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REED INTL. TRADING CORP. v. DONAU BANK AG

September 30, 1994

REED INTERNATIONAL TRADING CORP. and CHINA JIANGSU ANIMAL BY-PRODUCTS IMPORT & EXPORT (GROUP) CORP., Plaintiffs,
v.
DONAU BANK AG, KAZAKH REPUBLIC BANK FOR FOREIGN ECONOMIC AFFAIRS, CHASE MANHATTAN BANK, N.A., and THE BANK FOR FOREIGN ECONOMIC AFFAIRS OF THE USSR, Defendants.


SOTOMAYOR


The opinion of the court was delivered by: SONIA SOTOMAYOR

Defendant The Bank for Foreign and Economic Affairs of the Russian Federation ("Vnesheconombank") moves, pursuant to Fed. R. Civ. P. 12(b)(1), 12(b)(2) and 12(b)(6), to dismiss the second amended complaint (the "Complaint") against it. Defendant Donau Bank, A.G. ("Donau") joins Vnesheconombank's motion to dismiss that part of Count III of the Complaint which alleges that Donau converted funds it transferred to Vnesheconombank after the letter of credit at issue in this litigation expired. Donau also joins Vnesheconombank's motion to dismiss Count IV of the Complaint for failure to state a claim. For the reasons discussed below, Vnesheconombank's motion to dismiss the Complaint against it for failure to state a claim is GRANTED, and Donau's motion to dismiss Count IV and that part of Count III asserting allegations against it based on the transferred funds is GRANTED.

 FACTUAL BACKGROUND

 This action arises out of a letter of credit issued for the benefit of plaintiff Reed International Trading Corp. ("Reed"). In October 1991, Reed, a New York corporation, entered into a contract with Alink, a "U.S.S.R. business," pursuant to which Reed agreed to sell Alink down jackets for a price of $ 385,000. Second Amended Complaint ("Compl.") P 8.

 In November 1991, plaintiff China Jiangsu Animal By-Products Import and Export (Group) Corp. ("China"), a company organized under the laws of the Peoples Republic of China, contracted with Reed to supply the down jackets Reed was to sell to Alink. Compl. P 11. Reed, on an unspecified date, presented certain documents to Chase in an attempt to draw on the letter of credit. Compl. P 13. Chase purportedly informed Reed that the documents were "sufficient for Donau to honor [a] request for payment." Compl. P 14.

 However, upon receipt of the documents, Donau informed Chase that the documents did not conform to the terms of the letter of credit. Compl. P 16. Donau did not tender payment and refused to return the documents. Compl. P 18. Alink, according to the Complaint, waived the discrepancies in the documents presented and authorized Vnesheconombank, Kazvneshbank and Donau to make payment to Reed. Compl. P 19. Vnesheconombank, however, "directed defendant Donau not to make payment on any order drawn by the Kazvneshbank." Compl. P 20. Thereafter, Donau "may have credited the accounts of" Vnesheconombank "with funds representing the proceeds of the letter of credit." Compl. P 22.

 Based on the foregoing events, Reed and China claim that the defendants, including Vnesheconombank, (1) breached their contract with it by failing to honor its demand under the letter of credit, (2) failed to exercise reasonable care in reviewing and presenting documents to secure payment under the letter of credit, (3) converted funds securing the letter of credit, and (4) were unjustly enriched to the plaintiffs' detriment.

 Vnesheconombank moves to dismiss the Complaint on several grounds. First, Vnesheconombank-asserts that, as a bank organized pursuant to the laws of the Russian Federation it qualifies as an "agency or instrumentality of a foreign state" within the meaning of the Foreign Sovereign Immunities Act (the "FSIA"), and is, therefore, immune from suit in courts of the United States. Second, the Complaint, according to Vnesheconombank, fails to state a valid claim against it because it was not the issuing, confirming or advising bank in the letter of credit transaction described in the Complaint. Donau joins that portion of Vnesheconombank's motion to dismiss the conversion and unjust enrichment counts of the Complaint which are premised on the alleged transfer of funds between Donau and Vnesheconombank.

 DISCUSSION

 I. FSIA and the "Commercial Activity" Exception

 I will first discuss Vnesheconombank's argument that this court lacks subject matter jurisdiction because Vnesheconombank is immune from suit under the FSIA. Without subject matter jurisdiction, I could not otherwise reach the merits of the substantive motion against the Complaint.

 The FSIA provides the "sole basis" for obtaining jurisdiction over a foreign sovereign in United States courts. Argentine Republic v. Amerada Hess Shipping Corp., 488 U.S. 428, 439, 109 S. Ct. 683, 690, 102 L. Ed. 2d 818 (1989). Under the FSIA, "a foreign state is presumptively immune from the jurisdiction of United States courts; unless a specified-exception applies, a federal court lacks subject matter jurisdiction over a claim against a foreign state." Saudi Arabia v. Nelson, U.S. , 113 S. Ct. 1471, 1476 123 L. Ed. 2d 47 (1993). At issue in this case is the oft-invoked "commercial activity" exception, which strips a sovereign of immunity when it engages in conduct commercial in nature. See 28 U.S.C. § 1603(d) ("a 'commercial activity' means either a regular course of commercial conduct or a particular commercial transaction or act"); Republic of Arg. v. Weltover, Inc., 119 L. Ed. 2d 394, U.S. , 112 S. Ct. 2160, 2166-67 (1992). Specifically, the "commercial activity" exception, 28 U.S.C. § 1605(a)(2), provides in relevant part that a foreign state or its agencies or instrumentalities:

 
shall not be immune from the jurisdiction of the courts of the United States or of the States in any case . . . in which the action is based . . . upon an act outside the territory of the United States in connection with a commercial activity of the foreign state ...

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