Opinion
02 Civ. 7504 (KMW)(KNF)
October 28, 2003
REPORT AND RECOMMENDATION
I. INTRODUCTION
In this action, plaintiff Dorchester Financial Securities, Inc. ("DFS") alleges breach of contract against defendant Banco BRJ, S.A. ("BRJ" or "defendant"). Upon BRJ's failure to answer or otherwise respond to the complaint, your Honor ordered that a default judgment be entered against it. Your Honor then referred the matter to the undersigned to conduct an inquest and to report and recommend the amount of damages, if any, to be awarded to plaintiff against the defendant.
The Court directed plaintiff to file and serve proposed findings of fact and conclusions of law and an inquest memorandum setting forth its proof of damages, costs of this action, and its attorney's fees. The defendant was directed to file and serve opposing memoranda, affidavits and exhibits, as well as any alternative findings of fact and conclusions of law it deemed appropriate, and to state whether a hearing was requested for the purpose of examining witnesses.
In support of its request for damages, plaintiff served and filed proposed findings of fact and conclusions of law, inquest proofs, including the affidavits of Stanley Ford ("Ford"), the president of DFS, Gordon Mascarenhas ("Mascarenhas"), the CEO and president of MRK Development, Inc. ("MRK") and plaintiff's counsel, T. J. Morrow ("Morrow"), and a memorandum of law. The defendant did not respond to the Court's order for submissions. Plaintiff's submissions aver that it is entitled to $250,000,000 in damages. Plaintiff seeks to recover $100,000,000 in damages against defendant BRJ, plus interest on that amount and costs.
For the reasons set forth below I recommend that plaintiff be awarded $100,000,000 in damages against BRJ and prejudgment interest, calculated at the statutory rate of 9% per year, on the amount of $100,000,000, accruing on July 16, 2002.
II. BACKGROUND AND FACTS
Based on submissions by the parties, the complaint filed in the instant action — the allegations of which, perforce of defendant's default, must be accepted as true, except those relating to damages, seeCotton v. Slone, 4 F.3d 176, 181 (2d Cir. 1993); Greyhound Exhibitgroup, Inc. v. E.L.U.L. Realty Corp., 973 F.2d 155, 158 (2d Cir. 1992) — and the Court's review of the entire court file maintained in this action, the following findings of fact are made:
DFS is a corporation organized and existing under the laws of the state of Florida and having a place of business at 2 Pennsylvania Plaza, Suite 1500, New York, New York. BRJ is a bank located in Rio de Janeiro, Brazil, which maintains correspondent banking relationships in the United States that enable it to issue monetary obligations in United States currency. In addition, BRJ is a member of The Society for Worldwide Interbank Financial Telecommunication ("SWIFT") and, as such, has access to SWIFT's telecommunications banking system.
SWIFT provides "a secured means of communication between financial institutions used primarily to confirm financial transactions." United States v. O'Razvi, No. 97 CR 1250, 1998 WL 405048, at *2 (S.D.N.Y. July 17, 1998).
On October 16, 2001, ACP Investments Limited ("ACP") caused BRJ to issue an irrevocable letter of credit in United States currency in the amount of $250,000,000 in favor of DFS. The letter of credit, numbered BBRRJLC449977810, was issued pursuant to the Uniform Customs and Practices for Documentary Credits (1993 Revision), International Chamber of Commerce Publication Number 500. The term of the letter of credit was October 16, 2001, to October 17, 2002. DFS received the subject letter of credit by facsimile from BRJ on October 18, 2001. On the same date, DFS received notification from the Chase Manhattan Bank that BRJ had sent a message through SWIFT confirming that the letter of credit had been issued and that the original of the letter of credit would be held by BRJ and would be honored during the term of credit.
