Clarendon, Ltd. v. State Bank of Saurashtra, 101

• Decision Date: 23 February 1996
• Docket Number: No. 101,D,101
• Citation: 77 F.3d 631
• Parties: CLARENDON, LTD., Plaintiff-Appellant, v. STATE BANK OF SAURASHTRA, Defendant-Appellee. ocket 95-7145.
• Court: U.S. Court of Appeals — Second Circuit

Page 631

77 F.3d 631

CLARENDON, LTD., Plaintiff-Appellant, v. STATE BANK OF SAURASHTRA, Defendant-Appellee.

No. 101, Docket 95-7145.

United States Court of Appeals, Second Circuit.

Argued Nov. 14, 1995.

Decided Feb. 23, 1996.

Stanley McDermott III, New York City (Piper & Marbury, New York City, On the Brief), Attorneys for Plaintiff-Appellant.

Bud G. Holman, New York City (Talat M. Ansari and Cathleen K. Condren, Kelley Drye & Warren, New York City, Of Counsel), Attorneys for Defendant-Appellee.

Before: MAHONEY, LEVAL, and CABRANES, Circuit Judges.

LEVAL, Circuit Judge:

This appeal concerns an action brought by Clarendon, Ltd., as beneficiary of an unpaid letter of credit, against State Bank of Saurashtra ("SBS"), a governmental bank in India, and against Chase Manhattan Bank, N.A., as advising bank. SBS issued the letter of credit at the instance of its customer Saurashtra Steel Industries, Ltd. ("SSIL"), an Indian steel fabricator, to help finance SSIL's purchase of a shipment of steel from Clarendon. The court granted SBS's motion to dismiss under Fed.R.Civ.P. 19(b) & 12(b)(7) because it found SSIL, which was not subject to the court's jurisdiction, to be indispensable to the resolution of the action.

The district court found that the complaint alleged against SBS two different theories of liability, one asserting SBS's liability on the grounds that it failed to perform its obligation to pay Clarendon under the terms of the letter of credit ("the letter-of-credit theory"), the second based on SBS's wrongful failure to remit to Clarendon monies SBS had collected from SSIL for Clarendon's benefit ("the collection theory"). Believing that Clarendon could not prevail on the letter of credit theory because of its noncompliance with the terms of the letter of credit (consisting primarily of discrepancies in the documentation it presented), the district court treated the complaint solely as if it were based on the collection theory. The court found that SSIL was indispensable to the litigation of the collection theory, but could not be joined in the lawsuit because it was not amenable to process. Following the entry of judgment dismissing the complaint, plaintiff moved for reconsideration, tendering an affidavit on behalf of SSIL agreeing to submit to the court's jurisdiction. Ruling that it could not properly consider facts that had not been before the court at the time that it rendered judgment, the court declined to alter its judgment. For the reasons explained below, we vacate the judgment and remand for further proceedings.

Background

Because our holding depends more on considerations of procedure than on the merits of the dispute, we set forth a somewhat attenuated version of the complex facts. Furthermore, as there has never been an adjudication of the facts, we rely largely on the facts alleged in Clarendon's complaint.

Clarendon is a Swiss corporation, with offices in Stamford, Connecticut, which deals in bulk commodities. In May 1989, Clarendon entered into a contract to sell a cargo of scrap steel to SSIL, for shipment to India. The contract provided for payment under a 180-day irrevocable documentary letter of credit. A.7. On June 12, 1989, SBS issued, at SSIL's request, a 180-day irrevocable letter of credit in Clarendon's favor for approximately $2.2 million dollars. Meanwhile, on June 8, 1989, Clarendon had caused the scrap steel to be loaded on board the M/V Olympic Mentor at Liverpool, England, for shipment to SSIL in Bhavnagar, India. When the cargo arrived in India five weeks later, Clarendon had not yet assembled and transmitted all the necessary title documents. Nonetheless, Clarendon authorized the carrier by letter of indemnity dated June 30, 1989, to discharge the cargo to SSIL at Bhavnagar.

In August 1989, Clarendon presented the documents to Chase, which was acting as SBS's advising bank. Clarendon pointed out to Chase that there were discrepancies between the documents presented and those required under the letter of credit. For example, while the letter of credit required bills of lading dated on or after June 9, 1989, the bills of lading presented by Clarendon were dated June 8, 1989. Clarendon believed those discrepancies were of no commercial importance; it expected SSIL to waive the discrepancies and authorize SBS to pay. Clarendon instructed Chase to send the documents to SBS "with clear instructions that [SBS is] not to release the documents until all discrepancies have been waived and documents have been accepted." Chase, however, deviated from these instructions. Chase sent the documents to SBS "on a collection basis," telling SBS that the "documents should not be released to [SSIL] until accepted by them." Chase's message added, "On acceptance, please authorize us ... to claim reimbursement at maturity as per L/C [letter of credit] terms." SBS responded to Chase that it would hold the documents strictly on a collection basis and that Chase was not authorized to claim reimbursement upon maturity of the letter of credit. Chase failed to advise Clarendon of SBS's apparent disclaimer of its obligation to pay the letter of credit at maturity.

