Article

Factual Summary: To assure repayment of a loan of US$150,000,000, Korean Corporation (Borrower/Applicant) sought a standby LC from New York branch of Korean Bank (Issuer) in favor of Nissho Iwai (Lender/Beneficiary). Accordingly, Applicant's employees structured the requested LC in a manner similar to a previous LC that had been issued by the branch showing a face amount equal to one installment of the loan repayment. Applicant represented to the Issuer that the underlying contract was similar to the previous agreement for the purchase of automobile parts. On this basis, the LC was issued in the form requested with additional assurances provided to officials at the main office who questioned the LC and on that basis foreign exchange requests were sought and obtained from the regulatory authorities.

As contained in the opinion, the standby provided that "[Issuer] open[s] our irrevocable Letter of Credit NO. ___ in favor of you, [Beneficiary], for account of [Applicant], up to US$11,500,000 payable against your sight draft drawn on us accompanied by your signed statement stating that...".

The mid part of the letter of credit states, "[t]his Letter of Credit shall be revolved and reinstated every three months within the period of validity of this Letter of Credit mentioned below". The credit also read, "[t]his Letter of Credit shall be valid from the date hereof until September ___, 2001, but become drawable up to US$3,750,000 from September ___, 1994 until December ___, 1997 and up to US$11,500,000 from December ___, 1997 until September ___, 2001."

Misled by the lack of a total amount due and the representations of Borrower's employees, including representations that the loan was for the purchase of automobile parts, Issuer's employees booked the LC at US$11,500,000 when the actual exposure was US$221,250,000 and the loan was to provide funds for operating expenses. On the basis of this standby, Lender remitted US$150,000,000 to Borrower. After repaying a portion of the loan, Applicant/ Borrower became insolvent. Beneficiary then drew on the standby. After honoring drawings up to US$11,500,000, Issuer refused a subsequent drawing, stating that the amount of the LC was exhausted.

Claiming anticipatory repudiation, Beneficiary sued Issuer in the state courts of New York for wrongful dishonor. Finding that by its terms the credit revolved, the trial court granted summary judgment in the amount of US$82,139,226.62 with interest at 9% per annum in favor of Beneficiary. On appeal, the intermediate appellate court unanimously affirmed. During the pendancy of the appeal, a criminal investigation in Korea commenced. Based on information that allegedly revealed a systematic effort on the part of Borrower/Applicant fraudulently to induce issuance of the LC, criminal convictions of Applicant's employees in Korea resulted. Issuer subsequently appealed to the intermediate appellate court twice and then to the highest state appeal court, all of which unanimously affirmed the decision of the trial court ruling that the standby on its face revolved and that there was no evidence of fraud by the Beneficiary. Because Issuer had become insolvent, the judgment was paid by an insurance agency of the Korean government [Insurer] and the assets were sold to a new bank [Issuer's Successor].

In this action, Insurer and Issuer's Successor sued Borrower/Applicant, its subsidiary corporations, and various employees for fraudulent tortuous acts leading to the fraudulent issuance of the LC and also sued Beneficiary and its related corporate entities, for aiding and abetting the tortuous acts of Borrower/ Applicant. The Korean trial court granted judgment against Applicant/Borrower and its related corporations and certain individual defendants, but dismissed the claims against Beneficiary and its related correspondents and certain other defendants.

Legal Analysis:

1. Jurisdiction (Korea): Beneficiary argued that because its offices were not in Korea, the litigation should be dismissed without review of the merits of the claim. Noting that the principle of the exercise of jurisdiction is "impartiality among parties and fairness, promptness and efficiency of trial", the court observed that the plaintiffs were legal entities incorporated in Korea, the Applicant/Borrower was Korean, certain parts of the conspiracy took place in Korea, most of the documentary evidence was located in Korea, and a subsidiary of the Beneficiary is located in Korea. The court concluded that there was "substantial connection" with Korea, making it reasonable for the Korean courts to exercise jurisdiction.

2. Fraud; Fraudulent Inducement; Interpretation of LC: Beneficiary claimed that Issuer had violated a promise in a letter to the New York bank regulator indicating that Issuer would follow the decisions of the US courts and not take action in Korea. Concluding that there was insufficient evidence that Issuer agreed not to bring any legal proceedings in Korea, the court rejected this argument, noting that, in any event, it could not be asserted by the Beneficiary but only by the state regulator.

3. Fraud; Issuance, Fraudulent Inducement: Issuer claimed that Beneficiary was a joint tortfeasor in that it actively and knowingly participated in or knowingly aided and abetted Applicant/Borrower's fraudulent acts to deceive Issuer regarding the liability and amount due on the LC. The trial court stated that the evidence introduced by Issuer was "insufficient to find that [Beneficiary and related entities] actively participated in or supported the above tortuous acts committed by the [Applicant, its related corporations and its employees] who were found liable, and there is no other evidence to find that the [Beneficiary and related entities] are joint tortfeasors." Therefore, it concluded that Applicant's claim against Beneficiary "which is based on the assumption that they are the joint tortfeasors is without merit and does not warrant further consideration."

Comments By James E. BYRNE:

1. This decision leaves much unsaid. It ignores serious arguments regarding finality of payment and vulnerability to a collateral attack on a related theory cloaked under a different but related cause of action in a different forum of a final decision on the issue of beneficiary fraud or collusion in the forum in which an LC is issued and to whose law to which it is expressly subject, while suggesting that the Korean courts were prepared to take jurisdiction of the case. Whether the determination that there was no basis for the claims was, as it appears, based on an independent review by the Korean court or on effective deference to the findings of the New York courts on this issue is not revealed since the decision rests on a finding of fact given without explanation. In that it does not create a positive precedent for a collateral attack based on a tort theory, the decision is better than one reaching such a result. However, it leaves much to be desired and may suggest a tactic to be employed by desperate issuers in situations, such as this one, where there is enough money at stake to warrant it. Such tactics weaken the credibility of the letter of credit and should be forcefully rejected.

[JEB/ejh]

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