Previously, on September 26, 2001, Ford and Morrow had approached Mascarenhas, CEO and president of MRK, to seek his assistance in obtaining funding for the subject letter of credit. Thereafter, on October 18, 2001, DFS and MRK entered into an agreement whereby, inter alia, MRK would cause a nominated bank to accept and fund the letter of credit in ten (10) increments of $25,000,000 each. Each incremental payment was to be remitted not less than twenty (20) days after the previous remission, until the face value of the letter of credit was exhausted. The agreement between DFS and MRK was fully executed on October 25, 2001.
On December 3, 2001, DFS instructed Luis Alcazar ("Alcazar"), Chief of the International Department of BRJ, to "set off the agreed-upon increments of $25,000,000 and to remit them to DFS as directed. In addition, DFS advised Alcazar that BRJ was required to submit a "pre-advice" letter to plaintiff's counsel for review. DFS provided Alcazar with an exemplar of the required "pre-advice" letter, as well as the exact text of each incremental letter of credit (valued at $25,000,000) that was to be "drawn under" the original letter of credit issued by BRJ. In his affidavit in support of the instant claim for damages, Ford avers that DFS was ready, willing and able to perform its obligations under the letter of credit.
BRJ failed to honor plaintiff's December 2001 demand for payment. DFS continued to make demands for payment of the agreed-upon $25,000,000 increments during the period January 2002 through July 2002, but none of these demands was honored. On July 16, 2002, BRJ informed DFS that the letter of credit had been cancelled. The cancellation of the letter of credit was effected without plaintiff's consent and prior to the expiration date of October 17, 2002.
Plaintiff contends that BRJ's cancellation of the letter of credit constituted anticipatory breach of its contract with DFS and that, as a result, DFS has incurred damages in the amount of the face value of the letter of credit, that is, $250,000,000. Plaintiff's inquest submissions aver that it is entitled to damages against BRJ in the amount of $100,000,000, plus interest and costs. Plaintiff notes that this is the amount that was pleaded against BRJ in the complaint.
In support of its application for damages, plaintiff has submitted the following documentary evidence: (i) a copy of the agreement between DFS and MRK, dated October 18, 2001; (ii) a copy of the original letter of credit issued by BRJ; (iii) a copy of the model "pre-advice" letter that was provided to BRJ by DFS; (iv) a copy of the letter of credit text, or "drawn under language," that was provided to BRJ by DFS; and (v) a copy of page two of the February 2001 edition of SWIFT's Standards Release Guide.
III. CONCLUSIONS OF LAW
A default judgment in an action establishes liability, but is not a concession of damages. See Cappetta v. Lippman, 913 F. Supp. 302, 304 (S.D.N.Y. 1996) (citing Flaks v. Koegel, 504 F.2d 702, 707 [2d Cir. 1974]). Damages must be established by the plaintiff in a post-default inquest. See id. In conducting an inquest, the court need not hold a hearing "as long as it [has] ensured that there was a basis for the damages specified in the default judgment." Transatlantic Marine Claims Agency. Inc. v. Ace Shipping Corp., 109 F.3d 105, 111 (2d Cir. 1997). The court may rely on affidavits or documentary evidence in evaluating the fairness of the sum requested. See Tamarin v. Adam Caterers, Inc., 13 F.3d 51, 54 (2d Cir. 1993). Applicable Law
The letter of credit at issue in this action states expressly that it is subject to the Uniform Customs and Practices ("UCP") for Documentary Credits (1993 Revision), International Chamber of Commerce Publication Number 500. The UCP is an internationally accepted collection of standards and practices regarding letters of credit. See Alaska Textile Co., Inc. v. Chase Manhattan Bank, N.A., 982 F.2d 813, 816 (2d Cir. 1992); ITM Enters., Inc. v. Bank of New York, 302 A.D.2d 359, 360, 754 N.Y.S.2d 663, 664 (App.Div.2d Dep't 2003). Although the UCP is not law, its provisions have binding force when the UCP is expressly incorporated into a letter of credit. See Alaska Textile Co., 982 F.2d at 816-17. Moreover, under New York law, letters of credit that are subject to the UCP are exempted from the provisions of Article 5 of New York's Uniform Commercial Code ("UCC"); Article 5 of the UCC governs letters of credit. See UCC § 5-103(c); Nassar v. Florida Fleet Sales, Inc., 79 F. Supp.2d 284, 291 (S.D.N.Y. 1999); ITM Enters., Inc., 302 A.D.2d at 360, 754 N.Y.S.2d at 664. Nevertheless, New York courts often rely on provisions of Article 5 of the UCC, provided they are not in conflict with the UCP, concerning matters for which the UCP contains no explicit provision. See id.
