United Bank Ltd. v. Cambridge Sporting Goods Corp.

Duke Sports (Duke) agreed to manufacture boxing gloves for Cambridge Sporting Goods Corp. (Cambridge) (defendant). Duke financed the project with two Pakistani banks (plaintiffs). To ensure repayment of their loan, the Pakistani banks instructed Cambridge to obtain a letter of credit from Cambridge’s bank, Manufacturers Hanover Trust Company (Hanover Trust), to pay for the gloves. Hanover Trust issued the letter of credit to Duke. After the contract was executed, Duke asked for an extension of the manufacturing deadline. Cambridge said an extension was not possible and canceled the contract. A month later, the Pakistani banks sent documents to Hanover Trust claiming that the boxing gloves had been delivered to Cambridge. The Pakistani banks also included two drafts drawn by Duke, each payable to the Pakistani banks under the letter of credit. Cambridge inspected Duke’s glove shipment and discovered that the gloves were severely defective. Cambridge prevented Hanover Trust from paying the Pakistani banks. The Pakistani banks sued Cambridge, seeking payment under the letter of credit. The Pakistani banks argued that they were holders in due course of the drafts issued by Duke. As holders in due course, the Pakistani banks argued they were entitled to payment of the drafts, even if Duke had defrauded Cambridge. The lower courts agreed with the Pakistani banks, finding that the banks were holders in due course and entitled to payment. Cambridge appealed to the New York Court of Appeals, the highest court in the state.