## Facts

- Woodings Consolidated Industries, Inc. (Woodings) sold a piece of machinery to General Electric Credit Corporation (GECC), and GECC leased the machinery back to Woodings.
- In connection with the leaseback, Woodings arranged for Mellon Bank, N.A. (Mellon) to issue a $600,000 standby letter of credit naming GECC as beneficiary.
- The letter of credit permitted GECC to draw upon presentation of the documents the credit required, including a statement that the amount demanded was “due and owing” by Woodings.
- Woodings later failed to make a monthly lease payment of about $15,000.
- GECC presented Mellon with a demand for $600,000 under the standby letter of credit, including the required paperwork and the “due and owing” statement.
- GECC did not formally declare Woodings in default under the lease in a manner that would trigger acceleration of the full balance under the lease.
- Mellon honored the presentation and paid GECC $600,000.
- Mellon then sued GECC to recover the payment, alleging that the draw was improper because the $600,000 was not actually “due and owing” under the lease when GECC made its demand.
- The parties filed cross-motions for summary judgment.

## Issues

1. Whether Mellon, after honoring GECC’s presentation, could recover the $600,000 from GECC by showing that the full amount was not “due and owing” under the underlying lease transaction (including because acceleration had not been invoked).
2. Whether GECC’s draw could be attacked based on the underlying lease dispute, or only under limited letter-of-credit doctrines such as fraud connected to the presentation.

## Decision

- The court applied core letter-of-credit rules separating the bank’s documentary obligation from the Woodings–GECC lease dispute.
- The court ruled that an issuer’s payment obligation is determined by whether the beneficiary’s presentation conforms on its face to the letter of credit’s stated documentary conditions, rather than whether the beneficiary is right on the merits of the underlying contract.
- The court granted partial summary judgment resolving key legal questions about the letter of credit in GECC’s favor and denied Mellon’s effort to turn the case into litigation over whether the lease had been accelerated.
- To the extent Mellon’s theories depended on proving something like fraud (as opposed to an ordinary contract disagreement about what Woodings owed), the court treated that as a narrow basis for relief and did not accept Mellon’s claim that the underlying dispute alone justified recovery.

## Legal Principles

- A standby letter of credit is a separate undertaking from the underlying contract between the applicant and beneficiary; the issuer’s duty is not conditioned on actual performance of the underlying deal.
- The issuer generally “deals in documents”: it examines the beneficiary’s presentation for facial conformity with the credit’s requirements.
- If the required documents (including any required certifications) are presented in the form demanded by the credit, the issuer must honor the draw even if the applicant disputes default or the amount owed under the underlying agreement.
- Contract defenses drawn from the underlying transaction ordinarily do not allow an issuer to refuse honor or claw back a payment simply because the beneficiary’s demand appears excessive under the underlying contract.
- Relief based on fraud in a letter-of-credit transaction is limited to serious misconduct tied to the presentation, not routine disputes over interpretation or enforcement of the underlying contract.

## Conclusion

Mellon Bank could not recover the $600,000 paid on GECC’s draw merely by arguing that the underlying lease had not been accelerated and the full amount was therefore not yet owed; because GECC’s presentation met the standby letter of credit’s documentary requirements on its face, Mellon’s attempt to recast an underlying contract dispute as a basis to unwind payment failed absent a showing meeting the narrow fraud-based exception.


Mellon Bank, N.A. v. General Electric Credit Corp., 724 F. Supp. 360 (1989)