Nissho-Iwai American Corp. v. Kline

Decision Date31 May 1988
Docket NumberNo. 87-2902,NISSHO-IWAI,87-2902
Citation845 F.2d 1300
PartiesAMERICAN CORPORATION, Plaintiff-Appellee, v. R. Sukarno KLINE, Individually and d/b/a Frankenburg Import-Export Ltd., Defendants-Appellants.
CourtU.S. Court of Appeals — Fifth Circuit

Howard R. Birnbach and Martin Sulkow, New York City, for R. Sukarno Kline and Frankenburg Import-Export.

Paul E. Galvin, Kathleen J. St. John, Dallas, Tex., for plaintiff-appellee.

Appeals from the United States District Court for the Southern District of Texas.

Before POLITZ, KING and SMITH, Circuit Judges.

JERRY E. SMITH, Circuit Judge:

In this appeal from a final judgment incorporating a partial summary judgment on the issue of liability, appellants Rukmini Sukarno Kline and Frankenburg Import-Export Ltd. contend that the court below abused its discretion in not reinstating their pleadings, stricken by a state court prior to removal of this case. Appellants also assert--contrary to a finding below--that evidence in the record is competent to raise issues of material fact precluding summary judgment. We AFFIRM.


Appellant Rukmini Sukarno Kline ("Kline") was sole owner of appellant Frankenburg Import-Export Ltd. ("Frankenburg-Kansas"), a Kansas corporation registered in Mexico as a middleman-supplier of steel products to that country. In December 1978, Petroleos Mexicanos ("Pemex") accepted Kline's bid to supply Pemex with some 93,000 meters of steel oil field pipe, and in March 1979 forwarded Frankenburg-Kansas a purchase order (hereinafter "the Pemex purchase order") requesting various types and quantities of pipe for which Pemex was willing to pay approximately $5.2 million.

To obtain assistance in locating a manufacturer of pipe for resale to Pemex, Kline entered into an agreement with Aston Oilfield Supply Co. ("Aston") and its principals, Richard Neal, Cliff Douglas, and Bud Franklin ("the Aston group"). Under this agreement, Aston and Kline each became fifty percent owners of Frankenburg Import-Export Limited ("Frankenburg-Cayman"), a Cayman Island corporation formed to locate a supplier to fill the Pemex purchase order.

In February 1980, after Pemex agreed to a price increase consonant with world market prices, negotiations between the Aston group and representatives of appellee Nissho-Iwai American Co. ("Nissho") resulted in a sales confirmation agreement according to which Nissho contracted to sell 92,000 meters of pipe to Frankenburg-Cayman for approximately $5.6 million. This agreement was made contingent on a direct payment arrangement that would be consummated between Pemex and the Bank of Tokyo, where Nissho was a customer.

In June 1980, a direct payment arrangement was finalized between Nissho, Pemex, and Richard Neal on behalf of Frankenburg-Cayman. This so-called "Lock Box Agreement" provided that Pemex would issue a $5.6 million company check made payable to Frankenburg-Cayman's order and send it to a lock box in New York under the control of the Bank of Tokyo Trust Company.

In the meantime, Kline sent a letter to the Bank of Tokyo Trust Company authorizing it to collect Pemex's check and to credit the proceeds to Nissho's account. She also executed an Assignment and Security Agreement on behalf of Frankenburg-Kansas, granting Nissho a security interest in monies she might receive from Pemex pursuant to the Pemex purchase order. This Security Agreement further provided that she would receive such payment as "trustee" for Nissho and deliver it immediately thereafter "without commingling."

Throughout June 1980, Nissho shipped the pipe to Veracruz and delivered the original bills of lading and other shipping documents to Frankenburg-Cayman. These documents were forwarded to Pemex on June 26. Before Pemex could issue the check, however, and without the knowledge of Nissho, Kline sent a letter to the Houston office of Pemex instructing Pemex to make its check payable to Frankenburg-Kansas and to hold it for her to pick up personally. She also demanded possession of the shipping documents representing title to the pipe. Pemex responded that it was bound under the Lock Box Agreement to send the check to New York, and could not do otherwise without first receiving joint instructions from Nissho and Frankenburg-Cayman. Kline thereupon insisted that the original Pemex purchase order had been issued to Frankenburg-Kansas, making her company its sole owner.

