Case ID: ohio-misc_14/html/0163-01.html
Source: Caselaw Access Project
Author: {"author": "BeeNtoit, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Mead Corp. v. Farmers and Citizens Bank.
    (No. 127829
    Decided December 13, 1967.)
    Common Pleas Court of Montgomery County.
    
      Messrs. Smith & Schnacke, for plaintiff.
    
      Messrs. Young, Pryor, Lynn, Strickland & Falke, for defendant.
   BeeNtoit, J.

Plaintiff, The Mead Corporation, hereinafter referred to as “Mead,” seeks recovery from defendant, The Farmers and Citizens Bank, hereinafter referred to as “Bank,” contending that a certain writing constitutes a letter of credit in fact and in law.

The controversial writing is as follows:

Mead to Bank: Feb. 29, 1962; “we have been given to understand that if we handle on a sight draft basis for your bank an order from Pan Ohio Book & Magazine Company, 141 Eingold Street, Dayton, Ohio, for an MA 70 Mehl Packaging Machine with attachments and conveyor totalling $4,045, that it will be honored when it is presented for payment. If such is the case please advise us immediately, as the order has been entered on that basis. ’ ’
Bank replied to Mead on the same paper writing: 2-28-62; “Above arrangement will be honored by this bank.”

Letters of credit have been known and used for many years in international and domestic sales. For the most part they have not been the subject of statutory enactment, and the law concerning them has been developed in the cases. Research indicates there has been astonishingly little litigation on the subject of letters of credit.

The U. C. C. deals with letters of credit and for the greater part continues the prior commercial practice. The cause of action herein arose prior to Ohio enacting the U. 0. 0.

The cases reflect generally that a letter of credit is a letter authorizing one person to pay money or extend credit to another on the credit of the writer. Further that it does not have to be in a particular form if it is such in effect and intention. It may be a request whereby one person requests some other person to advance money or give credit to a third person, and promises that he will repay or guarantee the same to the person making the advancement.

Bank contends that the writing is not a letter of credit. Bank further contends that at no time was there a presentment of a sight draft in any amount.

Pan Ohio Book & Magazine Company of Dayton, Ohio, hereinafter referred to as “Pan Ohio” wanted to purchase a certain machine from Mehl Manufacturing Company of Cincinnati, Ohio, hereinafter referred to as “Mehl.” To finance the deal Pan Ohio made certain arrangements with the Bank. It appears from the evidence that the Bank would handle same on a sight draft with bill of lading. Mead took over as the seller of the machine, entered the order on its books “To be shipped sight draft bill of lading via Farmers & Citizens Bank, Trotwood, Ohio. Attn: Mr. Robert Gump, Y. P.”

During these happenings the inquiry of Mead to Bank and Bank’s reply, the alleged letter of credit, transpired. Thereafter Mead allowed and permitted the machine to be shipped and delivered directly to Pan Ohio without bill of lading and contends that it forwarded by mail sight draft to Bank for payment in the sum of $4,743.15 on March 6, 1962. Mead did not receive payment and learned by telephone that the machine had arrived in a damaged condition and that Bank had issued its draft for the price of the machine and delivered it to Pan Ohio to negotiate with Mehl and Mead. It developed that the draft was returned to the Bank.

Mead claims that Bank, by telephone, authorized the modification of the original order, thereby eliminating the bill of lading which Bank denies.

The court finds that letters of credit are to be construed with reference to the particular and often varying terms in which they may be expressed, the circumstances and intentions of the parties to them, and the usages of the particular trade or business contemplated. The Ohio Supreme Court, in Palmer v. Yarrington, 1 Ohio St. 253, appears to hold that the general rule that a contract should be construed in the light of all the surrounding circumstances applies to the construction of letters of credit. Such a letter should be construed in the light of all the surrounding circumstances which induced its execution as well as with reference to the condition and situation of the parties.

