Chuidian v. Philippine Nat. Bank, CV 86-2255-RSWL.

• Decision Date: 09 April 1990
• Docket Number: No. CV 86-2255-RSWL.,CV 86-2255-RSWL.
• Citation: 734 F. Supp. 415
• Parties: Vicente B. CHUIDIAN, Plaintiff, v. PHILIPPINE NATIONAL BANK, et al., Defendants, Philippine Export and Foreign Loan Guarantee Corporation, Intervenor.
• Court: U.S. District Court — Central District of California

734 F. Supp. 415

Vicente B. CHUIDIAN, Plaintiff, v. PHILIPPINE NATIONAL BANK, et al., Defendants Philippine Export and Foreign Loan Guarantee Corporation, Intervenor.

No. CV 86-2255-RSWL.

United States District Court, C.D. California.

April 9, 1990.

COPYRIGHT MATERIAL OMITTED

Steven C. Finley, San Francisco, Cal., for plaintiff.

Joanne Frasca and Douglas Altschuler, Jones, Day, Reavis & Pogue, Max L. Gillam and Thomas R. Freeman, Latham & Watkins, Los Angeles, Cal., and Gregory P. Landis, McCutchen, Doyle, Brown & Enersen, San Francisco, Cal., for defendants.

ORDER AND JUDGMENT

LEW, District Judge.

This matter was tried before the Court from July 25, 1989 to August 18, 1989. Based upon the evidence presented during trial and upon the arguments made in the post-trial briefs, the Court issues the following order.

I. BACKGROUND

In September 1980, Asian Reliability Company, Inc. ("ARCI"), of which Chuidian owns 98%, filed a request with Philippine Export and Foreign Loan Guarantee Corporation ("Philguarantee") for a loan guarantee ultimately totalling $25 million. ARCI represented to Philguarantee and the lenders that the proceeds from the loan were to be used in five interrelated electronics projects (the "business plan" or "project plan"). These projects were designed to permit Philippine manufacturing of silicon chips and eliminate the need for importing silicone chips from the United States. On the basis of these representations, Philguarantee agreed to guarantee the loan.¹ Philguarantee is a Philippine government agency established to promote the Philippine economy and is limited by its charter to guaranteeing debts of local companies incurred in furtherance of its objectives. Philguarantee agreed to guarantee the loan because the business plan called for the establishment of businesses in the Philippines which would benefit the national economy. After approval of the guarantee, Chuidian changed the business plan and invested the loan proceeds in corporations outside of the Philippines, most significantly Dynetics, Inc. and Interlek, Inc. Philguarantee established at trial that it would not have been authorized nor could it have approved the guarantee if Chuidian would have revealed his plan to use the loan proceeds for foreign stock investments. Subsequently, ARCI defaulted on the loan payments, and Philguarantee was called upon and did make the payments pursuant to the guarantee. The loan diversion was then discovered, and Philguarantee filed suit in the California Superior Court in Santa Clara County against Chuidian, ARCI and the companies in which Chuidian had invested the loan proceeds. Philguarantee argued at the trial that former Philippine president Ferdinand Marcos was a secret partner of Chuidian and a beneficiary of this unauthorized loan diversion, and that when Philguarantee sued Chuidian, Chuidian threatened to expose Marcos' involvement unless Marcos forced Philguarantee to settle the Santa Clara litigation on terms favorable to Chuidian and consequently unfavorable to Philguarantee. The settlement called for Philguarantee to get the stockholdings of ARCI, Dynetics and Interlek in exchange for an irrevocable letter of credit ("the L/C") in Chuidian's favor in the sum of $5.3 million drawn on Philippine National Bank ("PNB"). The Philippine government owns 99.95% of PNB. PNB's principal place of business is in Manila, and it has a branch office in Los Angeles. Philguarantee argued at trial that Dynetics was virtually worthless at the time the settlement agreement was executed. Subsequently, Marcos was expelled from the Philippines, and Philguarantee filed a motion in the Santa Clara action to vacate the settlement agreement on the ground that it was illegal and was procured by duress and fraud. That motion was denied. Philguarantee appealed that denial, and the California Court of Appeal affirmed the superior court's denial in Philippine Export and Foreign Loan Guarantee Corp. v. Chuidian, 218 Cal. App.3d 1058, 267 Cal.Rptr. 457 (1990). As of the date of this opinion, that appellate court ruling is subject to a petition for review by the California Supreme Court. In the meantime, Chuidian had received two payments under the L/C, which called for periodic payments to be made over a number of months at the Los Angeles branch of PNB ("PNB/LA"). When Marcos was expelled, payment on the L/C was frozen by an order issued by the Philippine Commission on Good Government ("PCGG"). In response, Chuidian filed the instant action against PNB for payment of the L/C. Philguarantee intervened and, in addition to arguing that PNB was excused from making payment on the L/C, made the same arguments as it made in the Santa Clara action, i.e. that the Santa Clara action settlement is void due to illegality, duress and fraud, and Philguarantee is entitled to damages for the loan diversion.

