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June 2, 1994



The opinion of the court was delivered by: LEONARD B. SAND


 Plaintiffs Semetex Corporation ("Semetex") and Eaton Corporation ("Eaton") bring this diversity action to compel payment on an international letter of credit issued by the Central Bank of Iraq and confirmed by Defendant UBAF Arab American Bank ("UBAF"). The controversy between the parties arises out of an extraordinary accident of timing -- the fact that Iraq invaded Kuwait, and President Bush froze all Iraqi assets in the United States, at the very time that equipment manufactured by Eaton and procured by Semetex was en route from Austin, Texas to the purchaser in Baghdad in satisfaction of the contract underlying the letter of credit. As a result of the assets freeze, the equipment was diverted to a warehouse in Massachusetts (where it remains today), and UBAF refused to honor Plaintiffs' transport documents, which evidenced consignment of the equipment to an international carrier as the letter of credit required.

 Semetex and Eaton brought this action only after applying twice for licenses from the Office of Foreign Assets Control ("OFAC"), the agency within the United States Department of the Treasury responsible for administering the Iraqi assets freeze. Plaintiffs' first attempt, an application with UBAF's consent for a license that would allow UBAF to pay Plaintiffs from its Iraqi assets, was unsuccessful. Plaintiffs' second attempt, for a narrower license allowing them to sue UBAF without OFAC's intervention, was successful, and in January 1993 Plaintiffs brought this action.

 In April 1993, Plaintiffs' initial motion for summary judgment was denied. Following subsequent discovery, Plaintiffs moved again for summary judgment, and UBAF cross-moved. The cross-motions for summary judgment require us to consider the scope of the so-called "independence principle" governing documentary letters of credit, which provides that letters of credit impose obligations on participating parties independent of the contracts underlying them. In particular, the motions hinge on two issues: 1) whether Plaintiffs' recovery is barred by the Iraqi sanctions order and subsequent regulations; and 2) if not, whether UBAF has submitted evidence of fraud by Plaintiffs sufficient to excuse its obligation under the Letter of Credit. For the reasons set forth below, we answer "no" to both questions, and accordingly we grant Plaintiffs' motion for summary judgment and deny UBAF's cross-motion.


 On a motion for summary judgment, we must view the facts in the light most favorable to the non-moving party, and resolve all ambiguities and draw all reasonable inferences against the moving party. Eastman Kodak Co. v. Image Technical Services, Inc., 119 L. Ed. 2d 265, 112 S. Ct. 2072, 2076-77 (1992); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986). In this case, both parties have cross-moved for summary judgment. Since we ultimately conclude that Plaintiffs' summary judgment motion prevails, we view Plaintiffs as the moving party for purposes of the analysis that follows, and accordingly resolve all factual ambiguities and draw all reasonable inferences against them. Drawing all reasonable inferences against Plaintiffs, the essential facts are as follows.

 Diversity jurisdiction in this action is uncontested. Plaintiff Semetex is incorporated under California law and has its principal place of business in California. Plaintiff Eaton is incorporated under Ohio law and has its principal place of business in Ohio. Defendant UBAF is a consortium bank organized under Article III of New York banking law and has its principal place of business in New York City.

 Semetex engaged Eaton to manufacture the ion implanter to Al-Mansour's specifications. In July 1990, with the ion implanter complete, Semetex executed an irrevocable Assignment of Proceeds directing UBAF to pay $ 720,000 of Semetex's first drawing on the Letter of Credit to Eaton as payment for the machine. At roughly the same time, through an agent, Semetex engaged a freight-forwarding company to ship the equipment from Eaton's factory in Austin, Texas to Baghdad. For reasons that the parties dispute, the shipment was scheduled in several stages -- the initial leg was by United Van Lines from Austin to John F. Kennedy International Airport in New York, followed by a Lufthansa flight to Frankfurt and a connecting Iraqi Airways flight to Baghdad.

 On August 1, with the truck carrying the ion implanter from Austin on its way to JFK, the freight forwarder hired by Semetex presented a set of transport documents to UBAF along with a drawing request for $ 964,640.81, representing Semetex's second attempt to obtain payment under the Letter of Credit for the ion implanter (it had tried and failed a few days earlier due to discrepancies in its documents). That night, while Semetex was awaiting payment on the Letter of Credit and while the truck carrying the ion implanter was approaching Baltimore, Iraq invaded Kuwait. Early on the morning of August 2, President Bush issued Executive Order No. 12722, blocking Iraqi assets in the United States.

