Itek Corp. v. First Nat. Bank of Boston

• Decision Date: 22 March 1984
• Docket Number: No. 83-1594,83-1594
• Citation: 730 F.2d 19
• Parties: 39 UCC Rep.Serv. 625 ITEK CORPORATION, Plaintiff, Appellee, v. The FIRST NATIONAL BANK OF BOSTON, Defendant, Appellee. Bank Melli Iran, Defendant, Appellant.
• Court: U.S. Court of Appeals — First Circuit

Page 19

730 F.2d 19

39 UCC Rep.Serv. 625

ITEK CORPORATION, Plaintiff, Appellee, v. The FIRST NATIONAL BANK OF BOSTON, Defendant, Appellee.

Bank Melli Iran, Defendant, Appellant.

No. 83-1594.

United States Court of Appeals, First Circuit.

Argued Dec. 9, 1983.

Decided March 22, 1984.

Greg A. Danilow, with whom Daniel P. Levitt, Alan R. Friedman, Michael B. Reuben, Kramer, Levin, Nessen, Kamin & Frankel, New York City, William A. Zucker, and Gadsby & Hannah, Boston, Mass., were on brief, for Bank Melli Iran.

Thomas D. Edwards, Boston, Mass., with whom Andrew M. Higgins, Stephen M. Perry, and Casner, Edwards & Roseman, Boston, Mass., were on brief, for Itek Corp.

Before CAMPBELL, Chief Judge, BOWNES and BREYER, Circuit Judges.

BREYER, Circuit Judge.

The First National Bank of Boston ("FNBB"), at the request of Itek Corp., issued several letters of credit running in favor of Bank Melli Iran ("Melli"). Melli demanded payment from FNBB of the money that the letters promised. Itek obtained a federal district court injunction (see 12 U.S.C. Sec. 632) prohibiting FNBB from paying Melli, 566 F.Supp. 1210. Melli, the true party in interest, appeals. The basic question that Melli's appeal presents is whether its effort to obtain the money by calling the letters is "fraudulent." We find the district court's affirmative answer to this question adequately supported. And we therefore affirm its decision to issue the injunction.

I

The following, somewhat simplified, account provides the necessary factual background:

a. The basic contract. The letters of credit arise out of promises made in a 1977 contract between Itek and Iran's Imperial Ministry of War. The contract provided that Itek would make and sell high-technology optical equipment to the War Ministry at a price of $22.5 million. Iran was to make a twenty percent down payment ($4.5 million). It would pay Itek sixty percent of the total price ($13.5 million) as work progressed; it would pay the remaining forty percent upon satisfactory completion. The down payment amount would be deducted gradually from the payments due under Itek's "work-in-progress" invoices. See Contract, Appendix 3, paragraphs 1.1, 1.4.

b. The contract's bank guarantees. The contract required Itek to provide two types of bank guarantees. The first, the "down payment" guarantee, was for $4.5 million, the amount of the down payment. Its object apparently was to give the Ministry the right to obtain return of the down payment (or portions of the down payment) until Itek produced work of sufficient value to have "earned" the down payment. The second, the "good performance" guarantee was for $2.25 million, ten percent of the contract price. Its object was to protect the Ministry against a breach of contract as might occur, for example, if the goods produced were defective. These guarantees were to be issued in favor of the Ministry by an approved Iranian bank. The Ministry could call for payment under the guarantees simply by submitting a written request for payment to the bank.

Bank Melli, an instrumentality of the Iranian government, issued the guarantees in the form of five "guarantee letters." One letter was for $2.25 million; it backed "good performance." The other four letters were each for $1.125 million; they backed the down payment. Melli, as a condition for issuing them, required Itek to provide it with five similar "standby" letters of credit, issued by an American bank in Melli's favor, and payable on Melli's certification that the Ministry had required it to pay under its letters to the Ministry. The "standby" letters are the FNBB letters at issue here.

c. The contract's procedures for cancelling the guarantees. The contract contains specified procedures and conditions governing the termination of the guarantees. It states that the Ministry is to release "down payment" guarantees "within 4 weeks after the clearance of down-payments amount." Contract p 9.5. It states that the Ministry is to release the "good performance" guarantee four weeks after its final acceptance of the goods.

