Article

Factual Summary:

To secure their obligations upon becoming "Names" of a Lloyd's insurance syndicate, the applicants had letters of credit issued by US banks and confirmed by banks in the UK. Subsequently, the applicants filed suit against the beneficiary insurance syndicate for securities fraud. Specifically, the applicants alleged that the beneficiary failed to disclose liabilities for which the applicants could and had become liable. In the course of the litigation, the applicants sought to enjoin the issuers of the letters of credit from using any of the applicants' funds to satisfy obligations under the letters of credit. The state trial court granted a temporary restraining order, and the issuers and the beneficiary removed the case to federal court, claiming that jurisdiction arose under the Edge Act, 12 U.S.C.A. - 632.

Upon removal, the federal court vacated the temporary restraining order and denied the applicants' application for a new restraining order. The applicants then withdrew their motion for a preliminary injunction and voluntarily dismissed the issuers from the action.

Once the issuers had been dismissed, the applicants sought to remove the case to state court since the Edge Act basis for jurisdiction had disappeared. Moreover, the applicants argued that the federal court never had proper Edge Act jurisdiction. The beneficiary, however, argued that the court now had diversity jurisdiction because all remaining parties were from different states and countries. The beneficiary also moved to dismiss the complaint on the ground that the applicants had all signed valid choice of law and forum clauses. The court denied the applicant's motions and dismissed the action for improper forum.

Legal Analysis:

1. Jurisdiction: Edge Act: The court first ruled that jurisdiction under the Edge Act was present when the case was originally removed. The court noted that the Edge Act granted the federal courts jurisdiction in suits "arising out of transactions involving international or foreign banking ... operations." Since the deposits, security and issued letters of credit were all part of a "complex international transaction" the court concluded that it had jurisdiction. Moreover, the court noted that the Edge Act traditionally confers jurisdiction upon the court in letter of credit cases "even when the issuer is no longer a party to the action."

The applicants argued, however, that the Edge Act did not confer jurisdiction in this case because the issuers were mere stakeholders and not interested parties. The court rejected this argument by noting that the issuers faced the prospect of financial loss in that they would be obligated to honor a drawing by the beneficiary but prevented from reimbursing themselves from the applicants' funds. Additionally, the issuers had made a showing that "their reputations as reliable international bankers and the integrity of the system of letters of credit were at stake." Accordingly the court found that it had jurisdiction under the Edge Act and the case had been properly removed originally.

2. Jurisdiction: Diversity: The applicants next argued that the dismissal of the issuers terminated the Edge Act jurisdiction. While noting that it could still assert jurisdiction over the pendant state law claims that remained even without resorting to an independent basis for its jurisdiction, the court ruled that its jurisdiction was based on the diversity that now existed between all of the remaining parties.

3. Choice of Law: Forum Selection Clause: The court ruled that the choice of law and forum clauses signed by the applicants were valid and enforceable, dismissing the applicants' complaint since it was brought in an improper forum.

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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.