Here, since the UCP is incorporated into the letter of credit, the UCP governs this action. However, where the UCP is silent, an analogous provision of the UCC may be applied. Letter of Credit Principles
Under New York choice-of-law principles, New York law applies in this diversity action because: (1) the letter of credit at issue here expressly provides that it is to be paid in United States currency; (2) the letter of credit is silent as to governing law; and (3) the cause of action arose in New York and New York has the greatest interest in the outcome of the case. See Optopics Labs. Corp. v. Savannah Bank of Nigeria, Ltd., 816 F. Supp. 898, 902-904 (S.D.N.Y. 1993) (citing Bank of Cochin Ltd. v. Manufacturers Hanover Trust Co., 612 F. Supp. 1533 [S.D.N.Y. 1985], aff'd., 808 F.2d 209 [2d Cir. 1986]).
"The commercial letter of credit . . . is a common payment mechanism in international trade that permits the buyer in a transaction to substitute the financial integrity of a stable credit source (usually a bank) for his own." Alaska Textile Co., 982 F.2d at 815. Three parties are involved in a letter of credit transaction: (i) the buyer, who is also called the "account party" or the "applicant," (ii) the buyer's bank which issues the letter of credit and is also called the "issuer" or "issuing bank," and (iii) the seller, who is also called the "beneficiary." See id.; Nassar, 79 F. Supp.2d at 291. In addition, in its classic form, a letter of credit involves three distinct agreements: the underlying contract between the account party and the beneficiary, the application agreement between the bank and the buyer pursuant to which the bank agrees to issue the letter of credit to the beneficiary, and the actual letter of credit, which is an irrevocable promise by the bank to pay the beneficiary upon the presentation of certain documents that conform to the terms of the credit. See Alaska Textile Co., 982 F.2d at 815;Nassar, 79 F. Supp.2d at 291: First Commercial Bank v. Gotham Originals, Inc., 64 N.Y.2d 287, 294-95, 486 N.Y.S.2d 715, 718-719 (1985).
It is a fundamental principle of letter of credit law that these three relationships are entirely independent of one another. Alaska Textile Co., 982 F.2d at 815. Thus, "the obligation of the issuing bank to honour a draft on a credit when it is accompanied by documents which appear on their face to be in accordance with the terms and conditions of the credit is independent of the performance of the underlying contract for which the credit was issued." Id. (citations omitted); see also First Commercial Bank, 64 N.Y.2d at 294-95, 486 N.Y.S.2d at 718-719. This principle of independent contracts, which is embodied in the UCP, "infuses the credit transaction with the simplicity and certainty that are its hallmarks." Alaska Textile Co., 982 F.2d at 815; see also Nassar, 79 F. Supp.2d at 292 (citing UCP Article 3, 4).
