# Philadelphia Gear Corporation v. Central Bank > Court of Appeals for the Fifth Circuit · November 17, 1983 · 717 F.2d 230 URL: https://www.frixlaw.com/law-library/cases/9471176 ## Case - **Full name:** PHILADELPHIA GEAR CORPORATION, Plaintiff-Appellee, v. CENTRAL BANK, Defendant-Appellant - **Court:** Court of Appeals for the Fifth Circuit - **Decided:** November 17, 1983 - **Citations:** 717 F.2d 230 - **Precedential status:** Published - **Opinion:** Dissent by Goldberg - **Judges:** Goldberg, Gee, Randall - **Cited by:** 63 later opinions in the Frix Law Library ## Citator (automated) - No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases. - Full citator and citing cases: https://www.frixlaw.com/law-library/cases/9471176 ## How later opinions describe it (automated extraction) - discussing the doctrine of "strict compliance" in litigation concerning letters of credit, citing White & Summers, Uniform Commercial Code § 18.7 at 742-43 (1972) ## Opinion text GOLDBERG, Circuit Judge, dissenting: Ever mindful of the persuasive force of the majority opinion, I must, nonetheless, dissent. The majority faults the district court for being unduly attentive to the issuing bank’s duty to pay a draft under a letter of credit rather than the beneficiary’s duty to comply strictly to the terms of the letter of credit. I fear that the majority has similarly been unduly attentive to the facts of this case and has uttered a rule insufficiently sensitive to the day-to-day use of letters of credit. Briefly stated, the case’s present posture is as follows: Central Bank issued a letter of credit of which Philadelphia Gear was the beneficiary. The letter of credit incorporated by reference two important terms: (e) If [the issuing bank claims a draft is not in compliance with the terms of the letter], notice to that effect, stating the reasons therefore, must, without delay, be given by cable or other expeditious means to the bank from which the documents have been received (the remitting bank) and such notice must state that the documents are being held at the disposal of such bank or are being returned thereto. (f) If the issuing bank fails to hold the documents at the disposal of the remitting bank, or fails to return the documents to such bank, the issuing bank shall be precluded from claiming that the relative payment acceptance or negotiation was not effected in accordance with the terms and conditions of the credit. International Chamber of Commerce Pub. 290 art. 8(e), (f). Philadelphia Gear submitted defective drafts to Central Bank under this letter of credit, knowing that “some” of the drafts were defective. Central Bank dishonored the drafts, offering no explanation other than noting that the drafts were not in compliance with the letter of credit; Central Bank also failed to return promptly the drafts with supporting documentation or to hold them at the disposal of the remitting bank. Philadelphia Gear sued Central Bank for wrongful dishonorment. The district court held that Central Bank was estopped from asserting defects in the drafts as a defense for two separate reasons. First, Central Bank failed to give notice to Philadelphia Gear of the specific defects; second, Central Bank did not return or hold at the disposal of the remitting bank the drafts and supporting documentation. The panel today holds that a knowing tender of defective drafts absolves the issuing bank of its duty to give notice of the defects and of its duty to return the drafts and supporting documentation; the panel remands for a *241 determination of which drafts were knowingly defectively submitted. I believe this rule to be inadvisable for two reasons. 1 First, although the majority’s rule might be an equitable treatment of the present litigants, it introduces a factor treading on the toes of principles basic to letters of credit. Letters of credit are near-mechanical forms of payment designed to facilitate commercial exchange. The terms of letters of credit and applicable laws choreograph an elaborate dance. As long as the steps are followed, payment also follows. There is no need to make inquiries into the underlying transaction; the parties need merely pirouette down the path prescribed by the letter and applicable statutes. Facial compliance is the watchword. The procedures relating to dishonoring a draft are equally choreographed. One of the important turns in that dance is providing the beneficiary an opportunity to correct a defective draft. I.C.C.Pub. 290 arts. 8(e), (f) delineates two steps in this turn: an issuing bank must return the defective draft and give specific notice of the defects. These two steps are crucial to allowing an innocent beneficiary an opportunity to cure an inadvertent error in a draft. Though this motivation is less compelling when the beneficiary knew beforehand of the defects, 2 the steps are still part of the dance. An inherent advantage of letters of credit is that questions