Opinion
Civ. No. 98-1926 (DRD).
October 14, 1999.
John R. Bailey, Esq., EUGENIO GENISE, P.C., Little Falls, New Jersey, Attorneys for Plaintiff.
Robert E. Bartkus, Esq., ROBERT E. BARTKUS, P.C., Morristown, New Jersey; Joseph A. Vogel, Esq. (Pro Hac Vice) KRAVET VOGEL, LLP, New York, New York, Attorneys for Defendant Standard Chartered Bank.
OPINION
This is a diversity action arising from an international commercial transaction for the sale of frozen shrimp. The matter is now before the Court on the motion of defendant Standard Chartered Bank for an order of summary judgment pursuant to Fed.R.Civ.P. 56. For the reasons set forth below, said defendant's motion is granted.
STATEMENT OF FACTS
A. The Parties
Plaintiff Sundarban Sea Food Industries, Ltd. ("Sundarban") is a Bangladeshi exporter of seafood products. Sundarban's financial transactions with defendants were handled by a non-party, Bangladesh Krishi Bank ("BKB"), located in Khulna, Bangladesh.
Defendant Flag Imports, Inc. ("Flag") is a Seacaucus, New Jersey company engaged in the food import business. Flag's payment arrangements with plaintiff were facilitated by defendant Standard Chartered Bank ("SCB"), an Illinois corporation, through its Foreign Trade Department in Chicago, Illinois.
Flag filed a Chapter 7 petition for bankruptcy with the United States Bankruptcy Court for the District of New Jersey on March 1, 1993.
B. The Transactions
Sundarban, in its complaint, sues for payment of debts arising from three shipments of frozen shrimp delivered to Flag during the Spring of 1992. On or about April 25, 1992, Sundarban entered into a sales contract with Flag. Three shipments were made under the contract; the first pursuant to an International Bank Collection arrangement, the second and third shipments under an irrevocable letter of credit.
1. The International Bank Collection Transaction
The first transaction is described by SCB as a "documentary collection" transaction. BKB and SCB apparently served as intermediaries between the two companies, arranging transfer of payment and documents of title.
Plaintiff's first shipment of shrimp was made early in May of 1992. On or about May 12, BKB, on behalf of Sundarban, presented SCB with a collection order and Bill of Exchange for the shipment in the amount of $220,900.92. These documents were submitted to SCB's Foreign Trade Department in Chicago, along with the various documents of title relating to the shipment.
SCB forwarded the Bill of Exchange to Flag for acceptance. Under the terms of the collection order, Flag would remit payment to SCB within 60 days of its acceptance of the Bill of Exchange. The proceeds would then be remitted to BKB.
Flag accepted the Bill of Exchange on May 18, such that payment of the Bill was due by July 17, 1992. After receiving the accepted Bill of Exchange, SCB released the documents of title to Flag. BKB was advised of this transaction by telex the following day, on May 19.
Upon the July 17, 1992 maturity date, Flag failed to make payment to SCB on the Bill of Exchange, and offered no explanation for its failure to do so. SCB passed this information along to BKB by telex on July 21. BKB responded with a telex on July 22, demanding that SCB make payment on the Bill of Exchange. On July 27, SCB informed BKB that Flag did not maintain an account with SCB and that BKB would have to seek payment directly from Flag.
By letter dated October 20, 1992, BKB issued a "Note of Protest for Dishonour of Export Bill." The Note demanded payment from SCB, together with costs, and accused SCB of illegally delivering the documents of title to Flag without first receiving payment.
SCB responded with a telex on November 2, 1992, describing its position with regards to the transaction. Therein, SCB stated that it had complied with the terms of the collection order because the documents of title were not released to Flag until receipt of the accepted Bill of Exchange. SCB asked that the Note of Protest be rewritten as against Flag.
2. The Letter of Credit Transaction
Plaintiff's second and third shipments were made under a letter of credit arrangement. On April 7, 1992, SCB had issued an irrevocable commercial letter of credit on behalf of Flag to another Bangladeshi export firm, Union Trading Company ("Union"). The letter was issued by SCB's Foreign Trade Department in Chicago and was expressly made subject to the laws of Illinois, as well as the Uniform Customs and Practice for Documentary Credits, 1983 Revision, International Chamber of Commerce Publications No. 400 ("UCP").
Union transferred its rights under the letter of credit to Sundarban on April 30, 1992. In order to collect payment under the terms of the letter of credit, Union had been required to present seven documents to SCB, including an Inspection Certificate issued by Lloyd's of London. Union sought amendment of two of these terms on Sundarban's behalf on May 11, 1992, but did not seek modification of the Inspection Certificate requirement.
