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Note: FMC Int'l A.G. (Sub-Contractor) entered into a contract with ABB Lummus Global, Inc. (Contractor) to provide two manifolds for deepwater oil exploration and caused a performance standby to be issued by Bank One which was drawn down. A dispute eventually arose, resulting in allegations that the Contractor improperly drew on the standby and withheld payment.

Sub-Contractor sued Contractor in a Texas County court for breach of contract and quantum meruit. Sub-Contractor subsequently amended its complaint to include a claim under Civil RICO, a US a federal racketeering statute based in part on an allegation of bank fraud in connection with the LC drawing. It alleged that

[t]he [Contractors] have refused to pay [Subcontractor's] invoices. The [Contractors'] business practice is to promise payment on the invoice in full (while knowing and intending that they will never pay in full), delay payment, refuse payment, present a guarantee or letter of credit and create a back charge for unnecessary items to reduce any amount owed to vendors and subcontractors. The [Contractors] systematically use the threat of non-payment, presentment of letters of credit, and back charges as a means to coerce a lower price from its vendors and subcontractors. The [Contractors] use their superior bargaining position to force its vendors and subcontractors to expend time and material and then refuse to pay some or all of the funds due to force the vendors or subcontractors to reduce their fees.

Sub-Contractor claimed that Contractor had misrepresented to the issuing bank that all the conditions precedent to Contractor's drawing on the LC had been met. Since this additional claim presented an issue involving a federal law, Sub- Contractor was then able to remove the case to a federal court. Contractor responded by moving to dismiss the racketeering claim. Contractor then moved to dismiss the case.

The United States District Court for the Southern District of Texas, Houston Division, Stacy, M.J., granted Contractor's motion and dismissed Sub- Contractor's racketeering claim.

The Magistrate then remanded the remaining claims to the state court system. The Magistrate ruled that the bank fraud allegation could not be used to support Sub- Contractor's racketeering claim because federal bank fraud statutes can only be used to protect the bank and not its customers. The Magistrate further ruled that, since Sub-Contractor did not cite any valid specific instances of racketeering as required by the federal rules of civil procedure, Sub-Contractor's racketeering claim could not survive the motion to dismiss. Since this racketeering claim under a federal statute was the only issue in this case that gave rise to federal court jurisdiction, the remaining claims had to be addressed by the state courts since there was no federal jurisdiction.

[JEB/az]

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