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Maxwell and Associates, a car distributor based in Columbus, Ohio, enters into negotiations with Chincotti, an Italian automobile manufacturer, for...

Maxwell and Associates, a car distributor based in Columbus, Ohio, enters into negotiations with Chincotti, an Italian automobile manufacturer, for rights to become the sole U.S. distributor of a new high end sports car. Maxwell believes that the sports car wull do well in its market, which encompasses most of the Midwestern United States. Chincotti is in the process of rebranding its image from a staid manufacturer of family sedans to a progressive manufacturer of sleek lucury cars. CHincotti tells Maxwell that in order to recieve the exclusive rights to sell Chincotti sports cars, Maxwell must first buy a large shipment of its sedans. Maxwell agrees to the deal and authorizes a Columbus bank to establish a letter of credit, subject to the UCP, in the amount of $20 million in favor of Chincotti for the purchase of 500 sedans. Maxwell the discovers that Chincotti has already given the exclusive U.S. rights to the sports car to a competitor in Indiana. In the meantime, Chincotti has presented conforming documents to the Columbus bank for payment under the letter of credit. Maxwell seeks to enjoin the Columbus bank from paying on the letter of credit on the basis of fraud. In its defense, Chincotti argues:

(1) the parties' agreement to have the letter of credit governed by the UCP results in the complete exclusion of the UCC, including its fraud provision, Section 5-109. The UCP's silence on the issue of fraud means that in cases where the parties have opted for the UCP and excluded the UCC, the fraud defense is not available at all.

(2)Even if the fraud doctrine applies to this case, the use of fraud as a defense to payment under the letter of credit fails for two reasons: (a) The fraud doctrine, as established in Sztjen and codified in the UCC, requires fraud in the letter of credit transaction; fraud in the under lying sales transaction is not sufficient unless the fraud is also manifested in the letter of credit transaction, that is, in a required document. In Sztejn, the seller presented fraudulent documents. Here the documents are genuine as they are for hthe 500 sedans and strictly conform to the requirements of the letter of credit. In cases where there is fraud in the underlying transaction that does not manifest itself in the letter of credit transactions itself, the independence riciple insulares the letter of credit from the fraud defense. Maxwell's recourse is to pay the ketter of credit and to sue Chincotti directly for breach of contract; and (b) Chincotti's actions did not amount to fraud. This was a simple breach of contract

HOW SHOULD THESE ISSUES BE DECIDED? See UCC section 5-109 and Mid-America Tire

refer to the case : Mid-America Tire, Inc. v. PTZ Trading Ltd/ supreme court of Ohio, 2002 95 Ohio st. 3d 367, 768 N.E.  2d 619§ 5-109. Fraud and Forgery.

(a) 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:

(1) the issuer shall honor the presentation, if honor is demanded by (i) a nominated person who has given value in good faith and without notice of forgery or material fraud, (ii) a confirmer who has honored its confirmation in good faith, (iii) a holder in due course of a draft drawn under the letter of creditwhich was taken after acceptance by the issuer or nominated person, or (iv) 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

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

(b) 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 thebeneficiary on the issuer or applicant, a court of competent jurisdiction may temporarily or permanently enjoin the issuer from honoring a presentation or grant similar relief against the issuer or other persons only if the court finds that:

(1) the relief is not prohibited under the law applicable to an accepted draft or deferred obligation incurred by the issuer;

(2) 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;

(3) all of the conditions to entitle a person to the relief under the law of this State have been met; and

(4) 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 subsection (a)(1).

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