Article

Note: Purchaser, P.T. Citra Kertasindo, obtained a US$5,300,000 standby LC from Bank DaGang Negara (Issuer) which was succeeded by Bank Mandiri to assure payment for used paper mill machines and equipment purchased from Perry H Koplik & Sons, Inc. (Seller/Beneficiary). When Purchaser/Applicant failed to pay, Seller/Beneficiary drew on the LC but payment was refused. Litigation occurred in Indonesia on claims of wrongful dishonor and, separately, fraud related to the underlying contract.

Seller/Beneficiary was forced into bankruptcy in the United States by its creditors and its Trustee filed an adversary action in connection with the US bankruptcy proceeding against Issuer for wrongful dishonor. Issuer moved to dismiss asserting that "(1) the action is barred by res judicata, (2) comity requires respect for the proceeding in Indonesia, (3) doctrines of collateral and judicial estoppel preclude the Trustee from relitigating, (4) [Seller/Beneficiary]'s Plan of Reorganization did not properly preserve the Bankruptcy Court's retention of jurisdiction over the Trustee's claims, and (5) the Bankruptcy Court lacked personal jurisdiction over [Issuer]." The Bankruptcy Court denied the Issuer's motion. In an interlocutory appeal, the United States District Court for the Southern District of New York, V. Marrero, J., affirmed.

There were two Indonesian actions. In one, Seller/Beneficiary sued Issuer for wrongful dishonor. The Surabaya District Court ruled that the LC was binding and ordered Issuer to honor the draft. Issuer appealed to the Indonesian High Court, an intermediate court, which "cancelled" the District Court decision. On appeal, the Indonesian Supreme Court initially reinstated the decision of the District Court; however, when Issuer appealed the Supreme Court's decision, the Supreme Court vacated its previous decision on the grounds that Seller/Beneficiary had provided an improper power of attorney under Indonesian law. Seller/Beneficiary notarized the power of attorney, but had failed to "legalize" it with the Indonesian Consul in New York, an authorization similar to a "notarial flag" attesting that the notary is a notary.

In the second Indoenesian action in the Surabaya District Court, Purchaser/Applicant sued Seller/ Beneficiary for fraud in the underlying contract. The District Court held that the contract was void for fraud and declared the LC null and void. It ordered Issuer to suspend payment on the LC "until judgment for this case has been final, binding and enforceable." An appeal is pending.

In the US action, the appellate court rejected Issuer's claims that the Bankruptcy Court erred in ruling that the principles of comity and res judicata did not warrant recognition of the Indonesian legal proceedings and that the Trustee is not estopped from litigating in the United States against Issuer. The appellate court stated that the question required a factual determination not appropriate for interlocutory appeal. The appellate court also stated that because of the denial of the motion for leave to appeal the question of comity was affirmed, the question of whether res juducata applies is likewise inappropriate for interlocutory determination. Issuer further argued that that a controlling question of law regarding judicial estoppel required an interlocutory determination. The appellate court rejected this argument because the Issuer did not show that the Trustee had taken an inconsistent position in a prior proceeding that was adopted by the first tribunal. The appellate court ruled that even though Seller/Beneficiary had voluntarily participated in litigation in Indonesian courts it was not estopped from later asserting that the Indonesian courts did not provide an impartial forum or one that comports with the notions of due process.

[JEB/mdg]

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