## Facts

- Cambridge Sporting Goods Corp. contracted to buy 27,936 pairs of boxing gloves from Duke Sports, a Pakistani manufacturer, for $42,576.80.
- Duke obtained financing from United Bank Limited and The Muslim Commercial Bank, which sought payment through an irrevocable letter of credit.
- Cambridge’s bank issued an irrevocable letter of credit requiring payment on drafts presented with specified shipping documents.
- Duke advised it could not meet the delivery deadline and requested an extension of delivery and the letter of credit; Cambridge refused, canceled the contract, and notified United Bank of the cancellation.
- The banks nonetheless presented drafts and documents to the issuing bank asserting shipment under the credit.
- Cambridge inspected the shipment and found the goods grossly nonconforming (old, unpadded, ripped, and mildewed).
- Cambridge obtained a preliminary injunction preventing honor of the drafts and levied on funds that would have been used to pay them.
- After Duke defaulted in related litigation, the banks sought to vacate the levy and compel payment, claiming they were holders in due course of the drafts.

## Issues

1. Whether fraud by the seller-beneficiary in a letter-of-credit transaction may be asserted as a defense against holders of drafts drawn under the credit unless they are holders in due course.
2. Whether, after a showing of fraud, the burden rests on the banks to prove holder-in-due-course status rather than on the buyer to disprove it.
3. Whether the banks could use their own interrogatory answers as substantive evidence in their case-in-chief to establish holder-in-due-course status.

## Decision

- The Court of Appeals reversed the Appellate Division and dismissed the banks’ petition to vacate the levy and compel payment.
- Fraud in the transaction was available as a defense against payment on the drafts unless the banks proved they were holders in due course.
- Once Cambridge made a sufficient showing of fraud, the burden shifted to the banks to prove they took the drafts for value, in good faith, and without notice of defenses; the lower courts misallocated this burden.
- The banks failed to carry their burden of proving holder-in-due-course status.
- The trial court erred by admitting the banks’ interrogatory answers as substantive evidence in their case-in-chief, where Cambridge lacked an opportunity for cross-examination.

## Legal Principles

- In letter-of-credit practice, fraud in the transaction may justify preventing honor of drafts where the party seeking payment is not a holder in due course.
- A fraud defense may be asserted not only against the seller-beneficiary but also against subsequent holders of drafts who cannot establish holder-in-due-course status.
- After a defense such as fraud is sufficiently shown, the party claiming holder-in-due-course protection bears the burden to prove value, good faith, and lack of notice.
- A party’s own interrogatory answers are generally not admissible as substantive proof in that party’s case-in-chief when offered for their truth without live testimony subject to cross-examination.

## Conclusion

Because Cambridge demonstrated fraud in the underlying transaction and the banks did not prove they were holders in due course, the banks were not entitled to payment on the drafts, and the levy preventing honor of the letter-of-credit drafts remained effective.


United Bank Ltd. v. Cambridge Sporting Goods Corp., 360 N.E.2d 943 (N.Y. 1976)