Article

Note: To assure payment for 1.3 million feet of pipe, Midcontinent Express Pipeline LLC (Buyer/ Applicant), a Houston company, obtained a standby letter of credit for US$33 million issued by Bank of Tokyo-Mitsubishi (Bank) in favor of Man Industries (India) Ltd. (Seller/Beneficiary), an Indian company.

When disputes arose, Seller/Beneficiary drew on the standby by presenting documents to an Indian nominated bank. The nominated bank sent a message to BTM demanding payment. Issuer refused, noting that original documents were required and asked the nominated bank to forward them. Immediately afterwards, Buyer/Applicant sued Seller/Beneficiary in the state court of Texas for breach of contract and fraud, and obtained a temporary restraining order (TRO) enjoining Seller/Beneficiary from presenting the LC to Issuer. The order further stated that Issuer was permitted to rely on the TRO in refusing to pay Seller/Beneficiary. The next day, Seller/Beneficiary and representatives of the nominated bank delivered the documents by hand to Bank and its original documents to Issuer. Issuer refused Seller/ Beneficiary's LC, claiming that the signature was defective. Bank presented its copy of the TRO to Seller/Beneficiary. Subsequently, the standby expired without being honored.

In the meantime, Seller/Beneficiary sued Issuer in New York state court for wrongful dishonor and Issuer filed a cross claim against Seller/Beneficiary in the Texas action, seeking declaratory judgment that it had properly refused to honor the presentation. Although Seller/Beneficiary consented to personal jurisdiction in Buyer/Applicant's contract claim, it resisted the Issuer's cross-claim, entering a special appearance under the Texas rules of civil procedure. The trial court 133rd District Court, Harris County, ruled that it had personal jurisdiction over Seller/ Beneficiary regarding all claims. On appeal, the Texas Court of Appeals, Houston (14th Dist.), Yates, Brown, and Boyce, JJ., in an opinion by Yates, J., affirmed.

The focus of the appeal was whether the Issuer's cross-claim was severable from the Buyer/ Applicant's claim. Under Texas rules of procedure, a claim is severable, among other grounds, if it is not so interwoven in the remaining claims as to have identical facts and issues. This determination is discretionary and can only be reversed for abuse of discretion under Texas law.

The appellate court noted that Buyer/Applicant's claim of fraud was based on the allegation that Seller/ Beneficiary's certification to the bank that Buyer/ Applicant had breached its obligation was false. The court also noted that Issuer's cross-claim referenced the TRO and recited that it had presented Seller/ Beneficiary with the TRO and required adjudication of Buyer/Applicant's rights before the court determined the Issuer's obligations under the standby.

The appellate court concluded that the question of whether Seller/Beneficiary had committed fraud was not severable from Issuer's cross-claim, thereby affirming the trial court's finding of personal jurisdiction over Issuer's cross-claim. The court rejected Seller/Beneficiary's argument that the refusal was not based on fraud, reciting that the cross-claim was interwoven with allegations of fraud.

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

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.