## Facts

- Former shareholders of Mennen Medical, Inc. sold their shares in a leveraged buyout financed in part by five-year promissory notes payable to the shareholders.
- The notes provided for annual principal installments, specified interest payments, and an acceleration clause upon default.
- To secure the note obligations, an issuing bank provided standby irrevocable letters of credit to each shareholder as beneficiary.
- Each letter of credit required payment within 10 days upon presentation of a draft and a notarized statement that the draw represented an unpaid installment or that the outstanding balance was due because of default.
- After the obligor defaulted on the third annual installment, the shareholders accelerated the notes and drew the maximum amounts under the letters of credit.
- The bank honored the draws upon presentation of documents that were facially compliant with the letter-of-credit terms.
- Months later, the bank asserted it had overpaid because the notarized statements allegedly overstated the indebtedness, and it sought recovery from the beneficiaries.
- The beneficiaries maintained the draws were authorized under the credit terms and reflected amounts that could include a negotiated premium associated with acceleration consequences.

## Issues

1. After honoring drafts supported by facially conforming documents under standby letters of credit, may an issuing bank sue beneficiaries to recover alleged overpayments based on asserted misstatements tied to the underlying transaction?
2. What is the scope and timing of the fraud exception to the independence principle in letter-of-credit transactions, particularly after payment has been made?

## Decision

- The court affirmed summary judgment for the beneficiaries and the declaration that the bank had no claim against them arising from the draws.
- The issuing bank’s obligations were governed by the letter of credit; having paid on facially conforming documents, it could not later “reach beyond” the credit to relitigate the underlying debt calculation as a damages or restitution claim against the beneficiaries.
- The fraud exception was treated as narrow and generally invoked to stop payment upon a timely showing of fraud in the presented documents; it did not support a post-payment action here.

## Legal Principles

- Letters of credit are independent of the underlying transaction; the issuer deals in documents and must honor facially conforming presentations.
- Payment against a compliant presentation is intended to be final, preserving the reliability of letter-of-credit commerce.
- The fraud exception is limited to egregious fraud in the documents and is typically pursued before payment (e.g., through judicial relief to prevent honor).
- An issuing bank that honors a facially compliant draw cannot later convert disputes about the underlying obligation into direct restitution or misrepresentation claims against the beneficiary, absent a properly invoked fraud-in-the-documents basis.

## Conclusion

The court held that once the issuing bank honored facially conforming draws under the standby letters of credit, it could not sue the beneficiaries for alleged overpayment based on disputes over the underlying notes; any fraud-based relief needed to be timely and fit the narrow fraud-in-the-documents exception.


Mennen v. J.P. Morgan & Co., 689 N.E.2d 869 (N.Y. 1997)