Chuidian v. Philippine Nat. Bank

Citation976 F.2d 561
Decision Date11 December 1992
Docket NumberNo. 90-56031,90-56031
Parties18 UCC Rep.Serv.2d 1006 Vincente B. CHUIDIAN, Plaintiff, and Robert M. Damir, Trustee in Bankruptcy, Appellant, v. PHILIPPINE NATIONAL BANK, et al., Defendants-Appellees. Philippine Export and Foreign Loan Guarantee Corporation, Intervenor.
CourtU.S. Court of Appeals — Ninth Circuit

Steven C. Finley, McKenna & Fitting, San Francisco, Cal., Vincente B. Chuidian, Hillsborough, Cal., for plaintiff-appellant.

Joanne M. Frasca, Jones, Day, Reavis & Pogue, Los Angeles, Cal., for defendants-appellees.

Appeal from the United States District Court for the Central District of California.

Before FARRIS, WIGGINS and FERNANDEZ, Circuit Judges.

FARRIS, Circuit Judge:

Robert Damir, trustee in bankruptcy for Vincente Chuidian, appeals the district court's judgment, following a bench trial, in favor of Philippine National Bank in Chuidian's action on a letter of credit. We affirm.

I

The underlying facts are set forth in Chuidian v. Philippine National Bank, 912 F.2d 1095 (9th Cir.1990) (Chuidian I ):

Chuidian owns interests in various businesses in California. In 1985, the Philippine Export and Foreign Loan Guarantee Corporation ..., an instrumentality of the Republic of the Philippines government under then-President Ferdinand Marcos, sued several of Chuidian's companies in Santa Clara Superior Court. Chuidian counterclaimed. The parties settled the Santa Clara County litigation in late 1985. As part of the settlement, the Bank, a state-owned bank, issued an irrevocable letter of credit to Chuidian on behalf of the Guarantee Corporation, payable ["at the counters of the"] Bank's Los Angeles branch.

Shortly thereafter, on February 26, 1986, the government of President Marcos was overthrown, and replaced by the ... government of President Corazon Aquino. The new government formed the Presidential Commission on Good Government ..., an executive agency charged with recovering "ill-gotten wealth" accumulated by Marcos and his associates....

... In March 1986 ... [the Commission] instructed the Bank not to make payment on the letter of credit issued to Chuidian.... [T]he Commission suspected that Marcos and Chuidian had entered into a fraudulent settlement of the Santa Clara County litigation to pay off Chuidian for not revealing certain facts about Marcos's involvement in Chuidian's business enterprises. As a result, the Commission wished to examine the propriety of the settlement, and, in order to secure payment in the event of a decision against Chuidian, needed to prevent payment under the letter of credit.

When the Bank, pursuant to [the Commission's] order, refused to make payment under the letter of credit, Chuidian sued the Bank in Los Angeles County Superior Court. The Bank removed the action to federal district court pursuant to 28 U.S.C. § 1441(d).

Id. at 1097. After a fifteen day bench trial, the district court refused to enforce the terms of the letter of credit. The court determined that the letter of credit was to be performed in the Philippines, and that Philippine law, specifically the Commission's order sequestering the letter of credit, prohibited the Bank's performance. Thus, the court concluded, the Bank had successfully raised the defense of illegality of performance and its obligations under the letter of credit were excused. The court also found that the doctrine of international comity and the act of state doctrine required the court to recognize the validity of the Commission's sequestration order. The court's judgment and order is published at Chuidian v. Philippine National Bank, 734 F.Supp. 415 (C.D.Cal.1990) (Chuidian II ). Chuidian filed this timely appeal.

II

Damir contends the district court erred in concluding that performance under the letter of credit was excused because of supervening illegality. He recognizes, as he must, that, if Manila is the place of performance of the letter of credit, performance is excused. He argues, however, that the place of performance is Los Angeles and that the Commission's order is therefore insufficient to excuse performance.

In considering this issue, we need not decide the appropriate standard of review. Even if we were to apply a de novo review standard we would conclude, with the district court, see 734 F.Supp. at 419, that Manila was the sole place of performance of the letter of credit.

The Los Angeles branch was nominated to service the letter of credit merely in an advisory role. According to Article 10(c) of the Uniform Customs and Practice for Documentary Credits (1983 Revision), "[u]nless the nominated bank is the issuing bank or the confirming bank, its nomination by the issuing bank does not constitute any undertaking by the nominated bank to pay, to accept, or to negotiate." See also U.C.C. § 5-107(1). A confirming bank, by contrast, makes a "definite undertaking" when it adds its confirmation. See Uniform Customs, Article 10(b); U.C.C. § 5-107(2).

