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Note: In order to refinance an aircraft, Castle Aero Florida International (Buyer) began working with Marketing & Financial Services (Financer). At no point did Financer have the funds necessary to complete Applicant's refinance. Financer believed, upon the advice and direction of Innovatis Asset Management, S.A. (Fraudster), that if Applicant provided Financer with a standby LC, it could borrow against the LC, invest in high yield trading accounts, and thereby procure the funds for Buyer's refinance. At no point did Financer disclose to Buyer that it intended to borrow against the LC funds.

Financer agreed to refinance Buyer, but required Buyer to post a USD 4,000,000 standby LC. Financer told Buyer that the LC was "to act as a partial security for [Buyer's] obligations under the...lease". Financer represented to Buyer that a third-party company (Fraudster) was "a licensed dealer that will act as an intermediary" that would protect Buyer from wrongful honor of the LC. At the direction of Fraudster, Financer directed Buyer to obtain a LC from Credit Suisse (Issuer) in favor of Fraudster, which it did.

However, prior to Buyer's LC being issued, Fraudster pledged the LC to Liechtensteinische Landesbank (LLB) to obtain a USD 3,600,000 line of credit, which he obtained and put to personal use after the LC was issued. Financer was not aware that Beneficiary/Fraudster had pledged Buyer's LC to obtain a personal line of credit. LLB drew on Buyer's LC, and a Swiss court ordered Issuer to honor the drawing.

Buyer and Financer ultimately failed to execute a lease agreement for refinance, and Buyer sought, but was unable to obtain, the cancellation of its LC due to Beneficiary/Fraudster's pledge of the LC funds to LLB. Buyer sued Financer and Beneficiary/Fraudster for fraud. The U.S. District Court of Minnesota, Magnuson, J., granted Buyer's motion for default judgment against Fraudster.

The Judge found that Fraudster's repeated delay of discovery, termination of legal counsel prior to trial, and failure to appear at trial merited entry of a default judgment. Based largely on affidavits and depositions submitted by Buyer, the Judge found that Fraudster's actions constituted fraud on Buyer, which it orchestrated, aided and abetted the fraud, and was liable for conversion, civil theft, and unjust enrichment. The Judge awarded damages to Buyer for the loss of funds used to secure its LC, and for out of pocket losses it suffered as a result of the fraud. The Judge also awarded Financer compensatory damages for proceeds that Fraudster led it to expect it could raise through the financing scheme with Buyer and similarly interested parties.

[MJS/jbb]

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.