The opinion of the court was delivered by: SWEET
Nord/LB is a foreign banking organization formed under the laws of German, its principal place of business is in Germany, and it has offices in New York, New York.
BOI is a foreign banking organization formed under the laws of India, with its principal place of business in India. BOI has banking offices in Singapore and New York, New York, among other places. BOI is an "agency or instrumentality" of India which carries on commercial business at its place of business in New York, as set forth in the FSIA.
Brenntag filed the complaint in this action on April 16, 1997, and on that day moved by Order to Show Cause for a temporary restraint and a preliminary injunction. The Court granted the temporary restraint and required Brenntag to post a bond as security.
On May 22, 1997, this Court held a hearing on the preliminary injunction. At the end of the preliminary injunction hearing, the Court observed that the "issue of holder in due course and the knowledge and the relationship between Bank of India and Petro Pharma . . . has not been completely explored." The Court further stated that "what we are interested in is the relationships." Accordingly, the Court instructed the parties to engage in expedited discovery on these limited issues and to file submissions which clarify the outstanding issues articulated by the Court.
The parties filed additional submissions and the preliminary injunction hearing was continued on March 25, 1998.
The parties here agree that the underlying business transaction giving rise to the instant dispute was a fraud. There is no dispute here that Petro Pharma, a Singapore corporation now in receivership, never shipped the chemicals to its customer, Brenntag, and yet represented to the BOI that it had. There is also no dispute that the BOI advanced to Petro Pharma approximately $ 2.4 million with the expectation that it would be repaid out of the proceeds from the purported sale.
The dispute here is whether, notwithstanding the underlying fraud perpetrated by Petro Pharma, the BOI is entitled to payment from Nord/LB pursuant to a stand-by letter of credit established by Brenntag to pay for the chemicals because, as the BOI contends, it validly negotiated for all of the documents required to be presented to Nord/LB for payment. The pertinent facts are set forth below in chronological order.
I. May 1995: BOI Began Its Banking Relationship With Petro Pharma
BOI began its banking relationship with Petro Pharma in May 1995, when Petro Pharma was introduced to BOI through one of BOI's customers in the trading business, Parsram Brothers. Petro Pharma opened a current account with BOI and "did some trade finance transactions" through BOI as well. BOI's primary contacts at Petro Pharma were its directors, Mr. Narasimhan Ashok and Mrs. Rema Ashok ("Ashoks"), as well as Mr. B. Aranaprasad, also known as Prasad ("Prasad"), and Mr. Venkat Iyer ("Iyer").
Prasad had previously been employed at BOI's Singapore Branch for four years as the Manager of Trade Finance (Export), where he dealt with letters of credit. Prasad's position as Manager of Trade Finance (Export) was subsequently combined with the position of Manager of Trade Finance (Import) to create the post of Manager of Trade Finance, a position assumed by Some Nath Banerjee ("Banerjee") on September 4, 1995. In this position, Banerjee managed all aspects of letters of credit, as well as other import and export trade finance matters. The parties dispute whether the term of employment for Prashad and Banerjee overlapped.
At the time Petro Pharma opened its account with BOI, the Ashoks signed a personal guarantee for the sum of Singapore $ 5 million, although BOI did not take any tangible securities to collateralize this guarantee. In addition, the Ashoks also signed a corporate guarantee, for indemnity against losses, as well as an indemnity against monies advanced on any bills or checks.
In order for BOI to determine which employees were authorized to act on behalf of Petro Pharma with respect to its BOI transactions, Petro Pharma provided BOI in May 1995, when the account was opened, with its Board Resolution naming the Ashoks and Prasad as authorized signatories for Petro Pharma. Petro Pharma also supplied BOI with an "authorized signatory" card, also known as a "face card," which contained sample signatures of the Ashoks and Prasad. BOI recognized that the "authorized signatories" were the only people that can sign on behalf of Petro Pharma. For verification purposes, BOI took copies of the passports of the authorized signatories at the time the account was opened. When the Petro Pharma account was opened, BOI kept all of these opening documents in its deposit section department.
On January 25, 1996, BOI received from Petro Pharma a copy of its new Board Resolution, passed on December 19, 1995, which changed the authorized signatories on Petro Pharma's account with BOI. The Board Resolution authorized either of the Ashoks to sign singly on behalf of Petro Pharma and authorized any two of the following individuals to sign jointly on behalf of Petro Pharma: Prasad, Iyer or Carter J. Ward. The Board Resolution provided sample signatures for all five signatories. BOI's notes on the new Board Resolution indicated that BOI was to "take out the old," "note these instructions," "obtain a face card for all," and "for Carter J. Ward, obtain passport/IC."
