative defenses.
Discussion
Defendants have established their entitlement to judgment as a matter of law and there are no genuine issues of fact (Rotuba Extruders, Inc. v. Ceppos, 46 NY2d 223 [1978]). Plaintiff cites no cases in support of its cross motion for summary judgment and primarily relies on the intentions of the parties as reflected in the LOC and the Lease. In contrast, defendants have demonstrated that plaintiff lacks standing to bring this action. The purpose of letters of credit in general, and the LOC in particular, support a dismissal of the complaint.
Plaintiff as the issuer of a letter of credit does not have standing to claim any monies paid pursuant thereto even though the beneficiary has applied only a portion of the proceeds to the obligations of the holder of the letter of credit. As long as the beneficiary has properly drawn down the letter of credit, the issuer does not have an interest in the money that the beneficiary may owe to the holder of the letter of credit, where the letter of credit was issued as security for a lease and the holder-lessee has defaulted in all or some of its obligations to the beneficiary-lessor.
Letters of credit typically involve three separate contractual relationships and undertakings: (1) the underlying contract between the customers and the beneficiary; (2) the agreement between the bank and its customer, by which the letter of credit is issued; and (3) the letter of credit itself, which represents the financial institution's commitment to honor drafts presented by the intended beneficiary upon compliance with the terms and conditions specified in the instrument (First Commercial Bank v. Gotham Originals, 64 NY2d 287 294 [1985] [citing United Bank v. Cambridge Sporting Goods Corp.., 41 NY2d 254, 258-259]). "Under a letter of credit the issuer must honor a draft or demand for payment from the beneficiary so long as the documents presented conform to the terms of the letter of credit" (Gillman v. Chase Manhattan Bank, N.A., 73 NY2d 1, 12 [1988]). The issuer's obligation to honor a properly presented draft is independent of any underlying contractual arrangement between the issuer's customer and the beneficiary (id.). Thus, the issuer must honor the draft irrespective of whether the underlying contract has been properly performed (id. [citing, among others, Matter of Supreme Mdse. Co. v. Chemical Bank, 70 NY2d 344 [1987]; UCC 5-114]).
The issuing bank must determine on the basis of the documents presented whether or not they appear on their face to be in compliance with the terms and conditions of the letter of credit; if the documents appear on their face not to be in compliance, the bank may refuse to accept the documents (Hellenic Republic v. Standard Chartered Bank, 219 AD2d 498 [1st Dept 1995]). This rule preserves the efficiency of the letter of credit as an instrument for the financing of trade. "It would be a most unfortunate interference with business transactions if a bank, before honoring drafts drawn upon it, was obliged or even allowed to go behind the documents, at the request of the buyer, and enter into controversies between the buyer and seller regarding the quality of the merchandise shipped" (Tranarg, C.A. v. Banca Commerciale Italiana, 90 Misc 2d 829 [Sup Ct, NY County 1977]).
Plaintiff acknowledges that TPA's drawing down of the entire amount of the LOC was valid. Nevertheless, plaintiff asserts that it has standing to claim a portion of the proceeds delivered to TPA to the extent that BHM has a right to the return of those proceeds. Plaintiff asserts that the terms of the LOC were incorporated by reference into the Lease between TPA and BHM and provided that plaintiff was a secured party entitled to any monies owed to BHM by virtue of the LOC. Specifically, it contends that Article 37 of the Lease grants TPA the right to mitigate its damages in the event of a default by BHM and incorporates by reference the terms of the LOC.
Article 37 of the Lease concerns BHM's security deposit. In part, Article 37 provides:
[BHM] agrees that, in the event that [BHM] defaults in respect of any of the terms, provisions and conditions of this Lease (including the payment of minimum rent and additional rent), after any applicable notice and expiration of any applicable cure period, Landlord may use, apply, or retain the whole or any part of the cash security so deposited or may notify the "Issuing Bank" and thereupon received all of the monies represented by the said Letter of Credit and use, apply, or retain the whole or any part of such proceeds, as the case may be to the extent required for the payment of any rent, additional rent, or any other sum as to which [BHM] is in default, or for any sum that Landlord may expend by reason of [BHM]'s default.
