Guangzhou Consortium Display Prod. Co. v. PNC Bank

• Decision Date: 14 February 2013
• Docket Number: Civil Action No. 11–5–DLB–JGW.
• Citation: 924 F.Supp.2d 800
• Parties: GUANGZHOU CONSORTIUM DISPLAY PRODUCT COMPANY, LTD., et al., Plaintiffs v. PNC BANK, NATIONAL ASSOCIATION, et al., Defendants.
• Court: U.S. District Court — Eastern District of Kentucky

924 F.Supp.2d 800

GUANGZHOU CONSORTIUM DISPLAY PRODUCT COMPANY, LTD., et al., Plaintiffs

v.PNC BANK, NATIONAL ASSOCIATION, et al., Defendants.

Civil Action No. 11–5–DLB–JGW.

United States District Court,

E.D. Kentucky,

Northern Division,

at Covington.

Feb. 14, 2013.

Todd J. Flagel, Allison Bisig Oswall, James Papakirk, Flagel & Papakirk LLC, Cincinnati, OH, Gregory W. McDowell, Gregory W. McDowell, P.S.C., Florence, KY, for Plaintiffs.

Byron E. Leet, Christopher Tyson Gorman, Cornelius E. Coryell, II, Rania Marie Basha, Wyatt, Tarrant & Combs, LLP, John Shannon Bouchillon, P. Blaine Grant, Hayden Craig & Grant PLLC, Louisville, KY, Alex Hood, Karl Geercken, Matthew Decker, Alston & Bird LLP, New York, NY, for Defendants.

MEMORANDUM OPINION AND ORDER

DAVID L. BUNNING, District Judge.

I. INTRODUCTION

This action primarily concerns a loan security instrument known as a “standby letter of credit.” In this case, a Chinese bank loaned money to the wholly-owned Chinese subsidiary of a Kentucky corporation. To secure that loan, the Kentucky corporation obtained a standby letter of credit from an American bank. As explained below, the Chinese bank eventually demanded payment from the American bank under the letter. The American bank made payment, but because of a currencyconversion problem, the Chinese bank never effectively received the payment. Consequently, Plaintiffs defaulted on their loan and brought the instant lawsuit.

This matter is currently before the Court on the Motion to Dismiss Plaintiffs' First Amended Complaint (Doc. # 57) filed herein by the Chinese bank, Defendant Standard Chartered Bank (China) Limited (hereinafter “Standard Bank”). This motion is fully briefed and ripe for review. ( See Docs. # 57–1, 68, & 79). The central question raised in the instant motion is whether Standard Bank subjected itself to personal jurisdiction in Kentucky by becoming a beneficiary of the standby letter of credit issued on behalf of a Kentucky corporation. Because the Court finds that merely becoming a beneficiary of a standby letter of credit does not subject a party to personal jurisdiction in a particular forum, the Court will grant Standard Bank's Motion to Dismiss.

II. FACTUAL AND PROCEDURAL BACKGROUND

The following facts are taken from Plaintiffs' First Amended Complaint (Doc. # 23), the Affidavit of Roger Schreiber (Doc. # 68–1) submitted by Plaintiffs, and the Affidavit of Yunni Tang (Doc. # 57–2) submitted by Defendant Standard Bank.

A. The Parties

Plaintiffs are a Kentucky corporation and its wholly-owned Chinese subsidiary. ¹ The Kentucky corporation is named Consortium Companies, Incorporated, and has its principal place of business in Kentucky. The Chinese subsidiary is named Guangzhou Consortium Display Product, Ltd., and has its principal place of business in China. The Court will refer to the Kentucky corporation as “Consortium USA” and to the subsidiary as “Consortium China.” It is important to note that the subsidiary, Consortium China, is organized under Chinese law and is considered an independent person under Chinese law.

Defendant PNC Bank, National Association ² is a banking association established under United States law, with its principal place of business in Pennsylvania. Defendant Standard Bank is a foreign bank incorporated in China with its principal place of business in China.

B. The Standby Letter of Credit

In the summer of 2007, Consortium China entered into a loan agreement with Standard Bank for over $1 million. To secure the loan, Standard Bank required Consortium China to procure a standby letter of credit. Acting on Consortium China's behalf, Consortium USA applied to PNC for a standby letter of credit. PNC approved the application and issued the “Irrevocable Standby Letter of Credit” (Doc. # 8–5) in August of 2007. The Letter named Standard Bank as the beneficiary. This meant that if Consortium China did not repay its loan to Standard Bank, Standard Bank could demand that PNC pay it off instead.

