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110 - Case laws - Applicant Vs. Beneficiary
Leonard A. Feinberg, Inc. v. Capital Corp., Ltd. 936 F. Supp. 250 (E.D. Pa. 1996) Applicant sued beneficiary and negotiating bank for fraud. |
| Principals: Plaintiff/Buyer: Leonard A. Feinberg, Inc.; Defendant/Negotiating Bank: Central Asia Capital Corporation, Ltd.; Defendant/Seller/Beneficiary: Fashion Will, Ltd. Transaction: Purchase of 30,000 dozen cotton rompers. LC: Two L/Cs: one for US $ 1,873,655; the second for $310,199.18. Silent as to whether subject to UCP. Procedural History: The United States District Court for the Eastern District of Pennsylvania, Padova, J., denied defendants' motions to dismiss for lack of personal jurisdiction. Rule: Court was found to have personal jurisdiction over negotiating bank and beneficiary where the parties had sent telefaxes into the court's jurisdiction in the alleged furtherance of a scheme to defraud the applicant. History: To finance the purchase of 30,000 dozen cotton rompers, a Pennsylvania bank issued a letter of credit on behalf of the buyer/applicant in favor of the Hong Kong seller/beneficiary. Because the beneficiary told the applicant that it could not perform the underlying contract, a "red clause" was added to the L/C which limited negotiation of the credit to the Hong Kong negotiating bank and authorized it to advance up to 60% of the amount available to the beneficiary without presentation of the required documents upon presentation of a sight draft and a statement by the beneficiary that the advance would be used to purchase raw materials or finished products. The credit was amended due to rising yarn prices as well as extended several times. Pursuant to the "red clause" the negotiating bank made several advances to the beneficiary. Each time it did so, it advised the issuer of the advances via facsimile and mail. Subsequent to these events, beneficiary informed the applicant that a typhoon in China had damaged the merchandise and a new letter of credit would be necessary. The applicant then had the issuing bank issue another L/C for $310,199.18. This L/C also contained the "red clause". Later that same month, the beneficiary informed the applicant that it could not perform on the contract. It also informed the applicant that the advances had been used, due to the negotiating bank's pressure and with its consent, to reduce the beneficiary's indebtedness to the negotiating bank. The applicant then brought this action against the Hong Kong negotiating bank and buyer on various theories including fraud, breach of contract, civil conspiracy, negligent misrepresentation and tortious inducement. The Hong Kong negotiating bank and buyer moved to dismiss the action on the ground that the Pennsylvania federal court had no personal jurisdiction (power) over them. The court denied the motions. Briefing: 1. Personal Jurisdiction: In denying the motions, the court concluded that it had personal jurisdiction over the defendants under Pennsylvania's Long Arm Statute which permits courts to exercise their power over people whose actions impact or affect those in the state even though acting from outside the state if certain minimum contacts are present. The court reasoned that defendant bank, by sending the facsimiles and mail to the issuer which misrepresented the intended use of the advances, had directed fraud at Pennsylvania and had acted to injure a party within the state. Likewise, the court found that by submitting agreements that misrepresented the use of the advances, the beneficiary had done the same. The court also found that these acts provided the necessary minimum contacts and, thus, satisfied the due process clause of the U.S. Constitution. The court noted that by aiming the fraud at a jurisdiction, the parties should have anticipated being hauled to court there, regardless of the absence of any branches, chattel, real estate, or licenses in that state. The negotiating bank argued that to subject it to jurisdiction in Pennsylvania was unfair and would cause a "chilling effect" on banks providing these services if all that was needed was sending a facsimile into the jurisdiction in order to subject them to jurisdiction. The bank pointed to the unfairness of subjecting an issuing bank to jurisdiction wherever the beneficiary decided to use the L/C. The court distinguished that example, however, by noting that the negotiating bank had committed allegedly tortious acts in this case and the unfairness did not compare to that of a bank that had merely issued a letter of credit. Views: While the possibility of being hauled before a distant court on the basis of sending a telefax should give negotiating or advising banks pause, it must be noted that the decision was based on the particular charges: the telefax was allegedly a misrepresentation that was part of a conspiracy to defraud. The difficulty, of course, is that similar allegations could be made by many disgruntled applicants, causing distant nominated banks the expense of defending themselves in distant fora. |