Article

Note: Buyer, North American Wire, an Ohio corporation with its principal place of business in Ohio, and Seller, GCR Eurodraw S.p.A, an Italian corporation with offices in South Carolina, contracted for the sale of wire manufacturing equipment, causing Buyer's bank, LaSalle Bank N.A., located in Illinois, to issue a commercial standby LC in the amount of US$2,210,000, representing 85% of the contract price, in favor of Intermediary, AS Associated Contractors, S.A., a Swiss financial company. Their agreement was reflected in two documents, an "Agreement", which memorialized the terms regarding production, sale and delivery, and "Order Confirmation", which described in detail the machinery and other terms of the sale. Meetings were held in Italy, Ohio, and Georgia. The goods were manufactured in Italy and delivered to Ohio.

The Agreement provided for binding arbitration in Geneva under ICC rules. The LC initially required "presentment of a certificate to [Issuer] stating that the amount drawn was equal to the value of the machinery shipped by [Seller] and due from [Applicant] under a purchase order." Before any draws were made on the LC, it was amended, replacing the receipt of the purchase order with the Order Confirmation and allowing ABN-Amro Bank N.V. in Monaco which was originally only to advise the LC to "ADD THEIR CONFIMATION."

Claiming that there were defects in the machinery received and that most of the machinery was never delivered or installed because Seller lied about its production capacity, Applicant failed to pay the full invoiced amount due. Beneficiary, on behalf of Seller, then made five presentations to Confirmer over a period of five months and was paid a total of US$2,072,186.14. The documents "certified that [Seller] had performed a portion of its obligations 'in accordance with all of the terms and conditions of the Order Confirmation.'" Confirmer then obtained reimbursement from Issuer, which sought reimbursement from Applicant.

Unable to reimburse Issuer due to losses on the contract, Applicant assigned its claims on the contract to Issuer which filed an action against Beneficiary and Seller in Illinois federal court for fraudulent inducement, promissory fraud, and fraudulent misrepresentation in drawing on the LC and against Intermediary/Beneficiary for tender of fraudulent documents under the LC. Beneficiary and Seller filed motions to dismiss for lack of subject matter jurisdiction, personal jurisdiction, failure to state a claim upon which relief can be granted, and, with regard to Seller, insufficient service of process and to enforce the binding arbitration clause.. The U.S. District Court of Illinois, Filip, J., granted the motion to dismiss for lack of personal jurisdiction, denied the motion to dismiss for subject matter jurisdiction, and denied the remainder of the motions as moot.

The court observed that under Illinois law, personal jurisdiction can be asserted over a non-resident defendant only where it has purposely availed itself of the privilege to act within the state, taking advantage of its legal benefits and protections. It noted that Issuer's claims were as assignee of the buyer and based on tort rather than contract and that "this is not a letter of credit case."

Issuer argued that jurisdiction arose because defendant demanded that an Illinois bank issue the LC.

The court rejected this claim, ruling it was "fundamentally flawed on factual grounds." The court noted unrebutted affidavits from officials of defendants "which make clear that [Beneficiary and Seller] never demanded that [Applicant] obtain a letter of credit from [Issuer] as opposed to any other reputable bank."

The court also observed that "Precedent rejects any notion that personal jurisdiction can be asserted over the beneficiary of a letter of credit simply because a letter of credit is issued by an institution in a particular putative forum." It also noted that: "In addition, there is wealth of precedent (from cases that were successfully litigated by banks, coincidentally enough) which establishes the related proposition that no personal jurisdiction can be asserted over an out-of-state bank that has issued a letter of credit to an in state beneficiary, simply by virtue of the issuance of the letter of credit."

Issuer alternatively argued that Beneficiary's and Seller's knowledge that their misrepresentation of documents in Monaco would trigger payment by Issuer in Illinois was grounds for personal jurisdiction, relying on Eastland Bank v. Massbank for Savings, 749 F. Supp. 433 (D.R.I. 1990) (where the court granted personal jurisdiction over Beneficiary/ Defendant that had visited the forum state rather than using another bank outside the forum state to draw on the LC). The court distinguished the case at bar by noting that neither Beneficiary nor Seller had come to Illinois during the negotiations or when demanding payment.

[JEB/ss]

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