SSIL meanwhile deposited moneys with SBS covering its obligations as account party of the letter of credit. The complaint alleges that SSIL's deposits with SBS ultimately exceeded the amount of the letter of credit, but that SBS, without advising SSIL, applied the deposits to other indebtedness of SSIL, rather than to the letter of credit. Also, in November 1989, without informing Clarendon, SBS released the letter of credit documents it had received from Chase to SSIL in exchange for SSIL's acceptance of Clarendon's drafts, but without obtaining SSIL's waiver of the discrepancies as against the requirements of the letter of credit.

In December 1989, after expiration of the 180-day duration of the letter of credit, SBS cabled Chase that the "documents ... held by us on collection basis [and] due for payment on 4th December 1989 remain unpaid." SBS then notified SSIL that it had used SSIL's deposits to set off SSIL's other debts owed to the bank. At Clarendon's request, Chase made repeated demands on SBS for payment. SBS denied that it had received money from SSIL intended as payment for Clarendon's steel shipment. SSIL meanwhile became insolvent and fell under the administration of an Indian bankruptcy tribunal under India's Sick Companies Act. See The Sick Industrial Companies (Special Provisions) Act, 1985 (India). Neither Chase nor Clarendon received payment for any part of the purchase price of the shipment of steel from SBS or SSIL.

Proceedings Below

Clarendon instituted this action in the district court against Chase and SBS. Against Chase, Clarendon pleaded negligence (based primarily on Chase's instructions to SBS and its failure to inform Clarendon of SBS's disclaimer of its obligations under the letter of credit) and breach of contract. Against SBS, as noted above, Clarendon pleaded both SBS's failure to make the payment due under the terms of the letter of credit and SBS's failure to remit funds it collected from SSIL for payment to Clarendon. SBS then moved pursuant to Fed.R.Civ.P. 12(b)(7) and 19 to dismiss the complaint for failure to join SSIL as an indispensable party. ¹

The district court analyzed the "indispensable party" motion in the following fashion. Recognizing that Clarendon had pleaded both a letter-of-credit theory and a collection theory, the court asserted that it first needed to determine "the essential nature of the action, which is critical to a resolution of the motions."

Clarendon and SBS posit opposing characterizations of the nature of this suit that are critical to reconcile prior to evaluating the merits of the motions. Clarendon asserts that this suit involves purely a letter-of-credit transaction, and so the rules governing international letters of credit apply. SBS maintains, conversely, that this is a collection case, and therefore the rules of collection govern. This becomes important to the motions at hand because the letter-of-credit and collection laws differ as to both the parties considered necessary to an action and in the forum best suited to applying the law.

The court acknowledged that a letter of credit represents a contract directly between the issuing bank and the beneficiary, and that a suit to enforce the bank's duty to pay does not require that the account party be joined. The court went on to note, however, that the "beneficiary must strictly comply with the terms of the letter of credit in order for the bank to incur an obligation to pay." In part because of documentary discrepancies, the court found that "Clarendon departed from the terms of the L/C. Therefore, as a matter of law, SBS's absolute duty to pay Clarendon under the letter of credit does not arise and letter-of-credit rules cannot control." The court then determined "that the rules governing collection apply to this dispute." Analyzing those rules, the court determined that SSIL was indispensable to the resolution of the collection dispute, and that since SSIL could not be joined, the action should be dismissed. The court decided the motion on March 21, 1994, and entered judgment on March 24, 1994, dismissing the action for failure to join a necessary and indispensable party.

On March 30, 1994, Clarendon moved to vacate or amend the judgment. In support of its motion, it submitted the affidavit of Bipin Paymaster, the Managing Director of SSIL, signed in India on March 25, 1994, undertaking that SSIL "will agree to be bound by all judgments entered in this case, as if it were a party to this case.... [and] [i]f, notwithstanding SSIL's agreement and covenant as aforesaid, SBS continues to insist that SSIL become a party to this case, then SSIL will submit to this court's jurisdiction and appear and answer any claim that SBS should assert against it." The district court denied the motion, ruling that...