Topics: Forged LCs; Jurisdiction; FSIA

Note: Theodore Hansen (Seller) owned gas stations, convenience stores, and other businesses in Utah, Idaho, and Wyoming, U.S.A. In 2003, Seller entered into an agreement to sell the businesses to Native American Refinery Company (Buyer) for USD 50 million. Following Buyer's initial failure to pay, Buyer's payment obligations increased to USD 118 million. To secure its obligations, Buyer provided bank guarantees and standby letters of credit purportedly issued by PT Bank Negara Indonesia (Persero) (Issuer).

Prior to the issuance of the guarantees and letters of credit, Seller had no experience with guarantees, but Seller and his agents made various attempts to confirm that they had been issued. Seller searched a purported website of the Issuer-which no longer exists-and found the phone numbers of the names of the bank officers who had purportedly authorized the issuance of the guarantees and letters of credit. Seller also telephoned individuals whom he believed to be employees of Issuer, and they confirmed the Issuer's relationship with Buyer and the guarantees. However, when Seller attempted to use the guarantees and letters of credit as collateral to obtain a line of credit from Merrill Lynch, a Merrill Lynch employee contacted Issuer's New York office to determine the authenticity of the instruments. While that office did confirm that the numbers of the instruments provided appeared to be consistent with Issuer's numbers generally, it would not confirm the authenticity of the instruments without reviewing them. Merrill Lynch did not extend the loan to Seller.

Ultimately, Buyer defaulted on its obligations to Seller, and other creditors foreclosed on the assets that had been sold to Buyer. When Seller contacted Issuer in an attempt to draw on the guarantees and letters of credit, Issuer denied the authenticity of the instruments and refused to make any payment to Seller. Seller sued Buyer and Issuer and others in federal court in Utah for the total amount of USD 118 million.

Following discovery, Issuer moved for summary judgment of the Seller's claims, on the basis that the court lacked jurisdiction to hear the claims under the Foreign Sovereign Immunities Act of 1976, 28 U.S.C. § 1604 ("FSIA"). The District Court granted summary judgment. On appeal, the United States Court of Appeals for the Tenth Circuit, Kelly, McKay, Holmes, JJ., affirmed in an opinion by Kelly, J.

The trial court noted that under FSIA, a foreign state and its instrumentalities (which undisputedly included Issuer), are immune from suit in United States courts unless an exception applies. Seller argued that an exception applicable to those foreign states engaged in commercial activity with direct effects in the United States applied.

That exception, however, required Seller to produce significantly probative evidence that Issuer had engaged in commercial activity in the United States. The trial court ruled that Seller had not shown that the guarantees and letters of credit could be sufficiently authenticated to demonstrate that Issuer had engaged in commercial activity in the United States.

In the appeal, Seller argued for the first time that the guarantees and letters of credit should be presumed valid for the purposes of ruling on jurisdictional questions. The appellate court disagreed both because Seller had not raised this argument before the trial court, and because it disagreed that any such presumption should apply when the Seller has had ample opportunity to conduct discovery and demonstrate the validity of the instruments. Seller's argument that the instruments were self2014 authenticating was also rejected, because Seller had failed to raise that argument in the trial court. Finally, the appellate court agreed with the trial court that various declarations concerning Seller's attempts to authenticate the instruments were inadmissible under evidentiary rules or were insufficient to demonstrate that the guarantees and letters of credit were valid.

Accordingly, the appellate court concluded that Seller could not demonstrate that Issuer had, in fact, engaged in commercial activity with direct benefits in the United States.



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.