regarding dishonorment are easily answered — a court or potential litigant need merely look to the choreography and see if the dancers took the proper steps. This usually poses an objective question, with the answer obvious from the face of the documents and the terms of the letter of credit. The rule the majority has chosen to apply to this case injects into the otherwise mechanical and simple inquiry that most subjective issue of the knowledge of the beneficiary. The result of the majority’s rule does not clearly offend me in the case in which the beneficiary in fact knowingly presented defective drafts — as I mentioned earlier, the opportunity-to-cure rationale is not overly compelling in such cases. What deeply disturbs me is that the majority has encouraged dishonoring banks to remain silent as to their reasons, stonewalling and injecting a complex, subjective, litigable issue into every wrongful dishonorment. Henceforth defendant issuing banks will include in their responsive pleadings the boilerplate Philadelphia Gear defense: “Furthermore, *242 the beneficiary knew of the defects at the time of submission.” What was once a rigidly choreographed dance now contains a grand jeté to the psychoanalyst’s couch to look inside the beneficiary’s head. My second major objection to the majority opinion is that it judicially alters the terms of the agreement between the parties before us. I.C.C.Pub. 290 art. 8(e) specifically requires a dishonoring issuing bank to give notice of the reasons for dishonorment and to return the draft and documentation. Article 8(f) even prescribes a sanction for failure to return the draft and documentation (upon which the trial court understandably based its decision). Nowhere is the issuing bank excused from its obligations by the state of mind of the beneficiary. The majority rule has simply engrafted a new term into the parties’ agreements. This judicially imposed condition renders somewhat suspect the majority’s nominal obeisance to the principle of free contracting. Though the instant case is a diversity case and “writing in diversity we write on the wind,” Thompson v. Johns-Manville Sales Corp., 714 F.2d 581 at 583 (5th Cir.1983) (Gee, J.), the precedential force of the majority opinion is likely .to be great considering the field of law and the stature of the author. It distresses me to think that the once useful device of letters of credit may be a less reliable device now. The previously impossible possibility of contentious litigation of a subjective element can now arise in every suit for wrongful dishon-orment. Accordingly, I must leave the majority to their pas de deux and glissade offstage, dissenting. . The majority rule contains some ambiguities that are undesirable, but that are not pertinent to my major objections. First, it is not clear to me what type of knowledge is required. Consider the following situations: 1. The supporting documents are voluminous and the beneficiary knows to a moral certainty that they must contain some errors somewhere. 2. The beneficiary suspects that a term in the draft is not in compliance, but is not sure. 3. The day after presentment the beneficiary discovers an error. I am not sure what result the majority rule would command in these three instances. A second problem may arise if the negative pregnant of the majority rule is true — if the beneficiary did not know of an error, the issuing bank is estopped from relying on that defect to justify dishonorment. Consider the situation in which (1) a draft contains two errors; (2) the beneficiary knows of error #1; (3) the issuing bank dishonors the draft without notice of reasons; (4) the beneficiary cures error # 1 and resubmits the draft. Is the bank then es-topped from dishonoring because of the unknown and uncured error # 2? Presumably, these are questions the majority would postpone for cases in which they are outcome determinative. That postponement, however, merely contributes to the uncertainty that the majority has injected into a device specifically created to remove uncertainty from commercial transactions. . In support of its key argument on this point, the majority relies solely upon District of Columbia v. Moulton, 182 U.S. 576 , 21 S.Ct. 840 , 45 L.Ed. 1237 (1901). The Court held in that case, inter alia, that it was not necessary for the District of Columbia to give notice of the danger to horses inherent in steam rollers. Being a dutiful circuit judge, I am, of course, bound by applicable Supreme Court precedent. I believe, however, that Moulton is factually distinguishable from the case at bar. It is the nature of steam rollers to have but limited mobility on commercial roads. Letters of credit, in contrast, are by nature intended to traverse the pathways of commerce with near supersonic speed. Accordingly, I do not believe Moulton controls. --- Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/9471176. Public record. Not legal advice.