After making the second shipment, plaintiff drew on the letter of credit in the amount of $225,367.43. The required documents were submitted to SCB; however, a survey report was presented in lieu of the Inspection Certificate. These documents, including the survey report, were accepted as conforming to the terms of the letter of credit and payment was made to BKB.
On May 17, 1992, plaintiff, through BKB, attempted to draw $104,233.49 on the letter of credit as payment for the third shipment of shrimp. On this occasion, however, payment was refused. Sundarban alleges that it satisfied all of the conditions required for payment and that SCB improperly refused to honor the second draw on the letter of credit.
SCB refused to honor the draw, asserting that Sundarban had failed to present all of the documents required by the letter of credit's terms, specifically the Inspection Certificate from Lloyd's of London. SCB advised BKB of this discrepancy by telex on June 1, 1992, remarking that a "survey report [was] presented in lieu of Inspection Certificate." SCB submitted a second telex on June 15 requesting that BKB "advise whereabouts of Inspection Certificate."
By letter dated June 6, 1992, BKB stated that "a survey report is in effect an Inspection Report." BKB further noted that SCB had paid on the earlier draw, which had included the same type of survey report in lieu of the Inspection Certificate.
SCB states that it forwarded BKB's various letters and telexes to Flag so that Flag could determine whether to accept the non-conforming documents. Flag advised SCB by telephone that it would not accept the survey report and would not waive the Inspection Certificate requirement. Flag's refusal was later confirmed in a letter dated June 24, 1992 and signed by John Guerriero.
On June 29, SCB informed BKB by telex that Flag had refused to waive the Inspection Certificate requirement and stated that the remaining documents would be returned to BKB unless a reply was received by July 6, 1992. By telex on July 4, BKB insisted that it had already satisfied the conditions of payment. SCB returned the documents to BKB on July 7, 1992, unpaid.
STANDARD OF REVIEW
Summary judgment will be granted if the record establishes that "there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c).
Rule 56(c) imposes a burden on the moving party simply to point out to the district court that there is an absence of evidence to support the nonmoving party's case. Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). Once the moving party has met this burden, the burden then shifts to the opposition to "set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e). The evidence need not be in a form that would be admissible at trial. Celotex, 477 U.S. at 324. However, the nonmoving party "must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986).
At the summary judgment stage, the court's function is not to weigh the evidence and determine the truth of the matter, but rather to determine whether there is a genuine issue for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986). The mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment. Id. at 247.
In addition to being genuine, the disputed facts must be material, as determined by the substantive law. Anderson, 477 U.S. at 248. Debate over extraneous issues will not suffice; "only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Id.
ANALYSIS
A. Applicable Law
The first issue to be resolved in deciding this motion is a conflict of laws. Defendant SCB contends that the Court should apply Illinois law, and particularly the Illinois statute of limitations, in reviewing these transactions; plaintiff argues in favor of the law of New Jersey. Not surprisingly, the fate of plaintiff's claim under the International Banking Collection transaction rests on the resolution of this conflict.
A federal court sitting in diversity must apply the conflict-of-laws principles of the forum state. Klaxon v. Stentor Elec. Mfg. Co., 213 U.S. 487, 496 (1940); Shields v. Consolidated Rail. Corp., 810 F.2d 397, 399 (3d Cir. 1987). Accordingly, this Court must look to the law of New Jersey in determining which law to apply.
1. The International Banking Collection Transaction
Plaintiff argues that in New Jersey, "the traditional rule to determine which of two statutes of limitations is applicable is that the statute of the forum governs unless the limitation is a condition of the cause of action." O'Keefe v. Snyder, 83 N.J. 478, 490 (1980). Plaintiff also recognizes that the "governmental interest" test adopted by the New Jersey Supreme Court in Heavner v. Uniroyal, Inc., 63 N.J. 130 (1973), provides a "limited and special exception" to this general rule under certain circumstances. See O'Keefe, 83 N.J. at 490. Under either the general rule or the exception, plaintiff argues, the Court should apply the New Jersey statute of limitations as it existed at the time of the transactions.
Prior to June 1, 1995, plaintiff argues, Article 4 of New Jersey's Uniform Commercial Code contained no statute of limitations, and thus the six-year statute of limitations provided by N.J.S.A. § 2A:14-1 would apply.