An aspect of the independence of the actual letter of credit from the other types of agreements in a credit transaction is the focus in the former on documents, rather than on the goods or services that are the substance of the underlying contract. See Nassar, 79 F. Supp.2d at 292. This emphasis on documents in letter of credit transactions means that strict compliance with the terms of the letter of credit by the beneficiary is required. See id. Thus, strict compli-ance is also a principle of letter of credit law. See Alaska Textile Co., 982 F.2d at 816 ("Because the credit engagement is concerned only with documents, the terms and conditions of a letter of credit must be strictly adhered to. . . . There is no room for documents which are almost the same, or which will do just as well.") (citations omitted) (internal quotation marks omitted). Furthermore, since a beneficiary must comply strictly with the terms of the letter of credit, those terms must be stated explicitly, so that the beneficiary is able to ascertain with certainty the nature and extent of its obligations under the contract.See Optopics Labs. Corp. v. Savannah Bank of Nigeria, Ltd., 816 F. Supp. at 908. Moreover, the issuer of the letter of credit also must adhere to a rigorous standard. Thus, "[i]f the documents do comply with the terms of the credit, the issuer's duty to pay is absolute. . . . Issuers, moreover, must swiftly and carefully examine documents submitted for payment; and they are estopped from complaining about discrepancies they did not assert promptly." Alaska Textile Co., 982 F.2d at 816.
Some letters of credit, such as the one at issue here, involve an "advising and confirming" bank, in addition to the issuing bank. See Nassar, 79 F. Supp.2d at 292-93. The "advising and confirming" bank is used in international letter of credit transactions where the issuing bank is not in the same country as the seller to be paid under the letter of credit; in such cases, the "advising and confirming" bank makes the payment and receives the pertinent documents. See id. The "advising and confirming" bank assumes strict compliance duties similar to those of the issuing bank. See id.
The consent of all parties is required to change the original terms and conditions of a letter of credit or to cancel a letter of credit. See Optopics Labs. Corp., 816 F. Supp. at 908. In the event that an issuer of an irrevocable letter of credit dishonors a proper demand for payment, the measure of damages is the amount of the credit balance. See Optopics Labs. Corp., 816 F. Supp. at 909 (finding that plaintiff's damages were fixed, with the exception of interest, at the time the defendant established the letter of credit); Ross Bicycles, Inc. v. Citibank, N. A., 161 Misc.2d 351, 355, 613 N.Y.S.2d 538, 541 (Sup.Ct. New York Cty. 1994) (finding that the way to make the beneficiary whole was to require the issuer to pay damages in the face amount of the credit balance). Thus, where no payments have been made by the issuing bank under an irrevocable letter of credit, the beneficiary thereto is entitled to receive its full face value. See Ross Bicycles, Inc., 161 Misc.2d at 357, 613 N.Y.S.2d at 542 ("[P]laintiff's damages must be measured by the face amount of the irrevocable letter of credit which was the measure of defendant's undertaking which was wrongfully repudiated."). Plaintiff's Claim
Plaintiff claims that BRJ's cancellation of the letter of credit constituted an anticipatory breach by BRJ of its contract with DFS. As noted above, under the principle of independent contracts, the letter of credit between DFS, the beneficiary in this case, and BRJ, the issuing bank, is independent both of the contract between BRJ and ACP (here, the account buyer), by which the bank agreed to issue a letter of credit to DFS, and of the underlying contract between ACP and DFS. Thus, the letter of credit is the sole contract between DFS and BRJ. In addition, DFS entered into a contract with MRK pursuant to which MRK agreed to produce the equivalent of an "advising and confirming" bank, which would fund the letter of credit issued by BRJ, provided that DFS presented conforming documents.
Under the doctrine of anticipatory breach, a wrongful repudiation of a contract by one party to the contract, before the time for performance, entitles the nonrepudiating party to claim damages for a total breach. See American List Corp. v. U.S. News and World Report, 75 N.Y.2d 38, 44, 550 N.Y.S.2d 590, 593-594 (1989).
The affidavits of Ford, Mascarenhas and Morrow, as well as the documentary evidence submitted by plaintiff, establish that plaintiff delivered to BRJ the documents that were stipulated in the agreement with MRK as the documents that were required under the letter of credit. Since the plaintiff complied fully with the terms of the letter of credit, BRJ had an absolute duty to honor the terms of that contract. Therefore, BRJ's cancellation of the letter of credit prior to the date of its expiration, and without the consent of the plaintiff, constituted anticipatory breach of contract.
