Article

Factual Summary: Turkish Financier agreed to provide USD 25,000,000 to fund an animated motion picture, but required additional participants to provide USD 6,250,000 "to enable it to obtain financing for its funding commitment." Investors 1 and 2 agreed to provide this amount in exchange for a standby in favor of Investor 1/Beneficiary. The Turkish Financier was to be the Applicant. The funding and standby were to be handled through a law firm escrow arrangement.

After Investors 1 and 2 wired funds into the escrow account, a member of the escrow agent law firm traveled to the office of Deutsche Bank in Dortmund, Germany "where he received an original, executed letter confirming that the Letter of Credit was ready to be issued and would be ready for collection on January 27, 2011" and "received the original, executed LOC."

When the Investors were not repaid, Investor/ Beneficiary presented complying documents to Bank which refused to pay "on the grounds 'that the Letter of Credit was neither validly issued by Deutsche Bank Privat-und Geschaftskunden AG nor recognized in its books.'" Investor 1/Beneficiary sued Bank and its subsidiary for failure to honor the letter of credit, negligence, negligent misrepresentation, and aiding abetting fraud. Bank moved to dismiss on grounds of forum non conveniens, Beneficiary's lack of standing, and Beneficiary's failure to assert any plausible claims, and its subsidiary moved to dismiss on the grounds of forum non conveniens and lack of personal jurisdiction. The trial Judge denied all motions to dismiss.

Legal Analysis:

1. Forum Non Conveniens: Bank argued that Germany was an adequate alternative forum to California. Beneficiary conceded this point, but responded that Bank had not proved that Turkish Financier was amenable to process in Germany. The Judge concluded there was insufficient information to resolve this issue on a motion.

2. Choice of Law & Forum: The Judge considered which law was applicable to the LC and tort claims, noting that "three major sources may apply", namely UCP500 or UCP600, the UCC, or ISP98. Applying the choice of law principles of California (the forum) the Judge observed that the law chosen by the parties would be applied unless that jurisdiction did not have a substantial interest in the transaction and there was no other reasonable basis for the selection. The Judge then concluded that California law governed because Beneficiary and the standby had a substantial relationship to California.

The Judge noted that California law provides for a one year statute of limitations. However, there was uncertainty regarding whether a German Judge would or would not toll this statute of limitations. The Judge observed this uncertainty weighed against finding that Germany was an adequate forum.

The Judge then turned to analysis of the private and public interest factors to determine whether to disturb Beneficiary's original choice of forum. The Judge concluded that private factors did not weigh in favor of dismissal, because Beneficiary's witnesses would have had to travel to Germany to be heard, unlike Bank's witnesses, who, under US rules, could have been deposed in Germany. According to the Judge, "traveling to Germany for a trial is substantially greater than the cost of deposing witnesses." Moreover, Beneficiary had no presence in Germany, whereas Bank had a significant presence in California.

Regarding public factors, the Judge recognized that Germany did have a significant local interest in the action, but noted that California did, too, because California law governed the letter of credit. The Issuer argued that transaction took place fully in Germany. The Judge found this unpersuasive, ruling that "negotiations took place from California to create the terms of the LOC and the effects of the LOC were felt most in California."

3. Standing, Assignee: The Bank argued that Beneficiary "as a successor-in-interest, lack[ed] standing to assert its claims because . . . an assignment of a letter of credit confers no rights unless the issuer consents to the assignment." The Judge concluded that Beneficiary was "not simply an assignee" but was "assigned the right to a cause of action against" the Issuer.

4. Personal Jurisdiction: Bank's Subsidiary argued that the court lacked personal jurisdiction over it. Accordingly, the Judge applied the two-prong purposeful availment and arising out of test to decide this issue. The Judge concluded that "[b]ecause [the Subsidiary] knew that [the Beneficiary] - the LOC's sole beneficiary - was a California resident, the court finds that the Complaint sufficiently alleges that [the Subsidiary] aimed its intentional acts at California for the purpose of causing harm it knew would be felt in California." Next, because the Beneficiary's cause of action arose out of reliance induced by the subsidiary, the second prong was met. And, lastly, on balance, the Judge did not find that California jurisdiction was unreasonable for the suit at hand.

Comments:

1. UCC § 5-116. In applying California choice of law rules, the Judge apparently overlooked Rev. UCC § 5-116(a) (Choice of Law and Forum), the UCC choice of law rule under which the law selected in the LC would apply regardless of whether it bears any relation to the transaction. Why the Judge refers to the UCP or ISP98 is a mystery. Neither provide for choice of law although the assumption under standard international letter of credit practice is that the law of the place of residence (Germany) will govern unless the LOC expressly provides otherwise (as this LOC did).

2. Assignment. The Judge concluded that successor of the beneficiary had standing to proceed. (Who drew? Successor. Why ISP98?)

[TEC]

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.

1. According to information provided by counsel for Deutsche Bank.

(Where there is a substitute entered, the jurisdiction whose law is chosen by the parties will be applied. Where the purported issuer knew that the beneficiary was located in California, it is not unreasonable to subject it to personal jurisdiction in California and the action can be brought by an assignee of the beneficiary.)