In deciding that Manila was the place of performance of the letter of credit, the district court relied on Sabolyk v. Morgan Guaranty Trust Co. of New York, No. 84 Civ. 3179, 1984 WL 1275 (S.D.N.Y.1984) (unpublished decision), and RSB Manufacturing Corp. v. Bank of Baroda, 15 B.R. 650 (S.D.N.Y.1981). Those cases look to the place of issuance of a letter of credit to determine the place of its performance. See Sabolyk, 1984 WL 1275, at * 2-3; RSB, 15 B.R. at 654. Designation of a place of payment under a letter of credit does not alter or amplify that result unless the paying bank also serves as a confirming bank or otherwise acts in a manner indicating that its role with respect to the letter of credit is more than merely mechanical. See RSB, 15 B.R. at 654. We agree. The Los Angeles branch did not function under the letter of credit as a confirming bank. The place of performance was Manila.

The rule Damir advocates--essentially that the place of performance of a letter of credit is the place designated for "payment at the counters"--is significantly more inflexible than the analysis we approve, which focuses primarily on the relationship between the issuing and paying banks. The commentary to § 5-102(3) of the U.C.C. states that "in the present state of the law and variety of practices as to letters of credit, no statute can effectively or wisely codify all the possible law of letters of credit without stultifying further development of this useful financing device." This statement suggests a policy favoring flexibility in the articulation of rules governing letters of credit. The uniform rule favored by Damir ignores the variety of relations that can arise between issuing and paying banks. As such, it threatens to stifle the diversity of roles that letters of credit may be called upon to serve. Our rule, by contrast, permits banks by their conduct to designate places of performance in addition to the situs of the issuing bank, although, of course, parties to a letter of credit are also free to allocate the risk as to supervening illegality by explicitly designating the place or places of performance in the instrument.

The fact that the Los Angeles branch is a subsidiary of the Manila bank does not alter our conclusion. In RSB, the court held that where the Bombay 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 because the New York branch served under the letter of credit in a limited, neutral capacity as adviser and payor. See 15 B.R. at 654.

As the district court pointed out:

The letter of credit was issued by PNB/Manila; the negotiations concerning the terms and conditions of the L/C took place at PNB/Manila's offices; the application for the issuance of the L/C was submitted to PNB/Manila; ... the L/C was approved by the board of directors of PNB in Manila; Amelia Gella, officer-in-charge of PNB/LA, contacted PNB/Manila for authority to remit the two payments made to Chuidian [before the Commission's order was issued]; ... no one at PNB/LA had authority to remit any payments under the L/C without first obtaining approval from PNB/Manila; ... PNB'/LA's role in the transaction as the designated "paying bank" was nothing more than a "mechanical paymaster" possessed of the least possible amount of authority and discretion; the "sight drafts" specifically provided that PNB/Manila was the "drawee;" the "advice of negotiation" forms completed by PNB/LA after each payment state that each payment was "drawn on Philippine National Bank, Escolta, Manila;" and the L/C was entered as a liability on the books of PNB/Manila but was not entered or carried on as a liability on the books of PNB/LA.

Chuidian II, 734 F.Supp. at 419. These findings, which are not clearly erroneous, support our conclusion that Manila was the sole place of performance of the letter of credit.

Damir relies upon Republic of Argentina v. Weltover, Inc., --- U.S. ----, 112 S.Ct. 2160, 119 L.Ed.2d 394 (1992), to support his position. Weltover is distinguishable. The Weltover Court decided only that Argentina's issuance of bonds was a commercial activity with a direct effect in the United States for purposes of asserting jurisdiction under the Foreign Sovereign Immunities Act. Id. at ----, 112 S.Ct. at 2162. The Court had no occasion in Weltover to articulate a rule to identify the place of performance of letters of credit.

III

A conflict of laws analysis supports the application of Philippine law. The Philippines is the jurisdiction with the most significant relationship to the issue and the parties in this case.

Generally, "[i]n a diversity case, a federal court must apply the choice of law rules of the state in which the action was filed." Sims Snowboards, Inc. v. Kelly, 863 F.2d 643, 645 (9th Cir.1988). Here, however, jurisdiction is not based upon diversity of citizenship--all parties are citizens...

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