II. CHUIDIAN v. PNB

It is not disputed between the parties that there was a stop payment issued on the L/C. The evidence is also clear that the L/C was irrevocable. The critical contention is whether any defenses are available to PNB. Both PNB and Philguarantee argue that under California Commercial Code § 5114(2) PNB is excused from payment of the L/C because of fraud in the underlying settlement agreement between Chuidian and Philguarantee regarding the Santa Clara litigation. PNB alone argues that under principles of illegality, international comity and act of state, it is excused from payment of the L/C and cannot be held liable for a breach of contract.

A. Fraud in the Transaction

Both PNB and Philguarantee argue that PNB would be excused from payment of the L/C upon a showing of fraud in the underlying settlement agreement between Chuidian and Philguarantee regarding the Santa Clara litigation. PNB and Philguarantee contend that non-payment of the L/C would be justified by reason of "fraud in the transaction" as set forth in California Commercial Code § 5114(2). The parties agree that there is a split of authority as to which "transaction" § 5114(2) references — the letter of credit transaction or the underlying transaction between the customer (Philguarantee) and the beneficiary (Chuidian). However, the Court need not venture into this unsettled area of law. The Court finds infra that there was no fraud in the underlying transaction, and PNB and Philguarantee do not argue that there was fraud in the letter of credit transaction. Thus PNB cannot be excused from making payment on the L/C under § 5114(2).

B. Illegality

It is well established that illegality or a legal prohibition on performance is a defense to a breach of contract action. See California Civil Code § 1511 ("The want of performance of an obligation ... is excused by the following causes ... 1. When such performance or offer is prevented or delayed ... by the operation of law...."); Bright v. Bechtel Petroleum, Inc., 780 F.2d 766, 772 (9th Cir.1986) (Under California Civil Code § 1511(1) "a party is not required to violate the law to avoid liability for breach of contract.")

The legality of a contract is determined in accordance with the law of the place where the contract is to be performed. While it is true that a foreign government's decree restraining party to a contract cannot excuse a performance to take place in the United States, it will excuse a performance to take place within that government's jurisdiction. 6 A. Corbin, Corbin on Contracts § 1351; Restatement (Second) of Conflicts of Laws § 202; RSB Manufacturing Corp. v. Bank of Baroda, 15 B.R. 650, 654-655 (S.D.N.Y.1981); Kashfi v. Phibro-Salomon, Inc., 628 F.Supp. 727, 737 (S.D.N.Y.1986).

Thus, the Court must determine (1) where the L/C agreement was to be performed, and (2) if the L/C was to be performed in the Philippines, whether performance is prohibited by Philippine law.

1. Place of Performance

Other courts have been called upon to determine the place of performance of a letter of credit. Sabolyk v. Morgan Guaranty Trust Co., No. 84 Civ. 3179, 1984 WL 1275 (S.D.N.Y. November 27, 1984) involved a plaintiff who sued Morgan Guaranty in New York for payment of amounts due on irrevocable standby letters of credit issued by Morgan Guaranty in Zurich. Morgan/New York refused payment on the letters of credit after a Swiss Court issued orders of attachment against plaintiffs' interest in the proceeds of the letters. The district court determined that the place of performance was Zurich, not New York. Morgan/New York did not confirm the letters of credit and was not designated in the letters as a paying bank or as a bank authorized to reimburse for any payments made under the letters of credit, the letters were issued by Morgan/Zurich over the signatures of two individuals who were empowered to sign solely on behalf of Morgan/Zurich, collateral was pledged to Morgan/Zurich, Morgan/New York was not identified in the letters of credit or in any amendment thereto as a confirming paying bank or as a participant in the transactions at all, and the letters of credit were shown as a contingent obligation on the books of Morgan/Zurich only. RSB Manufacturing Corporation v. Bank of Baroda, 15 B.R. 650 (S.D.N.Y.1981) held that where a Bombay, India branch of the Bank of Baroda issued an irrevocable letter of credit, the bank's use of its New York branch did not extend its undertaking since the New York branch only served in a limited, neutral role of advising and paying. The New York branch never confirmed the credit, and the branch expressly limited its role to that of an advising and paying bank.

In the instant case, Chuidian argues that the fact that the L/C calls for payment to be made at PNB/LA, that two payments were actually made to Chuidian at PNB/LA, that PNB's witnesses admitted that PNB/LA was not a separate bank or entity, that the separation of the obligations of PNB/Manila and PNB/LA was merely an internal matter, and that PNB issued consolidated financial statements for...