Since no payments were made by BRJ under the letter of credit, plaintiff, as beneficiary thereto, is entitled to receive the full face value of the letter of credit, that is, $250,000,000. In this case, plaintiff seeks to recover the lesser amount of $100,000,000 from defendant BRJ. Under the circumstances, the Court finds that plaintiff should be awarded damages in that amount.
Interest
As noted above, where the parties have provided that a letter of credit is subject to the UCP, New York courts have held that the UCP governs, except where it is silent or ambiguous. In such a case, a pertinent provision of the UCC may be used, if it is consistent with the UCP. See Optopics Labs. Corp., 816 F. Supp. at 909. The UCP contains no provision concerning the payment of prejudgment interest. See id. Consequently, the court may look to the relevant section of the UCC, which provides that the beneficiary's measure of damages for wrongful dishonor is "the amount that is the subject of the dishonor or repudiation [and] . . . incidental but not consequential damages." UCC § 5-111(a). Furthermore, an issuer who is found liable "shall pay interest on the amount owed . . . from the date of wrongful dishonor or other appropriate date." UCC § 5-111(d).
In New York, the statutory rate for prejudgment interest in a breach of contract action is 9% per annum. See New York Civil Practice Law and Rules ("CPLR") § 5004. The CPLR further provides that "[i]nterest shall be computed from the earliest ascertainable date the cause of action existed. . . ." CPLR § 5001(b). In this case, the plaintiff's cause of action for anticipatory breach arose on July 16, 2002, the date on which BRJ cancelled the letter of credit improperly.
Plaintiff's submissions aver that it is entitled to the costs of this action. Although an aggrieved beneficiary of a letter of credit is entitled to recover incidental damages under the UCC, in this case, plaintiff has failed to support a claim for incidental damages by submitting documentation describing the types of charges or out-of-pocket expenses to which it was subject as a result of the breach. Consequently, the Court has no basis for determining the amount, if any, of incidental damages plaintiff has reasonably incurred. See, e.g., Ernst Steel Corp. v. Horn Constr. Div., Halliburton Co., 104 A.D.2d 55, 60, 481 N.Y.S.2d 833, 837 (App.Div. 4th Dep't 1984) (finding that, although damages will rarely be denied because the amount is uncertain, there must be a reasonable basis for the determination so that the amount may be obtained with some exactness). Accordingly, plaintiff is not entitled to recover incidental damages in connection with BRJ's anticipatory breach of the letter of credit.
IV. RECOMMENDATION
For the reasons set forth above, I recommend an award to the plaintiff of $100,000,000 in damages, and prejudgment interest, calculated at a rate of 9% per year, on the amount of $100,000,000, accruing on July 16, 2002.Plaintiff shall serve a copy of this Report and Recommendation upon the defendant and submit proof of service to the Clerk of Court.
V. FILING OF OBJECTIONS TO THIS REPORT AND RECOMMENDATION
Pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure, the parties shall have ten (10) days from service of this Report to file written objections. See also, Fed.R.Civ.P. 6. Such objections, and any responses to objections, shall be filed with the Clerk of Court, with courtesy copies delivered to the chambers of the Honorable Kimba M. Wood, 500 Pearl Street, Room 1610, New York, New York, 10007, and to the chambers of the undersigned, 40 Foley Square, Room 540, New York, New York, 10007. Any requests for an extension of time for filing objections must be directed to Judge Wood. FAILURE TO FILE OBJECTIONS WITHIN TEN (10) DAYS WELL RESULT IN A WAIVER OF OBJECTIONS AND WILL PRECLUDE APPELLATE REVIEW. See Thomas v. Arn 474 U.S. 140 (1985); IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1054 (2d Cir. 1993); Frank v. Johnson, 968 F.2d 298, 300 (2d Cir. 1992); Wesolek v. Canadair Ltd., 838 F.2d 55, 57-59 (2d Cir. 1988); McCarthy v. Manson, 714 F.2d 234, 237-38 (2d Cir. 1983).