On two occasions prior to the transaction at issue here, Brenntag purchased goods from Petro Pharma and opened stand-by letters of credit to pay for the goods. For each transaction, Petro Pharma requested that BOI "negotiate/discount" the letters of credit. BOI has not, however, established that Brenntag or Nord/LB knew that BOI had "negotiated" the documents for the stand-by letters of credit. In neither case did Nord/LB pay to BOI under the letters of credit. In fact, Brenntag paid the invoices under the two stand-by letters of credit directly. BOI's contention that Nord/LB should have been aware because it made a request to draw upon a letter of credit which it later withdrew is not credible.
II. March 1996: Brenntag Purchased Naphtha From Petro Pharma, Payment Of Which Was Secured By The LOC0
On or about March 14, 1996, Brenntag entered into a contract with Reliance Industries Limited ("Reliance"), located in Bombay, India, in which Brenntag agreed to sell to Reliance 15,000 metric tons +- 5 percent of naphtha. To procure the naphtha for Reliance, Brenntag entered into a contract with Petro Pharma on or about March 19, 1996, for 15,000 metric tons of naphtha, delivery to be made in Bombay, India to arrive April/May 1996. Under the contract, payment was to be secured by an irrevocable stand-by letter of credit.
On or about March 21, 1996, at Brenntag's request, Nord/LB issued the LOC in favor of Petro Pharma as beneficiary and BOI as the advising bank, in the amount of US $ 2,340,000 +- 5%. The LOC was:
Payable at sight, but not earlier than 361 days after the loading date, at our counters, against presentation of the following documents:
1. Copy of commercial invoice covering 15,000 metric tons plus/minus five percent of naphtha at a price of US DLRS 158.00 per metric ton, CFR Bombay, India.
2. Copy of negotiable bill of lading.
3. Statement purportedly signed by an authorized representative of Petro Pharma Pte Ltd. Stating that: "payment, which was due 360 days after completion of loading, has not been received and is due from Brenntag International Chemicals, Inc."
4. Copy of beneficiary's covering letter addressed to Norddeutsche Landesbank GZ, 1270 Avenue of the Americas, New York, New York, 10020 under cover of all original negotiable documents sent, via courier service, directly upon shipment.
Presentation of copies of Petro Pharma's covering letter along with the original negotiable documents were acceptable under the terms of the LOC, presumably because Nord/LB was already supposed to be in possession of the originals, directly upon shipment, as set forth in of the LOC.
The LOC also provided the following Special Conditions:
1. Partial shipments/drawings are not acceptable.
2. All charges other than those of the issuing bank are for the account of the beneficiary.
3. Negotiation is restricted to the bank of India, Singapore.
Additionally, the LOC was made subject to the Uniform Customs and Practice for Documentary Credits (1993 Revision) Publication No. 500 of the International Chamber of Commerce, Paris, France (the "UCP").
The LOC was originally to expire on March 17, 1997. On March 22, 1996, the expiration date was amended to June 30, 1997. Additionally, on March 26, 1996, the unit price per metric ton of naphtha was amended to US $ 156.00.
III. March 1996: BOI Advanced US $ 2.4 Million To Petro Pharma Under The LOC
On March 22, 1996, immediately after becoming the beneficiary under the LOC, Petro Pharma wrote to BOI Chief Executive Nayak ("Nayak"), requesting that BOI approve "discounting of its invoices under the LOC," as BOI had apparently done on two of its prior transactions with Brenntag in May 1995. Banerjee defined "discounting" of letters of credit to mean "giving finance against letter of credit." Banerjee used the term "negotiation" synonymously with discounting.
Nayak passed along Petro Pharma's request to Banerjee, who handled the discounting transaction at issue. Banerjee admitted that Petro Pharma was requesting that BOI discount a stand-by letter of credit, as opposed to a documentary letter of credit. According to Banerjee, a stand-by letter of credit is "theoretically" different from a documentary letter of credit because an "applicant's non-performance" is required to give rise to a claim under a stand-by letter of credit, whereas a beneficiary need only "perform certain things, like submission of documents," under a documentary letter of credit.
Petro Pharma's March 22 letter states that it is tendering to BOI "documents as called for under the LOC . . . along with an undated claim letter form for the purposes of completing your records." The "undated claim letter," also known as the "Default Letter," was signed jointly by Prasad and Iyer, on behalf of Petro Pharma. At his deposition, Banerjee conceded a number of points with respect to the Default Letter:
1. At the time BOI received the Default Letter in March 1996, the stamp that now appears on the document -- March 14, 1997 -- was not there.
2. The Default Letter could not have been dated until after the due date (360 days after completion of loading).
3. Brenntag had not defaulted on any obligations it allegedly owed to Petro Pharma in March 1996.
4. On March 14, 1997, Banerjee instructed BOI's billing clerk to stamp the March 14, 1997 date on the Default Letter, even though nothing in the documents BOI received from Petro Pharma authorized BOI to date stamp the Default Letter.
5. BOI never asked or even attempted to ask anyone at Petro Pharma whether BOI was authorized to affix the March 14, ...