Centrifugal Casting Mach. Co., Inc. v. American Bank & Trust Co.

• Decision Date: 11 June 1992
• Docket Number: No. 91-5150,91-5150
• Citation: 966 F.2d 1348
• Parties: 17 UCC Rep.Serv.2d 1236 CENTRIFUGAL CASTING MACHINE CO., INC., Plaintiff-Appellee, v. AMERICAN BANK & TRUST CO., and Banca Nazionale del Lavoro, Defendant-Appellee, and Republic of Iraq, State Machinery Trading Company, Baghdad, Iraq, Central Bank of Iraq, and Bank of Rafidain, Defendants, United States of America, Intervenor-Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1348

966 F.2d 1348

17 UCC Rep.Serv.2d 1236

CENTRIFUGAL CASTING MACHINE CO., INC., Plaintiff-Appellee, v. AMERICAN BANK & TRUST CO., and Banca Nazionale del Lavoro Defendant-Appellee and Republic of Iraq, State Machinery Trading Company, Baghdad Iraq, Central Bank of Iraq, and Bank of Rafidain, Defendants United States of America, Intervenor-Appellant.

No. 91-5150.

United States Court of Appeals, Tenth Circuit.

June 11, 1992.

Douglas Letter, Appellate Litigation Counsel, Dept. of Justice, Washington, D.C. (Stuart M. Gerson, Asst. Atty. Gen., Washington, D.C., Tony M. Graham, U.S. Atty., Tulsa, Okl., William Hoffman and Susan Klavens Hutner, Office of Foreign Assets Control, U.S. Dep't of the Treasury, Washington, D.C., with him on the briefs), for intervenor-appellant.

Richard A. Schneider, of King & Spalding, Atlanta, Ga., and Terry L. Weber, of Lasorsa, Weber & Miles, P.C., Tulsa, Okl., (Paul E. Swain, III, of Boone, Smith, Davis, Hurst & Dickman, and Rodney A. Edwards and Robert S. Erickson, of Jones, Givens, Gotcher & Bogan, P.C., Tulsa, Okl., with them on the brief), for Centrifugal Casting Mach. Co., Inc., American Bank & Trust Co., and Banca Nazionale Del Lavoro, plaintiff-appellee.

Before SEYMOUR and BARRETT, Circuit Judges, and HUNTER, ^* Senior District Judge.

SEYMOUR, Circuit Judge.

The United States appeals from the judgment entered in one of two consolidated diversity actions involving a letter of credit and a standby letter of credit. The letters were issued in connection with a contract between plaintiff-appellee Centrifugal Casting Machine (CCM) and State Machinery Trading Company (SMTC), an agency of the Iraqi government, under which CCM was to provide cast ductile iron pipe plant equipment to SMTC for a total contract price of $27,390,731. The contracting parties agreed that the payment mechanism from SMTC to CCM was to be an irrevocable letter of credit for the benefit of CCM in the contract amount, out of which CCM was entitled to draw ten percent as a down payment. This letter was issued by Central Bank of Iraq and confirmed by defendant-appellee Banca Nazionale del Lavoro (BNL).

The parties further agreed that a standby letter of credit in the amount of the $2.7 million down payment would be issued on behalf of CCM for the benefit of an agent of SMTC, and would be available to repay SMTC the amount of the down payment upon the requisite proof that CCM had not performed under the contract. ¹ This standby letter was issued by BNL to defendant-appellee American Bank of Tulsa (ABT), CCM's bank, as account party, and made payable to Rafidain Bank, which in turn issued a $2.7 million guarantee to SMTC. CCM drew its down payment under the letter of credit and deposited that amount with ABT as security to protect ABT against any obligation it might incur on the standby letter of credit. Although an attempt was subsequently made on behalf of SMTC to draw on the standby letter of credit, the attempt was not accompanied by proof of nonperformance by CCM, and was not honored before the expiration date set out in that letter.

The suits below involved claims to the $2.7 million down payment by CCM, ABT, and BNL, the bank that had confirmed the letter of credit in favor of CCM and had issued the standby letter of credit in favor of SMTC. The United States intervened, asserting that Iraq had a property interest in the down payment and therefore in the money deposited by CCM in ABT. The United States claimed that the bank account was a blocked account under the regulations implementing the Executive Orders freezing assets of the Iraqi government.

The district court ruled that no valid draw had been made on the standby letter of credit, that this letter had expired by its own terms, and that CCM, ABT and BNL had no liability thereunder. ² As a result of that ruling, ABT declared that it no longer claimed an interest in the $2.7 million down payment and was granted leave to interplead the amount. The remaining parties resolved their claims to this money in a confidential settlement of disputes. Accordingly, the district court dismissed their claims against each other with prejudice, released the amount from interpleader, and ordered ABT to disperse it in accordance with the settlement. In so doing, the court rejected the claim by the United States. The United States appeals, and we affirm.

I.