What plaintiff fails to recognize, however, is that the general common law rules for determining choice of law are supplanted when an applicable statute provides the choice of law rule. In particular, defendants cite N.J.S.A. § 12:4-102(b), which states that:
the liability of a bank for action or non-action with respect to an item handled by it for purposes of presentment, payment, or collection is governed by the law of the place where the bank is located. In the case of action or non-action by or at a branch or separate office of a bank, its liability is governed by the law of the place where the branch or a separate office is located.
Although amended on June 1, 1995, the current language of N.J.S.A. § 12A:4-102(b) is essentially the same as it was upon adoption in 1961, well before these transactions took place. See N.J.S.A. § 12A:4-102(2) (West 1962). Moreover, the rule itself predates the Uniform Commercial Code. See Brook v. VanNest , 58 N.J.L. 162; 33 A. 382 (1895).
Under such a clear statutory mandate, there is simply no need to resort to the more general choice-of-law considerations discussed by plaintiff.See Bank Polska Kasa Opieki v. Pamrapo Sav. Bank, 909 F. Supp. 948, 952 (D.N.J. 1995).
Applying § 12A:4-102(b), the Illinois statute of limitations will govern this case. Sundarban' suit against SBC arises from an item, the Bill of Exchange, handled for payment by SBC. SBC is an Illinois corporation, and all of plaintiff's dealings with SBC were conducted through SBC's Foreign Trade Department in Chicago. Illinois law is the "law of the place where the bank is located," and so the Illinois statute of limitations will be applied.
At the time these transactions took place, Illinois had already adopted § 4-111 of the Uniform Commercial Code ("UCC"), which states that "an action to enforce an obligation, duty, or right arising under [Article 4] must be commenced within three years after the cause of action accrues." See 810 Ill. Comp. Stat. 5/4-111. Sundarban's putative cause of action against SBC accrued on July 27, 1992, when SBC refused to honor BKB's demand that SBC pay the Bill of Exchange. Because plaintiff did not commence this action until April 24, 1998, almost three years after the statute of limitations had expired, no claim based on the International Banking Collection transaction can be maintained. SBC is entitled to summary judgment on this claim.
New Jersey adopted UCC § 4-111 on June 1, 1995; thus Illinois and New Jersey law are now identical in providing a three-year statute of limitations for banking collection actions. See N.J.S.A. § 12A:4-111.
2. The Letter of Credit Transaction
New Jersey's Uniform Commercial Code ("UCC") also provides the choice of law applicable to the letter of credit transaction. Letter of credit transactions are generally governed by UCC Article 5, see Banco Nacional v. Mellon Bank, 726 F.2d 87, 90-91 (3d Cir. 1984); see also N.J.S.A. § 12A:5-116 at Comment 3 (noting that "letters of credit that incorporate the UCP or similar practice will still be subject to Article 5 in some respects"). Article 5 contains the following choice-of-law provisions:
a) The liability of an issuer [of a letter of credit] . . . is governed by the law of the jurisdiction chosen by an agreement in the form of a record signed or otherwise authenticated by the affected parties . . . or by a provision in the person's letter of credit, confirmation, or other undertaking . . .
b) Unless subsection a. of this section applies, the liability of an issuer . . . is governed by the law of the jurisdiction in which the [issuer] is located. The [issuer] is considered to be located at the address indicated in the person's undertaking . . . For the purpose of jurisdiction, choice of law, and recognition of interbranch letters of credit, but not enforcement of a judgment, all branches of a bank are considered separate juridicial entities and a bank is considered to be located at the place where its relevant branch is considered to located under this subsection.
The letter of credit issued to Union clearly states "this Agreement shall be governed by and construed in accordance with the laws of Illinois." Thus, under N.J.S.A. § 12A:5-116(a), SCB's liability on the letter of credit will be governed by Illinois law. B. SCB's Liability for the Letter of Credit Transaction
The court notes that the identical result would be reached under § 12A:5-116(b).
SCB concedes that plaintiff's claim based on the letter of credit transaction is timely because Illinois applies a ten-year statute of limitations to disputes arising under letters of credit issued prior to January 1, 1997. See defendant's brief at 23, at n. 6.
As in New Jersey, letters of credit in Illinois are governed by Article 5 of the UCC. See 810 Ill. Comp. Stat. 5/5-116 at Comment 3 (stating that "under revised Section 5-116, letters of credit that incorporate the UCP or similar practice will still be subject to Article 5 in certain respects"). However, UCC § 5-116(c) also provides that:
Except as otherwise provided in this subsection, the liability of an issuer [of a letter of credit] . . . is governed by any rules of custom or practice, such as the Uniform Customs and Practice for Documentary Credits, to which the letter of credit, confirmation, or other undertaking is expressly made subject. If . . . there is conflict between this Article and those rules as applied to that undertaking, those rules govern except to the extent of any conflict with the nonvariable provisions specified in Section 5-103(c).