The contract provided for another circumstance, directly relevant here, under which the Ministry was to release the "good performance" guarantee. If the contract "is cancelled due to Force Majeure ..., all Bank Guarantees of good performance of work will be immediately released." Contract p 9.4. The contract defines "Force Majeure" to include cancellation by the United States of necessary export licenses. If force majeure occurs--if, for example, there is a war or a natural disaster, or if the United States cancels the export license--either party can cancel the contract. A party can cancel the contract on this basis, however, only if it has notified the other party of the occurrence of force majeure, the parties have been unable to agree to some resolution of the force majeure difficulty, and three months have passed since notification. The contract also stipulates that, if force majeure leads to cancellation of the contract, Itek will be paid for equipment shipped, for equipment then being manufactured, and for all services rendered to date.

The guarantee letters and the letters of credit backing them had various expiration dates. But both provided for extension upon the request of their respective beneficiaries. And some of them were apparently extended as their expiration dates approached, so that they would remain valid until the completion of the work they guaranteed. The standby letters of credit stated that they were extendable on request and that, if the issuer was "unwilling to extend" a letter, it became immediately payable. See, e.g., Record App. at 31.

d. The circumstances of cancellation. Itek's work proceeded uneventfully until Iran's government collapsed in early 1979. At that time Itek's performance was ahead of schedule, but it had not yet delivered any equipment to Iran. By February 1979, Itek had billed Iran for more than $20 million. It had received the original down payment of $4.5 million and additional payments of $6.6 million--a total of $11.1 million. Iran had consequently released the down payment guarantees to the point where there remained outstanding but one full down payment letter in the amount of $1.125 million and one partial down payment letter in the amount of $70,753.

The change of government in Iran, however, brought with it a deterioration in Iranian/American relations. In April 1979 the United States suspended Itek's export license. In May Itek notified Iran's new Ministry of National Defense about this "force majeure" problem, and, in accordance with the contract's terms, it called for consultations. These took place in Iran in August. Subsequently Itek applied for renewal of the suspended export license.

In November 1979 Iranians seized the United States Embassy in Teheran and took the Americans within it hostage. Given this fact, it is not surprising that, later that month, the United States refused to renew or to reissue the necessary export license. On December 6, 1979, Itek reported this fact to the Iranian Ministry and again invoked the contract's force majeure clause and requested consultations. No consultations took place. On February 18 and March 4, 1980, Melli cabled FNBB requesting extensions of the two remaining down-payment letters of credit, which, by their terms, expired in mid-April. On March 7, 1980 (three months after Itek had told the Ministry about the new United States refusal to grant export licenses), Itek cancelled the contract in accordance with the force majeure provisions. About one week later (on March 13) FNBB told Melli that it would not extend the down-payment letters of credit, for the contract, along with the guarantees that the letters backed, had been terminated. Melli cabled back on March 16 stating that the Ministry had demanded payment of Melli's outstanding guarantee letters and that FNBB should therefore immediately pay to Melli the standby letters of credit then outstanding--the "good performance" letter for $2.25 million and the two down-payment letters for $1.125 million and $70,753 respectively. FNBB did not honor this demand, for by that time a temporary restraining order prohibited it from doing so.

e. The court proceedings. In January 1980, before Itek cancelled the contract, it brought this suit against FNBB seeking an order requiring FNBB to tell it if Melli tried to call the letters and then to delay for several days before paying. The district court granted this order on January 19. On March 11, after Itek cancelled the contract, it asked the court to enjoin FNBB from honoring any call on the letters. The court granted a temporary restraining order. Itek then joined Melli as a defendant. In April 1981, after hearings and fact finding, the court entered a preliminary injunction forbidding FNBB to pay Melli. It accompanied the injunction with extensive findings of fact and a published opinion. Itek Corp. v. First National Bank of Boston, 511 F.Supp. 1341 (D.Mass.1981). A year later, in May 1982, it made the injunction permanent. We had to vacate the permanent injunction, however, because of a change in Treasury Department regulations that had the effect of preventing American courts from entering final judgments in Iranian letter of credit cases. Itek Corp. v. First National Bank of Boston, 704 F.2d 1 (1st Cir.1983). The district court then reinstated its preliminary injunction; and Bank Melli now appeals that decision.

Melli raises two sets of arguments. First, it claims that Itek has not shown the "irreparable harm" requisite to the award of an injunction. Second, it claims that Itek has not shown the "fraud" here necessary to stop a beneficiary from calling a letter of credit. The record before us supports the district court's rejection of these arguments. See Massachusetts Association of Older Americans v. Sharp, 700 F.2d 749, 751-52 (1st Cir.1983); National Tank Truck Carriers, Inc. v. Burke, 608...