Sztejn vs. J. Henry Schroder Banking Corporation, Robert Schwarz Bristle Corp, Transea Traders, Ltd., The Chartered Bank of India, Australia and China Analysis

Sztejn vs. J. Henry Schroder Banking Corporation, Robert Schwarz Bristle Corp, Transea Traders, Ltd., The Chartered Bank of India, Australia and China Analysis

Created by: Shannon Campbell

• Plaintiff: Chester Charles Sztejn
• Defendant(s): J. Henry Schroder Banking Corporation, Robert Schwarz Bristle Corp, Transea Traders, Ltd., The Chartered Bank of India, Australia and China
• Location: Supreme Court of New York, Special Term, New York County
• Case Title: 177 Misc. 719; 31 N.Y.S.2d 631; 1941 N.Y. Misc. LEXIS 2434
• Case Date: July 1, 1941
• Terms to know:
• Letter of Credit: A document issues by the importer’s bank stating its commitment to honor a draft, or otherwise pay, on presentation of specific documents by the exporter within a stated period of time. The documents the importer requires in the credit usually include, at a minimum, a commercial invoice and clean bill of lading, but may also include a certificate of origin, consular invoice, inspection certificate, and other documents. The most widely used type of credit in international trade is the irrevocable credit, which cannot be changed or cancelled without the consent of both the importer and exporter. In a confirmed irrevocable credit, the confirming bank adds its irrevocable commitment to pay the beneficiary (the confirmation is an additional guarantee of payment). Taken from: ICC Guide to Export/Import 4^th Edition by Guillermo C. Jimenez
• Overview: Chester Charles Sztejn, the plaintiff, brings forward the case of credit fraud, which originally occurred on January 7, 1941. Sztejn, who bought a shipment of bristles from (defendant) Transea Traders, Ltd (based out of Lucknow, India) originally opened an irrevocable letter of credit with Henry Schroder Banking Corporation (defendant). Sztejn presented the necessary documents (letter of credit and draft) to the Chartered Bank, who then presented the documents to Schroder Banking. The documents provided that Schroder would pay a specified portion of the purchase price of the bristles, upon shipment with the invoice and bill of lading being shown. The letter of credit was shipped by Schroder’s correspondent bank in India, where it was then delivered to Transea. Transea Traders, however, ended up shipping crates filled with “cowhair and other worthless material”, and not what Sztejn had originally ordered. Transea procured a bill of lading from the steamship company that shipped these materials, as well as obtaining the customary invoice (for the bristles). Naturally, Sztejn filed a case that declared the letter of credit under null and void, so that the defendant could not pay the draft. The original draft and the other fraudulent documents were delivered to the Chartered Bank, who then presented to Schroder for payment. The court ended up favoring Sztejn, whom they believed that the allegations he presented were correct. This stated that Transea had in fact committed fraud, and that the Chartered Bank was not completely at fault for the fraudulent transaction.
• Analysis: The issues that are presented in this case do not only cover the issue of fraudulent documents, but an overall fraudulent transaction. The importer discovered in good timing and prevented payment under the letter of credit through null and void. The UCC now recognizes a fraud exception in Section 5-114. If the documents are forged or fraudulent, including the transaction, the bank can make a payment if it is acting in good faith. However, the company who is exporting is still at fault if they committed fraud through the shipment or transaction of products or documents.
• Information provided by: http://www.uniset.ca/other/cs6/31NYS2d631.html