Finanz Ag Zurich v. Banco Economico

• Decision Date: 01 August 1998
• Docket Number: Docket No. 98-7770
• Citation: 192 F.3d 240
• Parties: (2nd Cir. 1999) FINANZ AG ZURICH, Plaintiff-Appellant, v. BANCO ECONOMICO S.A., Defendant-Appellee
• Court: U.S. Court of Appeals — Second Circuit

Page 240

192 F.3d 240 (2nd Cir. 1999)

FINANZ AG ZURICH, Plaintiff-Appellant, v. BANCO ECONOMICO S.A., Defendant-Appellee.

Docket No. 98-7770

August Term, 1998

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

Argued: February 1, 1999

Decided: October 07, 1999

Appeal from a judgment of the United States District Court for the Southern District of New York (Shira A. Scheindlin, Judge), granting the defendant's motion to dismiss the plaintiff's complaint pursuant to the doctrine of international comity. We hold that the District Court did not exceed its allowable discretion by deferring to an ongoing liquidation proceeding in Brazil.

Affirmed.

[Copyrighted Material Omitted] HENRY WEISBURG, Shearman & Sterling, New York, NY (Karl A. Cole-Frieman, of counsel), for Plaintiff-Appellant Finanz AG Zurich.

MICHAEL J. CANNING, Arnold & Porter, New York, NY (Marla Eisland, New York, NY, Whitney Debevoise and Michael B. Mierzewski, Washington, DC, of counsel), for Defendant-Appellee Banco Economico S.A.

Before: CABRANES and STRAUB, Circuit Judges, and MCCURN, District Judge.^*

STRAUB, Circuit Judge:

Plaintiff Finanz AG Zurich ("Finanz") appeals from a judgment of the United States District Court for the Southern District of New York (Shira A. Scheindlin, Judge), dismissing its complaint on the ground of comity. Finanz sought to recover on certain promissory notes allegedly guaranteed by the defendant, Banco Economico S.A. ("BESA"). However, BESA is currently subject to an extrajudicial liquidation in Brazil, and the District Court dismissed the action in favor of that foreign proceeding. See Finanz AG Zurich v. Banco Economico S.A., No. 98 Civ. 0005, 1998 WL 205341 (S.D.N.Y. Apr. 28, 1998). On appeal, Finanz contends that this was an abuse of the District Court's discretion because deferring to the Brazilian liquidation would violate significant policy interests of the United States as well as principles of due process and fundamental fairness. We disagree and therefore affirm.

BACKGROUND

This case involves a "forfaiting" transaction, which is "an inventive means of facilitating exports to troubled or debt-laden countries." A.I. Trade Fin., Inc. v. Petra Bank, 989 F.2d 76, 78 (2d Cir. 1993). We have previously described the type of forfaiting present in this case as

involving the sale of goods for promissory notes, [in which] the forfaiter finances the sale by paying the exporter (usually at a substantial discount) and receives in return the importer's promissory notes....

A forfaiting transaction involves at least one other essential party: a guarantor bank. In the ordinary course, forfaiters will not finance any trade debts without an unconditional and irrevocable guaranty from a bank or other substantial guarantor.... The importer arranges for the bank to guarantee the payment of the note to the forfaiter, at which time the forfaiter becomes fully responsible for payment to the exporter. All burdens of debt collection fall upon the forfaiter, without recourse to the exporter. Upon maturity of the notes, the forfaiter typically presents them to the guarantor for payment.

The guaranty employed in a forfaiting transaction often consists of a two-word endorsement, "per aval," recorded on the note itself and followed by one or more authorized signatures of the guarantor bank. This endorsement is known as an "aval." As brief and cryptic as the aval may be, the customs and practices of the forfaiting industry make it a fully articulated contractual obligation. Id. (footnote omitted). The promissory notes "are usually payable in a commercial center, where there is an expectation of regularity in financial dealings," such as in New York. Id.

In this case, on May 2, 1995, a Brazilian importer, Delba Comercio Importacao e Exportacao Ltda. ("Delba"), issued six promissory notes with a combined face value of over $5.6 million to forfaiter Deutsche Morgan Grenfell Trade Finance Ltd. ("Morgan Grenfell"). These notes, which were to mature one year from their date of issue, were "avalized" or guaranteed by BESA's Grand Cayman branch ("Grand Cayman Branch") located in Grand Cayman, Cayman Islands. However, each note stated that it was "payable at" BESA's New York branch ("New York Branch"), rather than at the Grand Cayman Branch. The notes also referred to the New York Branch as the "[d]omicile for payment." In a subsequent telex to Morgan Grenfell on May 19, 1995, BESA's International Division transcribed a message "on behalf of [its] Grand Cayman Branch" in which the Grand Cayman Branch certified that it had "affixed [its] aval" on the promissory notes and that "this... represent[ed its] irrevocable and unconditional guarantee of payment." The telex also stated that "[t]he notes should be presented for payment on their respective maturity dates to ourselves [the Grand Cayman Branch]" at the New York Branch.

