Appeal and cross-appeal from a decision of the United States District Court for the Southern District of New York (Abraham D. Sofaer, Judge), awarding damages in connection with an allegedly fraudulent grain transaction. Affirmed in part, reversed in part and remanded. Judge Kaufman dissents in part and concurs in part in a separate opinion.
Before: KAUFMAN, MESKILL and WINTER, Circuit Judges.
Habibollah Haj Mohammad Hossein Kashi and his wholly-owned company Ashka B.M.M. (hereinafter "Kashi") appeal from Judge Sofaer's decision following a non-jury trial. Kashi, the plaintiff in this action, seeks additional damages, extension of liability with respect to one defendant, and enforcement of a settlement agreement. Cross-appellant, defendant David A. Friedmann seeks reversal of that portion of the judgment which holds him liable for Kashi's damages. We reverse with respect to the limitation of defendant Gratsos' liability and the measure of Kashi's contract damages. We affirm the judgment of the district court with respect to the remainder of the issues raised in the appeal and cross-appeal.
This case arises out of Kashi's efforts to purchase grain in the United States and ship it to Iran during the Iranian Hostage Crisis of 1979-80. From the outset, the proposed transactions involved bogus documents in order to circumvent the refusal of American longshoremen to load ships destined for Iran. We state the facts as found by the district court and as supported by the record.
Defendant Standard Grains, Inc. ("SGI") was formed by defendants Wilbur A. Stile, Theordore Graino, and David A. Friedmann to engage in the grain selling business. SGI solicited Kashi's business between 1978 and December, 1979, but Kashi, skeptical of SGI's reliability after hearing that it had once failed to make a promised shipment to Iran, declined to deal with it.
In May, 1979, SGI formed a joint venture with deceased defendant Constantine Gratsos (represented here by his Estate) and his associate, defendant Car Wischmann. The joint venture, Standard Metropolitan Shipping Corp. ("SMSC"), was to handle SGI's shipping. The organizational structure of SMSC was somewhat uncertain. Some steps were taken to incorporate in Panama, and the entity is referred to as a "corporation"; however, an SGI brochure called SMSC a joint venture. Though no shares of SMSC were issued, the parties agreed that Friedmann and Stile would receive 50% of the SMSC profits, the remaining 50% to be divided between Gratsos and Wischmann as Gratsos directed. Gratsos was SMSC's Chairman, Friedmann its Treasurer, and Stile a Vice-President.
Graino contacted Kashi in the summer of 1979 and informed him of the formation of SMSC and of the participation of the "Onassis people" in the venture. This was a reference to Gratsos, who had close ties to the well-known Onassis shipping organization. Graino told Kashi that he would introduce him to the "Onassis people" the next time Kashi came to New York. Kashi became interested in dealing with SGI because of this information and came to New York in August or September, 1979. He met with Graino, Gratsos and Wischmann at Gratsos' office in the Olympic Tower of Fifth Avenue. Kashi told Gratsos and Wischmann of his reluctance to deal with Graino and SGI due to their unreliability. Gratsos assured Kashi that Gratsos' participation in the SMSC joint venture ensured its reliability. At this meeting, Kashi was shown an SGI brochure that described its connection to SMSC as follows:
An impressive advantage in shipping is afforded Standard Grains customers because of its joint venture, STANDARD METROPOLITAN STEAMSHIP [sic] CORPORATION, chaired by Mr. Constantine Gratsos of the Onassis organization, one of the world's most honored and respected names in shipping. The major advantage not only insures the most competitive prices for SG products but also it assures our importers of reliable, on-time deliveries of any commodities ordered from STANDARD GRAINS, INC.
In December, 1979, Kashi met with Stile and Graino who again took him to the Olympic Tower to meet with Gratsos and Wischmann. Gratsos reassured Kashi that any shipments contracted for would be made. Following these personal assurances, Kashi, on December 13, 1979, signed a contract for a shipment of grain ("first shipment"). Kashi opened a letter of credit ("L/C") at a Swiss bank, and at Graino's request, named Standard Grains (Canada) Ltd. ("SGCL") as beneficiary. SGCL was a fictional subsidiary of SGI.