810 Ill. Comp. Stat. 5/5-116(c). The letter of credit issued by SBC on behalf of Union states that it will be governed by Illinois law. The telex transferring the letter of credit to Sundarban notes that "this L/C subject to 1983 UCP Revision ICC Publication 400."
A letter of credit transaction involves three separate contracts.Village of Long Grove v. Austin Bank, 644 N.E.2d 456, 458 (Ill.App. 2 Dist. 1994); Banco del Estado v. Navistar Int'l Transp. Corp., 954 F. Supp. 1275 (N.D.Ill. 1997). The first is the contract between the beneficiary and the customer, in this case between Sundarban and Flag.See id. The second is between the customer and the bank, here between Flag and SCB, when the customer offers collateral in exchange for the bank's issuance of a letter of credit. See id. The third contract is between the bank and the beneficiary, in this case between SCB and Sundarban, wherein the bank agrees to pay the beneficiary an amount stated when and if the beneficiary complies with the terms cited in the letter. See id.
It is this third contract which is at the heart of this dispute. Under Illinois law, the general rule known as the independence principle requires the bank to pay the beneficiary as long as the documents presented to the bank conform to the requirements stated in the letter of credit. Village of Long Grove, 644 N.E.2d at 458-59. "Conversely, when the documents do not comply, the issuer is not authorized to pay until discrepancies are waived by its customer." Pioneer Bank v. Seiko Sporting Goods, 540 N.E.2d 808, 811 (Ill.App. 1 Dist. 1989).
1. The Standard of Compliance
There is no dispute that the letter of credit required Sundarban to present an Inspection Certificate from Lloyd's of London. The question at issue is whether Illinois law requires strict compliance with the letter of credit's terms or whether Illinois' courts will accept reasonable compliance.
Sundarban contends that reasonable compliance is the law in Illinois, relying primarily on First Arlington Nat'l Bank v. Stathis, 413 N.E.2d 1288 (Ill.App. 1 Dist. 1980). As one federal court described it, "Stathis's standard of reasonable compliance in presentation of draft documents found favor with some [federal] courts in [the Northern District of Illinois] in the years following its publication." Occidental Fire Cas. Co. v. Continental Ill. Nat'l Bank Trust Co., 718 F. Supp. 1364, 1370 (N.D.Ill. 1989), aff'd, 918 F.2d 1312 (7th Cir. 1990). The same court observed, however, that:
reports of the demise of the strict compliance rule were exaggerated . . . A different division of the same Illinois Appellate Court noted in Mt. Prospect State Bank v. Marine Midland Bank, [ 459 N.E.2d 979, 983-84 (Ill.App. 1 Dist. 1983)] that strict compliance was still the majority rule, and suggested that it was particularly appropriate in cases under the UCP.Id. at 1370. See also Banque Paribas v. Hamilton Indus. Int'l Inc., 767 F.2d 380, 384 (7th Cir. 1985) (commenting that "the long tradition of requiring strict compliance with the terms of a letter of credit . . . though challenged . . . has managed to retain its vitality"); Brown v. First Nat'l Bank, 1989 WL 4348 (N.D.Ill. Jan. 17, 1989) (finding that Illinois law requires strict compliance).
Upon reviewing these cases, it is concluded that Illinois law requires strict compliance with the terms of the letter of credit. Moreover, Article 15 of UCP 400, which is controlling to the extent that it conflicts with the provisions of the UCC, see 810 Ill. Comp. Stat. 5/5-116(c), also requires banks to "examine all documents with reasonable care to ascertain that they appear on their face to be in accordance with the terms and conditions of the credit."
Plaintiff contends that even if strict compliance is required, however, "courts in `strict compliance' jurisdictions have found non-conforming documents to be acceptable in cases where there is `no possibility that the documents could mislead the paying bank to its detriment." Plaintiff's brief at 14. Indeed, a federal court in Illinois, applying Illinois law, has adopted this identical standard.See Brown, 1989 WL 4348, at *2-3.