On or about May 24, 1995, shortly after Morgan Grenfell obtained the promissory notes guaranteed by the Grand Cayman Branch, Finanz purchased three of the notes-with a total face value of $3,000,000-on a non-recourse basis for $2,775,876.86. In a letter dated June 1, 1995, Morgan Grenfell provided Finanz with documentation of the transaction, including a copy of the May 19, 1995 telex "from Banco Economico S.A., Sao Paulo (on behalf of their Grand Cayman Branch)" to Morgan Grenfell and a copy of the three notes that were "domiciled for payment at Banco Economico S.A., New York." Morgan Grenfell also confirmed that the "signatures of Banco Economico S.A., Grand Cayman Branch" in the documentation were authentic. Morgan Grenfell agreed to retain the promissory notes and to present them for payment upon maturity to the New York Branch on Finanz's behalf.

However, on August 11, 1995, prior to the maturity date, Brazil's central bank, Banco Central do Brasil ("Central Bank"), placed BESA and its various branches into "intervention"-a form of pre-bankruptcy financial monitoring allowed by Brazilian law-as a result of insufficient equity and a lack of financial fitness. The Central Bank also appointed an intervenor "with full management power" over BESA's operations. The Central Bank converted the intervention into an extrajudicial liquidation in August 1996. The record reflects that under Brazilian law an extrajudicial liquidation functions similarly to a bankruptcy proceeding filed in the United States-assets are liquidated and distributed to creditors in an orderly fashion, and all proceedings against the entity in liquidation are stayed. In a Brazilian liquidation proceeding, all claims in foreign currency are converted into the domestic currency, the real. Notice of the liquidation is provided by publication rather than by individualized notice to each creditor of the entity to be liquidated.

As a result of the Central Bank's intervention, the United States Office of the Comptroller of the Currency ("OCC") initiated a cease-and-desist proceeding against the New York Branch, which, as a "Federal branch" of BESA in the United States, was licensed by the OCC. See 12 U.S.C. 1818(b) (provision of the Federal Deposit Insurance Act describing "cease-and-desist" proceedings); 12 U.S.C. 3102 (provision of the International Banking Act describing the establishment and regulation of a "Federal branch"); 12 U.S.C. 3101(6) (defining "Federal branch" as "a branch of a foreign bank established and operating under [12 U.S.C. 3102]"). The New York Branch, by its general manager, Getulio Pessoa, eventually stipulated to the issuance of an "Amended Consent Order," which established guidelines for the maintenance of sufficient assets to repay third-party liabilities as well as procedures for establishing a contingency plan for the ultimate liquidation of the Branch's assets. The Branch subsequently informed the OCC on July 19, 1996 that it would voluntarily liquidate and cease operations.

On May 2, 1996, Morgan Grenfell on behalf of Finanz presented the promissory notes for payment at the New York Branch, but payment was refused. After receiving a letter from counsel for Finanz requesting payment, Pessoa responded that the notes "appear to have been issued with the 'avals' of the Cayman Island Branch" of BESA and that "BESA's New York branch appears only to have been the location at which the notes were to have been paid." Accordingly, because the New York Branch was the "paying agent only," and because "neither BESA's Cayman Island branch nor the Issuer [Delba] has any funds on deposit with the New York branch with which to pay the notes," Pessoa concluded that the New York Branch had no obligation with respect to the promissory notes. Pessoa also described the BESA liquidation proceeding in Brazil and indicated that Finanz could either pursue Delba or assert a claim in the liquidation proceeding once the Central Bank had announced a claims procedure and the deadlines for asserting such claims. On May 16, 1997, the liquidator of BESA published a notice addressed to all of BESA's creditors in The New York Times describing the claims procedures and the deadlines for filing claims. It is undisputed that Finanz filed a timely claim to recover the value of the promissory notes in the Brazilian liquidation.

On December 3, 1997, Finanz filed suit in New York State Supreme Court, New York County, by motion for summary judgment in lieu of a complaint pursuant to New York Civil Practice Law and Rules 3213, seeking to recover on the $3,000,000 in notes guaranteed by the Grand Cayman Branch of BESA. BESA removed the action in timely fashion to federal court, asserting that the District Court had jurisdiction under 28 U.S.C. 1330(a) because BESA's liquidator, who was appointed by the Central Bank, was the real party in interest and was an "agency or instrumentality of a foreign state" as explained in 28 U.S.C. 1603(b). BESA then moved to dismiss the action in deference to the Brazilian liquidation proceeding and on the ground of forum...