Note: Richard Hvisdak (Buyer) entered into two separate contracts with Custom Marine International, Inc. (Seller and Joint builder) and FoShan Poly Marine Engineering Co., Ltd. (Chinese Builder) to build two 127-foot luxury motor yachts in China. Payment was to be by means of an LC payable to Chinese Builder's Bank, Shenzehn Development Bank Co., Ltd. (Beneficiary/Lender) which was to advance funds for building the yachts. Accordingly, two LCs for US$2,500,000.00 were issued by Huntington National Bank (Issuer) in favor of Beneficiary. They provided that Issuer must present a draft accompanied by a certificate stating:

The amount of this Letter of Credit is available for payment at sight by your draft drawn on (bank) and accompanied by a dated statement purportedly signed by an officer of the beneficiary, certifying that:

The amount of the draft drawn hereunder represents and covers unpaid balance of indebtedness including interest and bank charges, if any, due to the beneficiary by FoShan Poly Marine Engineering Co. Ltd.; per yacht building contract No. F127-1 [or F127-2].

The LCs provided that a drawing could not occur until 21 July 2008, approximately four years after the LCs were issued. Each of the LCs was to increase by US$3,000,000 at the completion of the hull and shipment of the engine, and an additional US$1,000,000 when the yachts were 90 days from completion. Under the terms of the sales contracts, the Seller was to post two US$6,500,000 performance bonds in favor of Applicant/Buyer.

Buyer terminated the two contracts less than six months after signing the contracts, alleging that no construction on the yachts had commenced, and that Seller had failed to post the performance bonds. One year later, Applicant/Buyer requested Issuer cancel the LCs. When Issuer contacted Beneficiary accordingly, Beneficiary refused its consent, claiming that it had loaned Chinese Builder approximately US$5,000,000.00 that remained unpaid.

Alleging "that they later discovered that the entire yacht building project was a scam perpetrated by [Chinese Builder], [Seller], and [Beneficiary] to induce American citizens to post Letters of Credit for vessel construction security and then fraudulently use the Letters of Credit to get 'free' money from [Beneficiary] and leave the liability with the Letter of Credit applicants", Buyer/Applicant sued Chinese Builder, Beneficiary, and Issuer in federal district court in Florida, seeking to enjoin Issuer and to recover from Beneficiary and Chinese Builder. Buyer/ Applicant alleged fraud and conspiracy amid a series of allegations in what the Judge described as a "shotgun" pleading (in that it scattered a broad set of allegations much like shotgun pellets instead of the more focused effect of a rifle). The United States District Court for the Middle District of Florida, Steele, J., granted Beneficiary's motion to dismiss for failure to state a cause of action but granted Buyer/Applicant leave to amend.

The Judge stated that "the parties have now resolved the issue of injunctive relief by agreeing that SDB would post a bond or letter of credit and Huntington Bank would then be allowed to release the two Letters of Credit to [Beneficiary]." The drawings were, however, not to be honored until such bond or LC was issued by Beneficiary.

The action therefore, continued as a tort action by the Buyer alleging fraud and conspiracy against the Beneficiary and Seller apart from the LC issues. Although there were allegations against the Chinese Builder, it was not joined as a party.

The Judge rejected Beneficiary's claim that the forum was not convenient, noting that the strong presumption that obtains in favor of a plaintiff's choice had not been rebutted. In so doing, the Judge noted that Chinese courts provided an adequate and available forum and observed that their fairness was not seriously questioned.

The Judge rejected Issuer and Seller's argument that the tort action should be dismissed because Buyer only suffered an economic loss for which contract relief was awarded. The Judge noted that the fraud was alleged in connection with the creation of the contract and not in its performance, making the economic loss theory inapplicable.

As to the fraud claim itself, the Judge pointed out that "the only allegedly false statement set forth in the Complaint attributed to [Beneficiary] is the January 6, 2006, SWIFT message from [Beneficiary] to [Issuer] refusing to cancel the Letters of Credit because it had loaned RMB 40,000,000 [(approximately US$5,000,000)] to [Chinese Builder] under the terms of the [Applicant's] letters of credit, which amount was still outstanding against the Letters of Credit." However, the Judge agreed with Beneficiary that there could have been no reliance by Buyer on this allegedly false statement since it occurred after cancelation of the contracts. The Judge also dismissed claims based on conspiracy since no underlying tort or act was pled as a basis for the conspiracy.


1. This case presents another instance where the beneficiary is a surety and not the mover in the underlying transaction. As a result, only the fraudulent act of the beneficiary/lender is relevant from an LC (and apparently tort) perspective.

2. This decision should be compared with Jaffe v. Bank of America, N.A., 276 Fed.Appx. 932 (11th Cir. 2008), also discussed in this volume apparently involving the same shipyard in a similar pattern.

3. The LC aspect of the case presents a more comfortable solution than would an injunction as well as one that does not require the rather unlikely conclusion that the drawing by the Chinese Bank/ Beneficiary facilitated a material fraud by Chinese Bank/Beneficiary on Applicant. Such a conclusion requires an entirely different order of proof than proving that the shipyard was engaged in a fraudulent scheme. It would require proof of a conspiracy between the Chinese Bank/Beneficiary and the shipyard. It is apparent from the Judge's dissection of the claims that Applicant/Buyer had failed even to assert even a basic factual predicate for fraud by the Chinese Bank/Beneficiary in the pleading much less prove that it is probable that it will succeed in its proof.



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.