 The freeze order abruptly derailed the ion implanter transaction. Eaton called United Van Lines and asked that, in order to comply with the assets freeze, the shipment be diverted to Eaton's warehouse in Massachusetts, and United complied. UBAF then refused payment on the Letter of Credit. Plaintiffs subsequently applied to OFAC for a license that would allow payment to be made from Iraqi assets. Following OFAC's denial of their application, Plaintiffs applied for a narrower license allowing them to sue UBAF without OFAC's intervention for payment from the bank's unblocked (non-Iraqi) assets. OFAC granted Plaintiffs' application, and this litigation ensued.

 Most of the material facts in this dispute concern the following topics: 1) the fairly elaborate shipping arrangements for the ion implanter, arranged through several intermediaries and then abruptly interrupted by the Iraq crisis; 2) the Letter of Credit, and Plaintiffs' unsuccessful efforts to draw on it; and 3) the Iraqi sanctions regulations and Plaintiffs' license applications. These are described in turn below, with all reasonable inferences drawn in favor of UBAF.

 A. Shipment of the Ion Implanter

 Following completion of the ion implanter in June or July 1990 at Eaton's Austin factory, Eaton had the equipment picked up by Central Forwarding, an Austin moving company. Central Forwarding packaged the equipment for air transport and held it at its Austin facility pending shipping instructions from Semetex.

 In order to facilitate the shipment of the ion implanter and other equipment ordered by Al-Mansour, Semetex engaged a logistics consultant, Michael Courtemanche. Courtemanche in turn engaged Alison Transport, Inc., a New York-based freight forwarder ("Alison"), to arrange shipment of the ion implanter. Robert Feldman of Alison contacted Iraqi Airways and informed a booking agent of the proposed shipment. Iraqi Airways at that time flew into only one airport in the United States, John F. Kennedy International Airport in New York ("JFK"). Additionally, the Iraqi Airways agent informed Feldman, the ion implanter was too large to be carried on the Iraqi Airlines flight from New York. Accordingly, the agent booked the equipment on a July 29 Lufthansa flight from JFK to Frankfurt, and from Frankfurt on a connecting Iraqi Airlines flight to Baghdad.

 Feldman was unable to transport the equipment from Austin to New York by air because no air carrier servicing Austin at that time flew a plane large enough to transport the ion implanter. Feldman therefore arranged for the equipment to be transported by truck from Austin to JFK Airport. Feldman scheduled the equipment to be picked up at Central Forwarding in Austin on July 26 and delivered to Lufthansa at JFK in time for the July 29 flight. When a truck arrived at Central Forwarding on July 26, however, Central Forwarding personnel declared it unsatisfactory for transporting the sensitive equipment. They informed Feldman that Central Forwarding was an agent for United Van Lines ("United"), and that United could supply an "air ride" truck which would provide a smoother ride that would be more appropriate for the job. Accordingly, Feldman arranged with Central Forwarding to have a United "air ride" truck pick up the equipment on July 31 for delivery to JFK. Feldman informed Iraqi Airways of the delay and rebooked the equipment on the Lufthansa flight scheduled to depart on August 2 for Frankfurt and to meet a connecting Iraqi Airways flight to Baghdad.

 On July 31, United picked up the ion implanter at Central Forwarding in Austin and began the journey to JFK Airport. In the early morning hours of August 2, President Bush issued Executive Order 12722, freezing all Iraqi assets within the United States and prohibiting all shipments from the United States to Iraq. Upon learning of the Iraqi sanctions, Richard Landwehr of Eaton's Austin factory took steps to ensure that the shipment would not violate the Executive Order. After consulting with Eaton's headquarters in Cleveland, Landwehr contacted Central Forwarding to find out where on its route the equipment was and whether shipment to Iraq could be prevented. After consulting with United headquarters and requesting a written request from Eaton, United ordered its driver to deliver the shipment to Eaton's factory in Beverly, Massachusetts rather than to JFK Airport. The ion implanter never reached the Lufthansa terminal, where an Alison Transport employee was waiting with the transport documents to meet the shipment. Accordingly, neither the equipment nor the transport documents were ever consigned to the possession of Iraqi Airlines or its designated carrier, Lufthansa.