The Brown decision suffers from a flaw in reasoning, however. The rule adopted in Brown, permitting variances where there is no danger of misleading the bank to its detriment, is taken from a decision by the U.S. Court of Appeals for the First Circuit, Flagship Cruises, Ltd. v. New England Merchants Nat'l Bank, 569 F.2d 699 (1st Cir. 1978). TheFlagship decision, ironically, is the source of the "reasonable compliance" rule adopted by the court in Stathis, which the Brown court purportedly rejected in requiring strict compliance. The Illinois courts' subsequent repudiation of the Stathis/Flagship rule leads to the conclusion that under Illinois law, strict compliance is intended to mean just that; "there is no room for documents which are almost the same, or which will do just as well." Courtlands N. Am., Inc. v. North Car. Nat'l Bank, 528 F.2d 802, 806 (4th Cir. 1975).
2. Was There Strict Compliance?
SCB admits that a survey report may be similar to and serve many of the same functions as an Inspection Certificate. As SCB's Vice-President notes, however, "in letter of credit parlance, a `Survey Report' is simply not an `Inspection Certificate.'" Affidavit of John McArthur ("McArthur Aff.") at ¶ 44. An Inspection Certificate is required, among other things, to be properly titled. See "Standard Banking Practice for the Examination of Letter of Credit Documents," as promulgated by the U.S. Council on International Banking, Inc., annexed to the McArthur Aff. at Exhibit 28. While requiring that letter of credit documents be properly titled may seem unusually rigid, banks which regularly handle letter of credit transactions should not be forced to risk liability by guessing the sufficiency of a given document.
Sundarban submits that, notwithstanding its title, "neither the content nor the form" of the survey report failed to qualify as an Inspection Certificate, such that Sundarban "could simply have typed `Inspection Certificate' at the top of the rejected document and resubmitted it." Plaintiff's brief at 12, 15 at n. 1. Plaintiff insists that it should prevail because SCB "has been unable to show any substantive difference between a `survey report' and an `inspection certificate.'" Id. at 11.
Plaintiff's position amounts to no more than arguing that the survey report "will do just as well" in satisfying the terms of the letter of credit. See Courtlands, 528 F.2d at 806. While plaintiff may condemn insistence on strict compliance as exalting form over substance, it remains the applicable standard with regard to international letter of credit transactions:
The financial value of the letter of credit promise is predicated upon its degree of legal certainty. Equity's heralded virtue — that it is administered with regard to fairness, as opposed to the rigid rules of the common law — has but a limited role in a credit engagement that demands certainty and predictability if it is to continue its vital role in facilitating international commerce.Alaska Textile Co. v. Chase Manhattan Bank, 982 F.2d 813, 820 (2d Cir. 1992) (citations omitted). In such circumstances, courts can offer little solace to plaintiffs who ask that their noncompliance be excused.
Sundarban's failure to submit the Inspection Certificate is particularly inexcusable in light of the fact that Sundarban was notified of and given an opportunity to correct the discrepancy.
3. Preclusion or Waiver
Finally, plaintiff contends that SCB's prior acceptance of a survey report in lieu of an inspection certificate precluded SCB from rejecting the second survey report as non-conforming, relying on several cases decided in previous decades. See, e.g., Chase Manhattan Bank v. Equibank, 550 F.2d 882, 887 (3d Cir. 1977).The modern trend, however, finds that occasional or even repeated failure to require strict conformity in letter of credit transactions cannot be construed as a waiver of the right to demand strict compliance in future transactions. See Banco General Runinahui v. Citibank Int'l, 97 F.3d 480, 485-86 (11th Cir. 1996) (one-time prior acceptance);Occidental Fire Cas. Co. v. Continental Bank, 918 F.2d 1312, 1320-21 (7th Cir. 1990) (several prior acceptances); North Am. Foreign Trading Corp. v. Chiao Tung Bank, 1997 WL 193197 (S.D.N.Y. Apr. 18, 1997) (finding no waiver where inspection certificate requirement had not been enforced in over forty prior negotiations).
"The parties to letter of credit transactions are sophisticated commercial entities who are quite aware of the rule of strict compliance." Chiao Tung, 1997 WL 193197 at *9. "Where, as here, a beneficiary presents documents under letters of credit that expressly incorporate the UCP as a template of rights and responsibilities, courts should be chary about altering the parties' relationships based on equitable doctrines such as waiver." Alaska Textile, 982 F.2d at 820. SCB did not waive the right to insist upon Sundarban's strict compliance with the terms of the letter of credit.
Furthermore, SCB notes that its failure to insist on strict compliance as to the first draw was based on Flag's consent. See Affidvait of John McArthur at Exhibit 30. As documented in the record, Flag refused to accept nonconforming documents with regard to the second draw. See Affidavit of John McArthur at Exhibit 24.