Article

Summary by Pooya Tavakol, Associate, Buonassissi, Henning & Lash, P.C.

Topics: Personal Jurisdiction

Note: Standard Chartered Bank (China) Limited (Lender), a Chinese bank, loaned funds to Guangzhou Consortium Display Product, Ltd. (Subsidiary), the Chinese subsidiary of Kentuckybased Consortium Companies, Inc. (Applicant). The loan was secured by a standby letter of credit issued by PNC Bank, National Ass'n (Issuer) on behalf of Applicant in favor of Lender. Lender demanded payment under the LC from Issuer and Issuer made payment, but the payment was never effectively received by Lender due to a currency conversion issue, thereby causing Subsidiary to default on its loan with Lender. The default caused the Applicant to cease its China operations.

As a result, Applicant and Subsidiary sued Issuer and Lender in the state courts of the U.S. State of Kentucky. The action was removed from state court to the federal U.S. District Court for the Eastern District of Kentucky. Lender moved to dismiss the action for lack of personal jurisdiction and Applicant and Subsidiary argued that there was specific personal jurisdiction.

The United States District Court for the Eastern District of Kentucky, Bunning, J., dismissed the action against the Lender for lack of personal jurisdiction.

The Judge ruled that even though the LC was issued by an American bank on behalf of a Kentucky corporation, personal jurisdiction over the Lender/ Beneficiary did not exist in Kentucky. The Judge relied upon a three prong test for finding specific personal jurisdiction: (1) "the defendant must purposefully avail himself of the privilege of acting in the forum state or causing a consequence in the forum state"; (2) the cause of action must arise from the defendant's activities in the forum state; and (3) "the acts of the defendant or consequences caused by the defendant must have a substantial enough connection with the forum state to make the exercise of jurisdiction over the defendant reasonable." The Judge considered the first prong of the test - "purposeful availment," in reaching his holding.

The thrust of the Judge's ruling was that "merely becoming a beneficiary of a standby letter of credit does not subject the beneficiary to personal jurisdiction in a particular forum." Rather, "[p]ersonal jurisdiction is only proper when the beneficiary purposefully avails itself of the privilege of conducting business in a particular forum by means of some affirmative act." Three factors led the court to conclude that the Lender did not subject itself to personal jurisdiction in Kentucky merely by virtue of its status as the beneficiary under the LC: (1) the Applicant and Subsidiary failed to allege that the Lender was involved in selecting the Applicant as the credit applicant; (2) the Judge would not assume that the parties to the LC implicitly relied on their ability to enforce the LC in Kentucky; and (3) the Applicant and Subsidiary failed to show that the Lender committed an affirmative act in Kentucky. Furthermore, the Judge concluded that the Lender did not "exercise a privilege" in Kentucky by advising the Applicant through phone and email regarding the operation of the LC, and rejected the Applicant's and Subsidiary's argument that the Lender subjected itself to personal jurisdiction in Kentucky by virtue of entering into a loan transaction with a subsidiary of a Kentucky corporation.

At a later hearing on cross motions for summary judgment by the remaining parties, the Judge granted summary judgment in favor of Issuer on Applicant and Subsidiary's complaint because they failed to meet their burden of proof and also granted summary judgment in favor of Issuer on Issuer's counterclaim against Applicant because Applicant failed to reimburse Issuer for its debt obligations. The Judge did not decide on the issue of damages because material issues of fact remained outstanding.

Comment: This decision stands for the proposition that a party does not subject itself to personal jurisdiction in a particular forum jurisdiction merely by becoming the lender of a standby letter of credit issued on behalf of an American company in that jurisdiction. However, the Judge's decision was ultimately based on a fact intensive inquiry regarding the Chinese Defendant's contacts with the Applicant and the forum jurisdiction. As such, the ruling should be construed narrowly as the court may have reached a different conclusion given a different set of facts, even where the defendant lender's only contact with the forum jurisdiction was related to and/or arose out of the standby letter of credit transaction.

[PT/pt]

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