 Shortly after the Iraqi sanctions order was issued, Semetex sent a telex to Al-Mansour informing it that delivery of the ion implanter had been prevented by the sanctions. Al-Mansour replied by telex instructing Semetex to continue to hold the equipment until the sanctions were resolved. On or about August 6, the ion implanter was delivered to Eaton's Beverly warehouse, where it has remained in storage ever since. Eaton reported the equipment to OFAC as blocked Iraqi property owned by Al-Mansour.

 B. Compliance with the Letter of Credit

 The Letter of Credit, an irrevocable documentary letter of credit, required that drawing requests be accompanied by specific documents evidencing shipment of goods by the beneficiary, Semetex, to the account party, Al-Mansour. The Letter of Credit, as amended, required that, in order to obtain payment for goods under the Letter of Credit, Semetex must, among other requirements: (1) submit to UBAF (a) commercial invoices and a certificate of origin, attested and "legalized" (that is, officially stamped); and (b) an air waybill (a type of bill of lading for shipment by air, see N.Y. U.C.C. § 1-201(6) (McKinney 1993)) evidencing air shipment, freight prepaid, from the United States to Baghdad via Iraqi Airways or carriers authorized by Iraqi Airways; and (2) send a telex cable to Al-Mansour advising Al-Mansour of the flight number and date of arrival at the Baghdad airport. Notably, the Letter of Credit did not require an "on-board" bill of lading or other evidence that control of the ion implanter had passed to a designated carrier before payment could be made. Instead, payment was conditioned solely on Semetex's presentation of the air waybill and other documents specified by the Letter of Credit. *fn1"

 The air waybill issued by Feldman of Alison Transport, covering the transport of the equipment from Austin to Baghdad, is at the center of the controversy between the parties. The source of the controversy, in part, is that the air waybill was created not by Iraqi Airways, the designated carrier, but by Alison Transport, Semetex's freight forwarder. A freight forwarder, a "travel agent for boxes," books space for freight shipments by its customers on carriers of commercial freight, much as a regular travel agent does with passengers. Alison was not a carrier or shipper of goods, but merely arranged transport by others. Alison was hired by, reported to, and was to be paid by Courtemanche, Semetex's logistics consultant. While Alison was not itself a carrier, though, it was authorized by Iraqi Airways to issue air waybills on its behalf, and Iraqi Airlines had issued blank air waybills to Alison Transport for this purpose.

 By the time Alison presented the air waybill to UBAF, the original shipment schedule had been altered. Central Forwarding, Eaton's local freight company, had turned away the flatbed truck that arrived to pick up the ion implanter on July 26, and Feldman had scheduled a United Van Lines "air ride" truck to pick up the ion implanter on July 31 for delivery to JFK. Because of the five-day trucking delay, the original July 29 flight to Frankfurt had been rescheduled to August 2. When he prepared the air waybill, however, Feldman did not list the revised flight numbers and dates, but instead jotted down a curious amalgam. In the boxes marked "Flight/Date," he filled in "4220/31" and "232/02." Plaintiffs' Exhibit ("Pls.' Ex.") 11. "4220" apparently referred to Lufthansa flight 4220 from JFK to Frankfurt -- the flight originally booked -- and "232" apparently referred to the flight with which flight 4220 had been scheduled to connect, Iraqi Airways flight 232 from Frankfurt to Baghdad.

 When the air waybill, telex, and other shipping documents were presented to UBAF for payment on July 27, *fn3" the bank, not surprisingly, found several internal inconsistencies and accordingly rejected the documents as not in conformity with the terms of the Letter of Credit. The most significant of these discrepancies was that between the dates of shipment listed on the air waybill and those noted in the accompanying telex. While the air waybill listed flight dates of July 31 and August 2, the telex to Al-Mansour, dated July 24 and presented to UBAF for payment on July 27, stated that the ion implanter was to be dispatched on a July 26 Iraqi Airways flight which was scheduled to arrive in Baghdad on July 29 -- a flight date three days earlier than the flight originally booked and seven days earlier than the August 2 flight eventually booked from JFK.