Contrary to plaintiff's assertions, the Lease does not incorporate by reference the terms of the LOC. The Lease requires certain terms to be in the LOC and provides that TPA may use the LOC as security for BHM's defaults. The LOC does not grant plaintiff a lien on monies TPA obtained from BHM through the LOC.
Plaintiff cites selected portions of Paragraph 9 of the standby LOC agreement between BHM and plaintiff in support of its argument that it has standing. The portions plaintiff cites state that BHM agrees to give plaintiff a "general lien upon and security interest in all money of each of the undersigned." Plaintiff, however, is not seeking a lien on BHM's money that TPA allegedly holds, nor has it established that it has a valid lien or security interest in the money that TPA holds.
Plaintiff has not shown that TPA is contractually obligated at this point to return any money to BHM. BHM may owe money to plaintiff for the money drawn on the LOC, but BHM is not a party here and TPA has no obligation to plaintiff to turn over any money that TPA may owe BHM. Furthermore, plaintiff cannot enforce BHM's rights, assuming that BHM has any rights to the money held by TPA, since plaintiff has not shown that it is the real party in interest (Taub v. Colonial Coated Textile Corp., 54 Ad2d 660 [1st Dept 1976; Facilities Dev. Corp. v. Oosterbaan, 132 Misc 2d 923 [Sup Ct, Clinton County 1986]). Once payment was made to TPA pursuant to the LOC, BHM alone became liable to plaintiff for the amount paid (see, National Bank of North America v. Alizio, 103 AD2d 690 [1st Dept 1984] [citing French v. Isbrandsten, 282 App Div 1024], affd 65 NY2d 788 [1985]). TPA might be required to return the proceeds of the LOC in limited circumstances, for example, in the case of fraud (see, Ultra Scope Intl. v. Extebank, 158 Misc 2d 117,125 [Sup Ct, NY County 1992], affd 192 AD2d 479 [1st Dept], lv denied 82 NY2d 655 [1993]). Plaintiff has not alleged or submitted evidence of any fraud.
Plaintiff has also failed to establish that TPA or Seavey converted any of its property because TPA is merely holding BHM's money and plaintiff has not shown that it has a superior right to such money or that TPA is presently required to return that money to BHM (Bankers Trust Co. v. Cerrato, Sweeney, Cohn, Stahl & Vaccaro, 187 AD2d 384 [1st Dept 1992]). Plaintiff has no standing to bring an action for unjust enrichment against TPA or Seavey because the damages sought were incurred by BHM, which is not a party to this action (see, Lefkowitz v. Kaye, Scholet, Fierman, Hays & Handler, 271 AD2d 576 [2d Dept 2000]). Plaintiff has not stated any grounds for the imposition of a constructive trust.
Since plaintiff does not have standing to bring this action against movants, its motion to dismiss the affirmative defenses is denied as moot.
TPA has not demonstrated that the action is frivolous so as to warrant an award of attorney's fees.
Conclusion and Order
Accordingly, it is
ORDERED that the motions of defendant Three Park Avenue Building Co., L.P. (002) and defendant The Seavey Organization, Inc. (003) for summary judgment are granted, the action is dismissed, and the Clerk is directed to enter judgment in favor of Three Park Avenue Building Co., L.P. and The Seavey Organization, Inc., with costs and disbursements as taxed by the Clerk; and it is further
ORDERED that the application by defendant Three Park Avenue Building Co. L.P. for an award of attorney's fees is denied; and it is further
ORDERED that plaintiff's cross motion for summary judgment is denied.
FOOTNOTES
1BHM was a New York general partnership consisting of four partners, Michael D. Blutrich, Richard B. Herman, Robert Miller and Steven Brown. In January 1995, the partners ceased practicing law as a partnership, forming, instead, a new entity known as Blutrich, Herman & Miller, LLP. Ten days after TPA commenced a proceeding to evict BHM from their leased premises, Michael Blutrich filed an involuntary chapter 7 petition against BHM without his partners' consent. Eventually the bankruptcy proceeding was terminated, in part because Blutrich had entered a federal witness protection program (see, In re Blutrich Herman & Miller, 227 BR 53, 61 [SDNY 1998]). The record does not indicate if any other bankruptcy proceedings were instituted or if the partnership was ever formally wound up.
2The Lease attached as an exhibit to the complaint is dated March 11, 1994. According to the parties, however, the Lease was entered into on March 29, 1994.