Article

Factual Summary: Unwilling to fulfill buyer's orders, seller's "affiliate" put buyer in contact with seller in Hong Kong with which buyer entered into a contract for the purchase and sale of bicycles on shipment terms of delivery "FOB Hong Kong". Payment by commercial L/Cs occurred within 90 days of buyer/applicant's filing for bankruptcy.

In the bankruptcy proceedings, the applicant's Creditor's Committee sought to recover the proceeds of the letters of credit from the beneficiary on a theory that they constituted an impermissible preference under sections 547 and 550 of the U.S. Bankruptcy Code. These sections provide that unless an exception applies (e.g., where there has been a contemporaneous exchange for new value), a transfer of assets of the bankruptcy estate within a set time before filing (usually 90 days) may be avoided. In response, the beneficiary moved to dismiss for lack of personal jurisdiction, claiming that insufficient personal contacts existed between it and the forum to permit the court to exercise its power over the defendant since its place of business was Hong Kong. The motion was denied.

Legal Analysis:

1. Jurisdiction (Personal): Weighing various tests to determine whether the exercise of jurisdiction was appropriate, the court concluded that minimum contacts existed sufficient to permit the exercise of jurisdiction over the foreign seller/beneficiary. Among the other factors of significance to the court, were the seller's purposeful contacts with the U.S., the custom manufacture of goods for a U.S business by the seller/beneficiary, the buyer's right to refuse the goods for non-compliance, and the seller/ beneficiary's drawing on a letter of credit from a U.S. bank.

2. Jurisdiction (Personal): The court disagreed with seller/beneficiary's argument that the use of the "FOB Hong Kong" term in its invoice ousted the U.S. court of jurisdiction over a foreign seller/beneficiary. It concluded that seller/beneficiary's acceptance of purchase orders sufficed as a minimum contact not-withstanding the delivery term.

3. Jurisdiction (Personal): The court did not accept the argument that the relationship between seller's affiliate and seller/beneficiary establishes jurisdiction over the foreign affiliate as well as the seller. The nature of the relationship was not defined. Since a defined relation, such as a parent-subsidiary relation, does not always permit the assertion of personal jurisdiction, the court concluded an undefined relationship would not permit the exercise of personal jurisdiction without further specificity.

Comment:

While not determinative, a relevant factor in assessing the weight to be given the U.S. issued L/C would be whether it was advised by a local bank, whether it was confirmed, whether it named a local bank as a paying or negotiating bank, and where the beneficiary's original presentation was made. These factors are not mentioned in the opinion. They are relevant because they would lessen the significance of the nexus of the L/C to the U.S. since if some or all were present, they indicate that the beneficiary is not relying significantly on the U.S. issuer for payment.

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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.