APV Baker, Inc. v. Harris Trust & Sav. Bank

• Decision Date: 11 April 1991
• Docket Number: No. 1:91-CV-197.,1:91-CV-197.
• Citation: 761 F. Supp. 1293
• Parties: APV BAKER, INC., a Michigan corporation, Plaintiff, v. HARRIS TRUST & SAVINGS BANK, a foreign corporation, Defendant.
• Court: U.S. District Court — Western District of Michigan

761 F. Supp. 1293

APV BAKER, INC., a Michigan corporation, Plaintiff, v. HARRIS TRUST & SAVINGS BANK, a foreign corporation, Defendant.

No. 1:91-CV-197.

United States District Court, W.D. Michigan, S.D.

April 11, 1991.

Richard A. Kay, Robert Dale Kullgren, Michelle K. Behaylo, Varnum, Riddering, Schmidt & Howlett, Grand Rapids, Mich., for plaintiff.

John D. Tully, Warner, Norcross & Judd, Grand Rapids, Mich., for defendant.

OPINION

HILLMAN, Senior District Judge.

This diversity case returns to the court on motion by plaintiff for preliminary injunction filed five days after the court had denied for lack of ripeness plaintiff's earlier motion for a preliminary injunction after granting a Temporary Restraining Order. Plaintiff, APV Baker, Inc. ("APV Baker"), a Grand Rapids-based manufacturer of baking equipment, again seeks injunctive relief blocking defendant Harris Trust & Savings Bank ("Harris"), an Illinois institution, from paying a letter of credit to Bank Melli Iran ("Bank Melli"), an Iranian bank. For the reasons set forth below, the court denies the motion.

Factual and Procedural Background

The prior history of this litigation may also be found in the March 15, 1991, opinion denying plaintiff's previous motion for a preliminary injunction. That opinion was authored by Judge Robert Holmes Bell, a district judge in this district, who graciously agreed to hear and decide plaintiff's motion on behalf of the court while I was holding court in the district's Northern Division.

On September 4, 1975, APV Baker's predecessor, Werner Lehara International ("Werner"), entered into a contract with a branch of the Imperial Government of Iran. The contract was initially between Werner and Iran's "Foreign Transactions Company", but on December 15, 1976, Iran's "State Organization for Grain, Sugar & Tea" substituted as party to the contract.

Under the contract, the Iranian governmental agency agreed to pay Werner $1.56 million to install bakery equipment in Bander Abbas, Iran. The contract stated that Werner would receive payment in increments of 20 percent, 60 percent and 20 percent, with the final payment to be made following installation of the equipment and preliminary acceptance by the Iranian agency. These payments were to be secured by a letter of credit for the value of the contract. It was to be obtained through Bank Markazi, an Iranian bank, for the contract price with Werner designated as the beneficiary.

This contractual arrangement also called for Werner to make a good-faith performance guarantee to the Iranian government, in the amount of 10 percent of the contract price, $156,095. The performance guarantee was to be secured with a standby letter of credit. Werner obtained the letter of credit, No. SP21571, from Harris and, at the request of the Iranian agency, designated Bank Melli as the beneficiary. This letter of credit ("the Harris letter") is the subject of the current litigation.

Under the contract between Werner and the Iranian agency, the Harris letter of credit was to last "twelve months extendable to another twelve months." The contract also provided for the value of the letter to be reduced by 50 percent upon preliminary acceptance and to be eliminated altogether one year after preliminary acceptance. In addition, the contract contained a mandatory forum selection clause designating Iran as the forum for resolution of any contract disputes.

Standby letters of credit, such as the Harris letter, generally function independently of the underlying contractual obligations between Werner and the governmental agency. Standbys that are "clean" letters like the one at issue here are payable to beneficiaries upon demand without any additional documentation or proof required. This form of commercial paper receives frequent use in international transactions. Standby letters of credit permit financial transactions to take place separate from contractual performance. Generally, when a demand on a standby letter of credit is made, the issuing bank pays the beneficiary independently and unconditionally and then seeks reimbursement from its customer. The issuing bank earns a small commission based on the value of the letter.

Although the contract between Werner and the Iranian agency was to have been performed within one year, contractual and financial difficulties developed from the outset. The Iranian government failed to open the letter of credit securing its own performance on the contract by the date initially agreed. As a result, Werner delayed shipment of the machinery and equipment until it received assurance of payment nearly seven months, until September 1975. This delay in shipment allegedly produced additional costs for Werner that have gone unpaid.