Following Iraq's invasion of Kuwait on August 2, 1990, the President issued two Executive Orders blocking any transfer of property in which Iraq holds an interest. See Exec. Order No. 12,722, 55 Fed.Reg. 31,803 (1990); Exec. Order 12,724, 55 Fed.Reg. 33,089 (1990). These orders are implemented by regulations promulgated by the Secretary of the Treasury, through the Office of Foreign Assets Control. See 31 CFR §§ 575.201-.806 (1991). Under these regulations, "no property or interests in property of the Government of Iraq that are in the United States ... may be transferred, paid, exported, withdrawn or otherwise dealt in." Id. § 575.201(a).

The United States contends on appeal that the freeze of Iraq's assets furthers national policy to punish Iraq by preventing it from obtaining economic benefits from transactions with American citizens, and by preserving such assets both for use as a bargaining chip in resolving this country's differences with Iraq and as a source of compensation for claims Americans may have against Iraq. We agree that these policy considerations are compelling and that we are therefore required to construe Iraqi property interests broadly. However, we are not persuaded these policies would be furthered by construing the circumstances here to give rise to a property interest on behalf of Iraq that would not otherwise be cognizable under governing legal principles. Iraq would not be punished if denied use of an asset in which it could not claim a property interest in any event. Likewise, compensation and bargaining through use of such an asset would not be to Iraq's detriment.

We perceive the gist of the United States's argument to be that the asset at issue is a down payment Iraq made on a contract that CCM has not performed. Therefore, it is argued, Iraq has a property interest in this asset on the basis of a purported breach-of-contract claim under principles of rescission and restitution. This analysis, however, runs directly contrary to the legal principles governing the financial mechanisms chosen by the contracting parties to facilitate payments under the contract.

II.

We begin by observing that CCM received the funds at issue by drawing on an irrevocable letter of credit. We must therefore determine the particular characteristics of that financial instrument and ascertain the nature of the interest that it conveys. Because the term "letter of credit" is not defined in either the Executive Orders or the implementing regulations, we give it the meaning ordinarily attributed to it by courts and parties dealing with this document. See Propper v. Clark, 337 U.S. 472, 480, 69 S.Ct. 1333, 1338, 93 L.Ed. 1480 (1949). ³

"[A] letter of credit involves three parties: (1) an issuer (generally a bank) who agrees to pay conforming drafts presented under the letter of credit; (2) a bank customer or 'account party' who orders the letter of credit and dictates its terms; and (3) a beneficiary to whom the letter of credit is issued, who can collect monies under the letter of credit by presenting drafts and making proper demand on the issuer."

Arbest Const. Co. v. First Nat'l Bank & Trust Co., 777 F.2d 581, 583 (10th Cir.1985). A letter of credit thus involves three legally distinct relationships, that "between the issuer and the account party, the issuer and the beneficiary, and the account party and the beneficiary (this last relationship being the underlying business deal giving rise to the issuance of the letter of credit)." Id. In this case, CCM was the beneficiary of the letter which was issued by Central Bank of Iraq to fund the contract, BNL was the confirming bank which then became directly liable to CCM, ⁴ and SMTC was the bank customer or account party.

Two interrelated features of the letter of credit provide it with its unique value in the marketplace and are of critical importance in our consideration of the United States's claim here. First, "[t]he simple result [of a letter of credit] is that the issuer substitutes its credit, preferred by the beneficiary, for that of the account party." Id.; see also Republic Nat'l Bank v. Fidelity & Deposit Co., 894 F.2d 1255, 1258 (11th Cir.) (letter gives beneficiary irrevocable right to payment, not from account party, who might become insolvent or refuse to pay, but from bank), cert. denied, --- U.S. ----, 111 S.Ct. 308, 112 L.Ed.2d 261 (1990); Airline Reporting Corp. v. First Nat'l Bank, 832 F.2d 823, 826 (4th Cir.1987) (issuer replaces customer's promise to pay with its own promise to pay); Pringle-Associated Mortgage Corp. v. Southern Nat'l Bank, 571 F.2d 871, 874 (5th Cir.1978) (beneficiary's claim based on letter of credit, not on agreement between issuer and account party and not on the underlying contract). The issuing bank thus pays the beneficiary out of its own funds, and then must look to the account party for reimbursement. See generally Republic Nat'l Bank, 894 F.2d at 1257-58; Okla.Stat. tit. 12A, § 5-114(3) (issuer which has honored demand for payment entitled to immediate reimbursement).

Second, the issuer's obligation to pay on a letter of credit is completely independent from the underlying commercial transaction between the beneficiary and the account party. See Ward Petroleum Corp. v. FDIC, 903 F.2d 1297, 1299-1300 (10th Cir.1990). Significantly, the issuer must honor a proper demand even though the beneficiary has breached the underlying contract, see id. at 1299; Okla.Stat.Ann. tit. 12A, § 5-114 Okla. comment (1); even though the insolvency of the account party renders reimbursement impossible, see ...