N.D. Cent. Code § 41-05-09

(5-109) Fraud - Forgery

Redline — December 1, 2021 → current.View current text →

Current — January 1, 2022

As of December 1, 2021

(1) If a presentation is made that appears on its face strictly to comply with the terms and conditions of the letter of credit, but a required document is forged or materially fraudulent, or honor of the presentation would facilitate a material fraud by the beneficiary on the issuer or applicant: The issuer shall honor the presentation, if honor is demanded by: A nominated person who has given value in good faith and without notice of forgery or material fraud;

(2) A confirmer who has honored its confirmation in good faith;

(3) A holder in due course of a draft drawn under the letter of credit which was taken after acceptance by the issuer or nominated person; or

(4) An assignee of the issuer’s or nominated person’s deferred obligation that was taken for value and without notice of forgery or material fraud after the obligation was incurred by the issuer or nominated person; and

(5) The issuer, acting in good faith, may honor or dishonor the presentation in any other case.

(6) If an applicant claims that a required document is forged or materially fraudulent or that honor of the presentation would facilitate a material fraud by the beneficiary on the issuer or applicant, a court of competent jurisdiction, temporarily or permanently, may enjoin the issuer from honoring a presentation or may grant similar relief against the issuer or other persons only if the court finds that: The relief is not prohibited under the law applicable to an accepted draft or deferred obligation incurred by the issuer;

(7) A beneficiary, issuer, or nominated person who may be adversely affected is adequately protected against loss that it may suffer because the relief is granted;

(8) All of the conditions to entitle a person to the relief under the law of this state have been met; and

(9) On the basis of the information submitted to the court, the applicant is more likely than not to succeed under its claim of forgery or material fraud and the person demanding honor does not qualify for protection under subdivision a of subsection 1.

(10) Whether a beneficiary can commit fraud by presenting a draft under a clean letter of credit (one calling only for a draft and no other documents) has been much debated. Under the current formulation it would be possible but difficult for there to be fraud in such a presentation. If the applicant were able to show that the beneficiary were committing material fraud on the applicant in the underlying transaction, then payment would facilitate a material fraud by the beneficiary on the applicant and honor could be enjoined. The courts should be skeptical of claims of fraud by one who has signed a “suicide” or clean credit and thus granted a beneficiary the right to draw by mere presentation of a draft.

(11) The standard for injunctive relief is high, and the burden remains on the applicant to show, by evidence and not by mere allegation, that such relief is warranted. Some courts have enjoined payments on letters of credit on insufficient showing by the applicant. For example, in Griffin Cos. v. First Nat. Bank, 374 N.W.2d 768 (Minn.App. 1985), the court enjoined payment under a stand by letter of credit, basing its decision on plaintiff’s allegation, rather than competent evidence, of fraud.

(12) Although the statute deals principally with injunctions against honor, it also cautions against granting “similar relief” and the same principles apply when the applicant or issuer attempts to achieve the same legal outcome by injunction against presentation (see Ground Air Transfer Inc. v. Westates Airlines, Inc., 899 F.2d 1269 (1st Cir. 1990)), interpleader, declaratory judgment, or attachment. These attempts should face the same obstacles that face efforts to enjoin the issuer from paying. Expanded use of any of these devices could threaten the independence principle just as much as injunctions against honor. For that reason courts should have the same hostility to them and place the same restrictions on their use as would be applied to injunctions against honor. Courts should not allow the “sacred cow of equity to trample the tender vines of letter of credit law.”

(13) Section 5-109(a)(1) also protects specified third parties against the risk of fraud. By issuing a letter of credit that nominates a person to negotiate or pay, the issuer (ultimately the applicant) induces that nominated person to give value and thereby assumes the risk that a draft drawn under the letter of credit will be transferred to one with a status like that of a holder in due course who deserves to be protected against a fraud defense.

(14) The “loss” to be protected against - by bond or otherwise under subsection (b)(2) - includes incidental damages. Among those are legal fees that might be incurred by the beneficiary or issuer in defending against an injunction action.

Official source: North Dakota Legislative Branch. Reproduced from public-domain North Dakota statutes; confirm against the official source for the current text. Not legal advice.