Because of the longshoremen's boycott, irregular documents were used. The shipping contract for the first shipment called for delivery to either Kuwait or Iran, though a second document signed by Kashi and Graino acknowledged that the true destination was Iran. The defendants used false papers in order to draw down the proceeds of the letter of credit and transfer them to the Southern Ohio Bank ("SOB"). Kashi knew that false papers would be used but allowed the letter of credit to be drawn because of Graino's representations to him that the deal was in fact being consummated.
The ship carrying the first shipment stopped in Kuwait for a few days, then proceeded to Iran where Kashi's cargo was unloaded in March, 1980. While in Kuwait, the ship incurred expenses of about $60,000. These were paid by a friend of Kashi's upon SMSC's promise to repay this amount within forty-eight hours. Kashi repaid his friend when SMSC failed to do so.
Kashi met with Graino in London in April, 1980 to resolve unsettled matters from the first shipment and plan a second one. The first shipment had been underweight and Kashi had incurred certain expenses in connection with its delivery in Iran. At this meeting, Graino told Kashi that he had a friend who owned a ship that would make a second shipment directly to Iran. Based on these representations, Kashi on April 26, 1980 signed a contract for the second grain shipment ("second shipment"). Graino said that no additional papers were require for the second shipment since his friend had agreed to ship the grain directly to Iran. Kashi opened a second letter of credit, and Graino again instructed him to designate SGCL as beneficiary. This Kashi did by telex on May 1, 1980. The proceeds were to be payable upon presentation of documentation that a vessel had been loaded, inspected, and was enroute to Iran. The defendants prepared a set of false shipping papers and presented them to the Swiss bank, and on the strength of these papers, 9,943,500 Swiss francs--worth about $6 million at the time--were transferred to defendants' accounts at SOB and First National Bank of Louisville ("FNBL"). The money first went to UCB-Ohio, the parent bank of SOB, apparently because UCB-Ohio had facilities for international monetary exchanges. The Swiss bank sent telexes to SGCL confirming payment of the letter of credit proceeds. Graino telexed Kashi, informing him of the delivery of the documents to Europe.
None of the defendants, however, had made any attempt to obtain or procure the grain, or to charter a vessel. Although Kashi could hardly complain about the use of false documents, the failure to ship any grain while drawing down on the L/C was clearly a fraud on him.
Within a few days of their receipt in the United States by UCB, the proceeds of the second letter of credit were distributed to various accounts: $3,927,672.37 went to defendants' accounts at UCB-Nassau; $1,227,613.00 went to defendants' accounts at FNBL; $615,402.16 was deposited at Friedmann's direction in defendants' accounts at SOB; and $297,892.42, representing 5% overage, was deposited at Friedmann's instruction in defendants' accounts of UCB and SOB.
The total amount received by Graino, Stile and Friedmann from the second letter of credit was $6,068,579.95. Nevertheless, as the district court found, "All three knew at that time or shortly thereafter that no grain had been acquired, loaded, or shipped and that the $6 million in their possession was obtained by representing to Kashi that grain would be shipped in the amount contracted for, even if not precisely in the manner specified in the L/C."
In the months that followed, Kashi made telephone calls and sent telexes to SGI, primarily to Graino and Stile, requesting information regarding the second shipment. Defendants continued to assert, through telexes from Graino, that Kashi's grain had actually been loaded and was on its way to Iran.
In August, 1980, Kashi made several efforts to ascertain the status of his shipment. Ali Afdahl, a friend of Kashi's, came to New York from London to investigate. After failing to obtain information from Graino, Stile, or anyone else, Afdahl retained New York attorney James Schreiber to investigate. Schreiber learned that no ship had been retained and that no shipment had been made. He flew to London in early September, 1980 to meet with Kashi. Graino and two New York attorneys, Robert Kiernan and Jeffrey Hoffman, also traveled to London to meet with Kashi. Graino, after insisting that Kashi meet him without Schreiber, tried to have Kashi sign a "Modification Agreement," promising to make the shipment shortly thereafter. Afdahl explained to Kashi that the document stated that Kashi had known of and authorized the use of false shipping documents, that he had violated Iranian currency laws, and that his New York ...