Other delays followed. Due to alleged problems with building construction caused by another contractor, the installation of the equipment and machinery was delayed further, leading to several extensions of the contract. In addition, Werner extended the expiration date of the Harris letter of credit on several occasions.

Following negotiations in Germany between Werner and a representative of the Iranian agency in June 1978, a new agreement known as a "process verbal" was made setting forth conditions for completion of the contract. Under the process verbal, Werner was to provide certain technical advice and personnel to make adjustments in the ensuing months. Performance of these final obligations by Werner officials would, in turn, trigger the Iranian agency's preliminary acceptance of the equipment and its payment of the last 20 percent of the contract. As part of this revised arrangement, Werner extended the Harris letter of credit to April 4, 1979.

To date, the contract apparently has not been completed. APV Baker alleges in this action that its predecessor Werner had performed all of its obligations by November 1978. Nevertheless, Werner never received formal preliminary acceptance or the 20 percent balance due on the contract as expected in late 1978, although Iranian officials made alleged assurances in late 1978 that acceptance and payment were imminent. Despite these continued alleged breaches by the Iranian agency, Werner extended the expiration date of the Harris letter of credit again in March 1979; the letter, due to expire April 4, 1979, was extended to October 5, 1981.

Starting in early 1979 and prior to any resolution of these contractual difficulties, revolution engulfed in Iran and radically altered the landscape for commercial transactions between Iran and United States companies. In the ensuing months, the Islamic Republic of Iran toppled the Imperial Government of Iran. The United States Embassy in Teheran was seized and American hostages were captured. Diplomatic and commercial relations between the United States and Iran became severed.

Although no demand for payment had been made under the Harris letter of credit during the initial stage of this tumultuous period, Werner filed suit in this court in April 1979 seeking to enjoin Harris from honoring any future demand by Bank Melli on the letter of credit. After a hearing on the preliminary injunction motion, I denied injunctive relief, but required that Harris provide Werner three days' notice of any demand for payment. Werner Lehara Int'l, Inc. v. Harris Trust & Sav. Bank, 484 F.Supp. 65 (W.D.Mich.1980). The court based its decision, in part, on Werner having failed to show irreparable injury because no demand on the letter of credit had been made. Id. at 74.

Following the decision, Werner apparently renewed its attempts to settle the lingering contractual problems. In March 1980, APV Baker asserts, Werner contacted officials at the Iranian Embassy in a futile attempt to discuss the contract. Again, in June 1981, Werner proposed in a telex communication to meet with Iranian officials in London, but received no response. In October 1981, the Iranian government again allegedly failed to respond to a telex proposing a settlement conference.

Werner's difficulties involving the contract and letter of credit were not isolated concerns during this period. By 1980, dozens of lawsuits had been initiated nationwide to enjoin payment on letters of credit associated with Iranian government contracts. See Getz, Enjoining the International Standby Letter of Credit: The Iranian Letter of Credit Cases, 21 Harv. Int'l L.J. 189 (1980); Zimmett, Standby Letters of Credit in the Iran Litigation: Two Hundred Problems in Search of a Solution, 16 Law and Policy in Int'l Bus. 927 (1984).

The issue of the fate of outstanding Iranian letters of credit extended beyond the courts. In response to an executive order by President Carter that blocked the transfer of all Iranian assets in the United States, the Treasury Department in 1979 issued the Iranian Assets Control Regulations, 31 C.F.R. Part 535. These regulations expressly set forth procedures for U.S. banks that received demands from Iranian beneficiaries on letters of credit. 31 C.F.R. § 535.568. The regulations provided for the payment of any demands into blocked accounts established through licenses issued by the Treasury Department and set up on the books of the issuing banks or the banks' customers. Id.

Under these regulations, the bank that issued the standby letter of credit had to give prompt notice to its U.S. customer of a demand by an Iranian beneficiary. § 535.568(b). Then, payment by the bank of the demand into a blocked account was prohibited until eight business days after the giving of such notice. Id. After receiving notice, the customer had five business days to apply for a license with the Treasury Department that would authorize it to establish a blocked account on its own books, instead of payment into a blocked account by the issuing bank and reimbursement by the customer.

These regulations came into play in this matter in August 1981, when Harris received a telex and a letter from Bank Melli requesting...