## Facts

- Mid-America Tire, Inc. (an Ohio tire wholesaler) and Jenco Marketing, Inc. (a Tennessee tire wholesaler) pursued an overseas purchase of Michelin “blemished” tires for resale in the United States.
- PTZ Trading Ltd., an offshore seller, acted as the beneficiary of an irrevocable letter of credit (LC) used to finance a large tire shipment.
- The LC was issued by First National Bank of Chicago and was payable through Barclays Bank PLC; the LC incorporated the Uniform Customs and Practice for Documentary Credits (UCP).
- Mid-America and Jenco alleged PTZ’s agents induced the LC and purchase by misrepresenting that PTZ could supply profitable “summer tires” and by pressuring the buyers to purchase “mud and snow” tires as a show of good faith.
- The buyers alleged PTZ mischaracterized certain tires marked “DA/2C” as merely cosmetically blemished or tied to warehouse location, when the marking indicated the tires were not approved for legal importation or sale in the United States.
- After the LC was issued, the buyers instructed PTZ not to ship once they concluded many tires were illegal for the U.S. market and the promised summer-tire program was not as represented.
- PTZ shipped anyway and presented invoice and shipping documents to obtain payment under the LC, prompting the buyers to sue to prevent honor of the LC.

## Issues

1. Whether Ohio law permits a court to enjoin honor of a letter of credit based on material fraud in the underlying transaction, even if the beneficiary’s presented documents facially comply with the credit.
2. Whether incorporation of the UCP into the letter of credit displaces or limits Ohio’s statutory fraud-based injunction remedy.

## Decision

- The trial court permanently enjoined honor of the LC, finding PTZ fraudulently induced the buyers to open the credit.
- The court of appeals reversed, reasoning that the independence principle and UCP-based documentary rules foreclosed injunctive relief premised on fraud in the underlying transaction where documents conformed on their face.
- The Supreme Court of Ohio reversed the court of appeals and reinstated the permanent injunction.
- The court held that Ohio Rev. Code § 1305.08(B) authorizes injunctive relief for material fraud by the beneficiary in either the LC transaction or the underlying sales transaction.
- The court held that UCP incorporation, and the UCP’s lack of an express fraud rule, did not displace Ohio’s statutory fraud exception.

## Legal Principles

- A letter of credit is generally independent of the underlying sales contract, and banks ordinarily honor conforming documents without adjudicating contract disputes.
- Ohio Rev. Code § 1305.08(B) provides a narrow exception allowing courts to enjoin honor when the beneficiary commits material fraud (or forgery) such that honoring the credit would consummate the fraud.
- “Material fraud” is a high-threshold standard: fraud so severe that it vitiates the transaction and makes it unjust to allow the beneficiary to draw on the credit.
- Incorporation of the UCP governs documentary credit practice and bank-document examination standards, but absent clear agreement it does not eliminate state statutory remedies for material fraud.
- Fraud allegations must go beyond routine performance or quality disputes; injunctive relief is reserved for conduct that effectively turns the letter of credit into an instrument to obtain payment through deceit.

## Conclusion

The Supreme Court of Ohio held that, under Ohio’s letter-of-credit statute, a court may enjoin honor of a letter of credit when the beneficiary’s material fraud in the underlying transaction makes payment unjust, and that incorporating the UCP does not negate Ohio’s statutory fraud-based injunction remedy.


Mid-Am. Tire, Inc. v. PTZ Trading Ltd., 95 Ohio St. 3d 367 (2002)