KMW Intern. v. Chase Manhattan Bank, N. A.
| Decision Date | 10 August 1979 |
| Docket Number | No. 1043,D,1043 |
| Citation | 27 UCC Rep 203,606 F.2d 10 |
| Parties | 27 UCC Rep.Serv. 203 KMW INTERNATIONAL, Appellee, v. CHASE MANHATTAN BANK, N. A., Appellant. ocket 79-7231. |
| Court | U.S. Court of Appeals — Second Circuit |
William E. Jackson, Milbank, Tweed, Hadley & McCloy, New York City (Norman R. Nelson, Lana Borsook, Milbank, Tweed, Hadley & McCloy, New York City, of counsel), for appellant.
Benjamin E. Haller, Hill, Betts & Nash, New York City (Lloyd DeVos, Hill, Betts & Nash, New York City, of counsel), for appellee.
Before SMITH, OAKES, and VAN GRAAFEILAND, Circuit Judges.
Defendant-appellant, The Chase Manhattan Bank, N. A. (Chase), appeals in this diversity case from the grant of a preliminary injunction on motion of the plaintiff-appellee, KMW International (KMW). The injunction was granted by the United States District Court for the Southern District of New York, Milton Pollack, Judge, by two orders, entered March 12, 1979, and March 29, 1979. It restrains Chase from honoring or making any payment under an irrevocable letter of credit issued by it from KMW's account in favor of Banque Etebarate of Tehran, Iran, on application of the City National Bank of Mobile, Alabama. The injunction also directed Chase to send notice to Banque Etebarate that the operation of the letter of credit had been suspended and would not be honored until further order of the court. Jurisdiction of this court is based on 28 U.S.C. § 1292(a)(1).
KMW is a Netherlands Antilles partnership consisting of three Netherlands Antilles corporations. Its principal business is the sale and export of forestry products from the United States to foreign purchasers. In August, 1978, KMW received a purchase order for telephone poles from the Khuzestan Water and Power Authority (Water and Power Authority). The order was conditioned upon KMW's obtaining a performance guarantee through an Iranian bank for 10% Of the total value of the purchase order, or approximately $350,000. KMW accepted the order in September, 1978.
Accordingly, KMW arranged to have its Alabama bank request Chase to issue an irrevocable letter of credit for the benefit of the Water and Power Authority in favor of an Iranian bank. The Iranian bank, in reliance on that letter of credit, was under the purchase order to issue a performance guarantee in favor of the Water and Power Authority. On October 3, 1978, Chase did issue an irrevocable letter of credit 1 in favor of Banque Etebarate of Tehran, providing for payment to Banque Etebarate upon receipt by Chase of
(Banque Etebarate's) authenticated cable certifying (that) the amount drawn is the amount you have been called upon to pay Khuzestan Water and Power Authority, P. O. Box 13, Ahwaz, Iran, under your guarantee issued at the request of KMW International due to nonperformance by KMW International under the terms of Khuzestan Water and Power Authority purchase order # 4229 dated August 1, 1978 . . ..
Having been issued the letter of credit, Banque Etebarate issued a performance guarantee in favor of the Water and Power Authority on October 29, 1978.
Under the purchase order, the Water and Power Authority was required to pay KMW for the telephone poles by means of a separate letter of credit that would be established by the Water and Power Authority through a prime American bank in favor of KMW. KMW's obligation to ship the telephone poles was deferred until a date within three to ten months after it received the letter of credit in its favor.
After Chase issued its letter of credit, KMW attempted to ascertain whether the Water and Power Authority had arranged for its letter of credit. It was told that the Authority was awaiting confirmation of the performance guarantee issued by Banque Etebarate. Banque Etebarate also told KMW that the performance guarantee had been issued to the Water and Power Authority's office in Tehran but that the Authority's Ahwaz office had not received notification because of the postal strike then in process before the downfall of the Imperial Government. KMW alleges, and we accept as fact, that it never received the letter of credit to be established in its favor. KMW therefore claims it has no obligation to ship any telephone poles under its contract, and we assume this to be the case, as of now.