The writing upon which Mead predicates its claim does not contain precise reference to shipping documents. Nevertheless there is no question that at the very least a bill of lading was contemplated in the original arrangement. Mead admits to this. Furthermore this so called letter of credit came about in a very unusual way. Actually the parties never intended such. Mead wanted to sell paper products to Pan Ohio and made inquiry of Bank as to the credit of Pan Ohio. Shipping and payment for the machine had been arranged. Mead, by its inquiry of February 20, 1962, sought confirmation. The key word in that writing is “basis” (sight draft basis). By this Mead meant bill of lading attached to sight draft and Bank so interpreted and thus returned the inquiry with its notation of February 23, 1962.

Among the conditions expressed or implied in a commercial letter of credit are: The specified shipping documents, usually negotiable bill of lading indorsed in blank, receipt for payment of freight, marine insurance policy and receipt for payment of insurance premiums, must be taken out and forwarded to the issuing bank; and the time within which the seller, the beneficiary, must perform in order to claim payment.

Another remarkable fact indicating that Mead never intended the writing of February 20, 1962, as a letter of credit is that on March 6, 1962, if it presented a draft, it was presented for collection and not for payment. It was not relying on the credit of the Bank irrespective of Pan Ohio’s acceptance of such draft. True, the inquiry of Mead says “that it will be honored when it is presented for payment.” Nevertheless, from all the facts and circumstances the court concludes that the intent of the parties was to the effect that this was an ordinary business transaction far and away from the implications of a commercial letter of credit. Only after Pan Ohio, Mehl and Mead were unable to negotiate after delivery and damage did Mead embark on the letter of credit theory and then four years later.

Furthermore, it would appear to the court that had this transaction been handled with bill of lading that Pan Ohio would have refused to accept the damaged machine and thus would have refused to accept the draft and Bank would have returned the documents.

It must also be observed that Pan Ohio was the customer of the bank and there is nothing before this court to indicate that it made any request that Bank issue a letter of credit to Mead.

Begardless of the language used by Mead in its inquiry of February 20, 1962, the facts and circumstances clearly indicate that the sole inquiry was as to the credit of Pan Ohio. And as to the purchase of the machine the net effect of the inquiry was, would there be funds available to the credit of Pan Ohio to take up the shipping documents and pay for the machine upon delivery.

Attention to fundamental theory and the conscious use of the canon of liberal interpretation to promote underlying purposes and policies of commercial letters of credit are compelling, but in this case the court is not about to malee a letter of credit out of the writing in question when the facts and circumstances show that the parties never intended that it be such. Furthermore, in legal contemplation the writing does not meet the tests.

The court observes that should the writing be construed most liberally and a finding that it is in the nature and effect of a letter of credit, then the question arises as to the effect of the failure of the documentary draft. The evidence here as to the alleged agreed modification is inconclusive. The evidence is that it was requested by Bank and agreed by telephone, which Bank denies. Regardless, nothing was in writing on the so-called modification. A letter of credit must be in writing and accordingly any modification thereof must be signed by the issuer — the Bank.

The law is clear that the slightest deviation on the seller’s part in assembling the documents required will justify the buyer’s bank in letter of credit cases in dishonoring the draft. There is no room in commercial contracts for the doctrine of substantial performance. Hand, J. in Mitsubishi Goshi Kaisha v. J. Avon & Co., 16 F. 2d 185.

Under the facts and circumstances presented the court can find no waiver or estoppel which may he employed as a predicate to liability.

The court also observes that Mead, on July 6,1966, attempted to send a draft for the exact amount stated in the letter of February 20, 1962. Again, if it was sent, it was sent for collection and not for payment. Regardless a delay of more than a year in the proper presentation of a draft to be accepted, has been held to be unreasonable. First National Bank v. Bensley, 2 F. 609.

The court has examined each and every authority cited by the parties, together with considerabe additional research. Considering all thereof in light of the facts and circumstances presented, the court finds that the plaintiff has failed to sustain its burden in making a case on its cause of action. Therefore plaintiff may not recover from the defendant.

Journal entry in accordance with the foregoing shall be by counsel prepared and filed.