 Before presenting the document package to UBAF a second time, Alison employees revised the shipping documents to fix the internal inconsistencies that the bank had noted. In particular, Alison changed the flight dates on the air waybill (Pls.' Ex. 23) to conform to the flight dates represented in the telex -- July 26 and 29 -- which at that time were clearly no longer accurate (if indeed they ever were). Feldman then had the document package redelivered to UBAF, along with a sight draft for $ 964,640.48, representing 80 percent of Semetex's charge to Al-Mansour for the ion implanter, of which $ 720,000 had been assigned as payment to Eaton. The bank received the documents on August 1. The parties dispute whether Courtemanche called the bank that afternoon and was informed by a UBAF employee that the documents complied with the Letter of Credit's terms and that UBAF would honor Plaintiffs' sight draft the following day. *fn4" The following day, of course, was too late. On August 2, UBAF telephoned Alison Transport and stated that, due to the issuance of Executive Order 12722, it would not make payment.

 C. The Iraqi Sanctions and Plaintiffs' License Applications

Except to the extent provided in regulations that may hereafter be issued pursuant to this order, all property and interests in property of the Government of Iraq that are in the United States. . . or that are or hereafter come within the possession or control of United States persons . . . are hereby blocked.

 Exec. Order 12724 § 1, 55 Fed. Reg. 33089 (1990) (emphasis added). Section 2 of the Order (which is still in effect, see Notice of the President, 58 Fed. Reg. 39111 (1993)), and regulations promulgated under the Order, prohibit a broad range of commercial activity relating to Iraq, as described in the Discussion section below.

 Licenses may be obtained from OFAC on a case-by-case basis to permit certain transactions otherwise prohibited by the regulations. 31 C.F.R. §§ 575.501, .510, .801 (1993). Plaintiffs made their initial application to OFAC on May 31, 1991 for a specific license pursuant to §§ 575.510 and 575.801(b), seeking leave for UBAF to pay Plaintiffs out of funds deposited by the Central Bank of Iraq as collateral for the Letter of Credit. In connection with their application, Plaintiffs contacted UBAF regarding the bank's willingness to join in the application.

 UBAF responded by letter dated March 5, 1991 from the bank's counsel, Isam Salah, stating that UBAF would assist in the license application and would sign a confirmation of facts for submission to OFAC. Plaintiffs then sent UBAF a draft license application, which contained a detailed recitation of the facts. Pls.' Ex. 28. UBAF counsel Salah responded with specific revisions (Pls.' Ex. 30) and with a separate letter, dated May 7, 1991, setting forth the facts known to UBAF (the "Confirmation Letter"). In particular, the letter confirmed that Plaintiffs' August 1, 1990 "drawing request and . . . documentation satisfy the terms of the Letter of Credit." Pls.' Ex. 31, P 9. After revising the license application, Plaintiffs sent it back to UBAF for an additional review. UBAF reviewed and approved the final draft for submission to OFAC, and specifically reconfirmed the May 17 Confirmation Letter and authorized its inclusion in the application. Pls.' Ex. 34. Several months later, in a letter dated August 19, 1991 responding to questions from OFAC about the application, UBAF again expressly reconfirmed its May 7 Confirmation Letter, noting in particular, "please note paragraph 9 of the Letter in which [UBAF] confirms that the drawing request satisfies the [Letter of Credit]." Pls.' Ex. 37.

 On January 2, 1992, OFAC denied Plaintiffs' first license application on the ground that the Iraqi Sanctions Regulations authorize licenses only "to permit payment . . . with respect to goods or services exported prior to the effective date" of the Iraqi sanctions. Pls.' Ex. 42. Since the ion implanter had not left the country by the night of August 2, 1990, when Executive Order 12722 was issued, OFAC concluded, Plaintiffs did not qualify for this exception.

 On May 14, 1992, Semetex and Eaton filed their second license application with OFAC, seeking narrower relief. The second application, which was prepared without UBAF's participation, sought only a declaration by OFAC that the Iraqi Sanctions Regulations imposed no bar to a recovery by Semetex and Eaton in an action against UBAF on UBAF's contract of confirmation. The contract of confirmation, the application noted, "is backed solely by the assets of UBAF and does not -- and will not-- involve any blocked Iraqi funds or assets." Pls.' Ex. 43, at 1. OFAC granted Plaintiffs' second application on June 15, 1992 (the "Litigation License"). The License authorizes "all transactions necessary for the initiation and conduct of legal proceedings against [UBAF] to recover ...

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