In January and February, 1979, the Shah left Iran; Dr. Bakhtiar, the head of the Regency Council appointed by the Shah, resigned; the Imperial Government of Iran ceased to exist; and the revolutionary regime opposed to the former Imperial Government was established. The United States on February 16, 1979, announced by a formal declaration, followed by statements by the Department of State's spokesman, Hodding Carter, that it at least informally recognized the government in power in Iran.
On February 28, 1979, KMW obtained a temporary restraining order enjoining Chase from making any payment. The basis of KMW's complaint was a claim that any demand under the letter of credit issued by Chase or under any performance guarantee issued by Banque Etebarate "of necessity would be false and fraudulent," that the contract had been wholly frustrated because of nonperformance of that contract by the Water and Power Authority, and that persons unknown during the civil turmoil in Iran might make fraudulent drawings under the performance guarantee or under the letter of credit.
At a March 9, 1979, hearing on KMW's motion for a preliminary injunction, the court stated that Iran was in a state of chaos and that there was then no recognized government in Iran. It added that the United States had made "only a gesture" toward recognition. The court took judicial notice that a state of insurrection had occurred which created "a suspension, if not a termination, of the status" of the Water and Power Authority. It further found that the Authority had not performed and the court was dubious whether it would or could perform by reason of the civil tumult, insurrection, and overthrow of the government.
Judge Pollack went on to reason that KMW had a right to cancel or suspend the irrevocable letter of credit, evidently on the basis that supervening illegality, impossibility, war, or insurrection as possible defenses to the underlying obligations of the contract of sale were the equivalents of fraud for purposes of granting an injunction. His order of March 9, given orally at the close of the hearing, preliminarily enjoined honoring the letter of credit and directed Chase to notify Banque Etebarate accordingly, which Chase did.
On March 16, 1979, at the request of Chase an additional hearing was held. The court made certain inquiries of the Department of State as to the status of the Water and Power Authority. The court received copies of the response which the United States Embassy in Tehran had given to the State Department's inquiries on the subject. The Embassy had informed the State Department that it had received a report from the Tehran representative of the Water and Power Authority that there was "no change" in its status, that it was functioning, and that nothing had changed concerning the status of its contractual obligations.
Chase also received a cable, dated March 19, 1979, from Banque Etebarate in response to its notification of suspension, pointing out that the Banque could not accept suspension of the letter of credit, because it was irrevocable and subject to the Uniform Customs and Practice for Documentary Credits, International Chamber of Commerce Publication No. 290 (1974 Revision) (the UCP), and that Banque Etebarate was under obligation to pay to the Water and Power Authority the amount of its guarantee due to the suspension of the counter-indemnity. Banque Etebarate also stated that absent confirmation it would "be forced to submit its file to the Iranian Finance Ministry and the Central Bank of Iran." Meanwhile, KMW had been unable to reach the Water and Power Authority by telephone. KMW had telexed both the main office and the Tehran office of the Authority insisting that the performance bond be returned immediately. At the request of KMW the State Department telexed the United States Embassy inquiring about KMW's inability to make contact with the Water and Power Authority. It also inquired about the broader consequences that the issues in this case could have on the conduct of international trade. In response, the Embassy pointed out that because March 20-27 was a holiday period in Tehran, it was not surprising that KMW had found it impossible to reach the Water and Power Authority.
Chase then requested reargument and a vacation of the preliminary injunction which had been orally granted on March 9 and filed on March 12. On March 29, 1979, the court convened a hearing to put assorted communications between the Department of State and the court, between Chase and Banque Etebarate, and from KMW to the Water and Power Authority in the record. The court then denied Chase's request to vacate the injunction, signed an order formalizing the injunction previously granted by endorsement, and fixed the amount of security required as a condition of the preliminary injunction. Chase filed a notice of appeal from the orders on March 30, 1979.
The legal standard in the Second Circuit for preliminary injunctive relief clearly calls for a showing of (a) possible irreparable harm and (b) either (1) likelihood of success on the merits or (2) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly toward the party requesting the preliminary relief. Jackson Dairy, Inc. v. H. P. Hood & Sons, Inc., 596 F.2d 70, 72 (2d Cir. 1979); Caulfield v. Board of Education, 583 F.2d 605, 610 (2d Cir. 1978). We agree with Chase that these prerequisites have not been established by KMW.
In the first place, KMW has not shown that it will suffer possible irreparable injury absent the injunction. KMW...
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