Article

Note: To support a loan of US$1,000,000, Borrower, Liag Argentina, S.A., executed a promissory note in favor of Lender, Landesbank Baden-Wrttemburg. The note provided that "[t]he Borrower submits to the jurisdiction of the courts located in USA, New York, and/or the Ordinary Courts in Commercial Matters of the Federal Capital of the Argentine Republic at the option of the holder."

To assure repayment of the loan, Fleet Bank, N.A. issued an irrevocable standby letter of credit at the request of Borrower/Applicant in favor of Lender/ Beneficiary. When Applicant defaulted on the note, documents were presented, and Issuer honored. Applicant claimed that the LC had expired and that the Beneficiary did not timely present the documents. After Issuer honored the draw, Beneficiary assigned its rights under the promissory note to Issuer. Issuer then informed Applicant of the payment of the LC and assignment of the note, and demanded reimbursement.

As a preemptive move, Applicant initiated proceedings on the note in Argentina, but did not provide prior notice of these proceedings to either the Beneficiary or the Issuer. The Argentine court's order, which the opinion stated "has apparently already issued ex parte", directed the "pesification" of the debt - conversion of the debt from U.S. currency to Argentine pesos at a rate of 1.40 pesos to the U.S. dollar. This had the effect of reducing the debt by 53% to approximately US$500,000.

In response, Issuer brought this action in the New York state courts, seeking repayment of the $1,000,000 promissory note. The trial court, the New York Supreme Court, Cahn, J., awarded summary judgment to Issuer on its action for "breach of contract default on the note-assignment."

[B]ased on its rights as the current holder of the promissory note[, a] prima facie case is made out by the Borrower's execution of the promissory note, its default in payment on October 18, 2002, and the subsequent assignment of the instrument to Fleet Bank." Although the issue of the expiration date of the letter of credit was material, the court stated that "the letter of credit and the promissory note are separate and independent contracts. Thus, even assuming there was a wrongful honor of the letter of credit, that is not a defense to the underlying loan transaction between the Borrower and the Lender.

In response to Applicant's argument that the action should be dismissed in favor of the Argentine proceeding, the court concluded that because the promissory note included a provision in which the Applicant submitted to the New York courts, at the option of the holder, New York is a convenient forum as a matter of law. In its determination that the Argentine order did not merit recognition as a matter of comity, the court noted "Fleet Bank was given no notice of the commencement of the Argentine proceeding and no opportunity to contest the Borrower's application for pesification."

Noting that the Issuer chose the New York courts and that the Argentine decree is of no relevance, the court stated "[t]he [Applicant]'s attempt to change the terms of the note, to commence an action or proceeding in Argentina, can not deprive the [Issuer] of its right to make the choice of which law will control and which court will hear the action."

[JEB/sal]

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