C. The Problem with the Standby Letter of Credit

As early as 2008, Standard Bank became concerned that Consortium China did not have enough capital to meet Chinese regulatory requirements. Accordingly, Standard Bank asked Consortium USA to sign a letter of undertaking promising to inject additional capital into Consortium China. Consortium USA agreed and executed a Letter of Undertaking in 2008. Nevertheless, by early 2010, Consortium China remained undercapitalized. Around this time, Plaintiffs learned that Consortium China's insufficient capital might cause a serious problem. Standard Bank informed Plaintiffs that under Chinese regulations, it could not convert U.S. dollars to Chinese Renmibi on behalf of a company that was undercapitalized. This meant that any payment PNC made to Standard Bank under the Letter could not be converted into Chinese currency and would therefore be ineffective to pay off Consortium China's loan.³

Around the same time, PNC notified Consortium USA that it would not renew the Letter, which was set to expire in July of 2010. Plaintiffs knew that before the Letter expired, Standard Bank would demand that PNC pay off Consortium China's loan. They also knew that if PNC attempted to make such a payment, it would be ineffective due to the currency conversion problem, and Consortium China would default on its loan.

D. The Solution: the Capital Contribution Authorization

To circumvent this problem, all parties (including Standard Bank, PNC, and both Consortium Companies) collaborated to devise a solution, ultimately agreeing on an alternative payment mechanism. Since PNC could not pay Standard Bank directly under the Letter, it would pay them indirectly. PNC would send Consortium China an amount of money equivalent to the outstanding balance on the loan, and Consortium China would then immediately turn around and use those funds to pay off its loan with Standard Bank. The plan's intent was to avoid a demand for payment under the Letter and to repay Consortium China's loan, while also discharging PNC's obligations to Standard Bank under the Letter.

Plaintiffs allege that PNC commemorated this plan in a document entitled “Capital Contribution Authorization.” (Doc. # 23–1). This document provided that:

“It is hereby acknowledged that under the authorization of Consortium Companies, Inc. and the credit facility and letter of credit previously established for Consortium Companies, Inc., PNC Bank, National Association is wiring funds on behalf of Consortium Companies, Inc. of USD 1,600,000 to Guangzhou Consortium Display Product Company Ltd. which Consortium Companies, Inc. advises it intends as capital.”

(Doc. # 23–1). Plaintiffs confirmed with PNC and Standard Bank that the Capital Contribution Authorization was acceptable, and then informed PNC that it could proceed with the transaction.

E. PNC's Failure to Follow the Capital Contribution Authorization

It is undisputed that PNC never wired the funds to Consortium China as contemplated by the Capital Contribution Authorization. Consequently, Standard Bank demanded payment from PNC under the Letter in the amount of $1,760,000, and PNC complied, making payment on July 9, 2010. As anticipated, due to the currency conversion problem, Standard Bank never effectively received this payment. Consortium China not only defaulted on its loan, but was exposed to double liability, since it now owed $1,760,000 to PNC as well. Plaintiffs contend that these events effectively shut down their Asian operations.

F. The Instant Litigation

Plaintiffs filed their original complaint in Boone Circuit Court on January 3, 2011. (Doc. # 1–1, at 8–9). On January 10, 2011, Defendant PNC removed to federal court, on the basis of diversity jurisdiction. (Doc. # 1). Plaintiffs later filed their First Amended Complaint on April 27, 2011. (Doc. # 23). By their First Amended Complaint (Doc. # 23), Plaintiffs allege eight counts; however, only Count 2 for breach of fiduciary duty is alleged against Defendant Standard Bank. The Court's jurisdiction is premised on diversity of citizenship under 28 U.S.C. § 1332.

On July 11, 2012, Defendant Standard Bank filed the instant Motion To Dismiss Plaintiffs' First Amended Complaint (Doc. # 57) which is ripe for decision.

III. ANALYSIS

Because a standby letter of credit stands at the heart of this litigation, it is important to understand what a standby letter of credit is and how it works. A standby letter of credit is a security device, which operates like a surety or performance bond. Lord, Richard A., Williston on Contracts, § 2.23 (4th ed. 1993). It differs from a commercial letter of credit, which substitutes as the primary means of payment in a sale of goods. In re Graham Square, Inc., 126 F.3d 823, 827 (6th Cir.1997). A standby letter of credit is used secondarily in a nonsales transaction “as a guarantee against default on contractual obligations.” Id. (quotation and citation omitted). It “substitutes the financial strength of the issuing bank for that of the applicant.” 50 Am. Jur. 2d Letters of Credit § 9 (2006).

The most crucial aspect of a standby letter of credit is the so-called “independence rule.” The independence rule holds that an issuing bank's duty to pay the beneficiary is not dependent on whether the customer failed to perform the underlying contract. Williston, supra. As long as the beneficiary demands payment in the form specified by the letter, the bank must pay the beneficiary. Id. “The bank is not concerned with whether the [customer] has in fact performed; its only concern is [ ] whether the [beneficiary's] demand for payment complies with the letter of credit.” Id. “Among other things, this means that the [bank] can generally ignore claims by its customer that the beneficiary has breached the contract....” Id. The independence rule thus “requires that a letter of credit be kept separate from the underlying contract that generates it. This ‘insulates the letter of credit from...