Pemex capitulated. On August 7, 1980, a check for $5,584,392.04 was issued payable to Frankenburg-Kansas, and the shipping documents were placed at Kline's disposal. On August 8, Kline went to Pemex's Houston office, took possession of the documents, and exchanged them for the check. She deposited it in Frankenburg-Kansas's account with Chase Manhattan Bank in New York and promptly withdrew the proceeds. Approximately $1.5 million she later spent as her personal funds, and the rest she secreted in an as-yet-undisclosed Lichenstein or Swiss bank.

This lawsuit ensued. In January 1981, Nissho filed its petition in Texas state district court alleging counts against Kline for breach of contract, fraud, and misappropriation of trust funds. The significant aspect of the state court proceedings for purposes of this appeal is the state judge's December 7, 1981, order striking Kline's defenses and counterclaims in their entirety as a sanction for abusing the discovery process. Kline twice moved the state court to reinstate her pleadings, which motions were denied.

In August 1982, Pemex was impleaded as a third party defendant and removed the case to federal district court. The following month, Kline moved to amend (i.e., reinstate) her pleadings. Before the court could rule on this motion, Nissho moved for partial summary judgment on grounds that presupposed reinstatement of all of Kline's defenses. Nissho argued, among other things, that Kline had incurred liability for the amount of the check proceeds under both the sales confirmation and security agreements. In reply to Kline's response to Nissho's motion, Nissho objected to Kline's affidavit--the linchpin of her summary judgment proof--as unsworn.

In October 1983, the court granted Nissho's motion from the bench and, in a written order dated July 5, 1984, declared as its rationale "the reasons stated in plaintiff's moving papers." Meanwhile, Kline's motion to file an amended answer was postponed to enable the parties to rebrief the issue; this motion was subsequently denied on December 1, 1983. The case then proceeded to trial on the issue of damages, resulting in a money judgment for Nissho. 1

In its brief, Nissho correctly points out that appellants cannot secure a reversal in this case unless we determine (1) that the district court abused its discretion in not permitting appellants to reinstate their defenses, and (2) that such defenses, if reinstated, raise issues of material fact precluding summary judgment. Since we now hold that the district court did not abuse its discretion and that appellants' summary judgment proof is incompetent, we affirm the judgment of the district court without reaching the merit of appellants' defenses.


One issue raised by this appeal is whether any deference is owed to an interlocutory state court order once a case has been removed to federal court. In determining not to permit appellants to reinstate their stricken pleadings, the district court deferred to the state court's imposition of such sanction as being "supported by the record." Additionally, the district court considered itself bound to do so by the "spirit and letter" of both 28 U.S.C. Sec. 1450 and the Supreme Court's interpretation thereof in Granny Goose Foods, Inc. v. Brotherhood of Teamsters, 415 U.S. 423, 94 S.Ct. 1113, 39 L.Ed.2d 435 (1974). Language in the Granny Goose Foods opinion figuring prominently in the district court's analysis states that section 1450 was designed to ensure "that interlocutory orders entered by the state court that protect the various rights of the parties will not lapse upon removal." 415 U.S. at 437, 94 S.Ct. at 1123. The question here, however, is not whether the order will lapse during transition from state to federal court, but rather, whether its origin in state court sets it apart from any interlocutory order a federal court may decide to reconsider.

For reasons stated below, we decline to read section 1450 as imposing comity restraints, and we thus agree with Kline that Granny Goose Foods mandates no predetermined level of deference which a federal court must observe in reconsidering an interlocutory state court order. However, we do not accept Kline's conclusion that the federal court abuses its discretion whenever, as was done below, it permits the state court order to stand on the basis of the record developed by the state court.

Interlocutory state court orders are kept in force upon removal of a case to federal court by 28 U.S.C. Sec. 1450, which in pertinent part states:

Whenever any action is removed from a state court to a district court of the United States ... [a]ll injunctions, orders, and other proceedings had in such action shall remain in full force and effect until dissolved or modified by the district court.

In Granny Goose Foods, the Supreme Court interpreted section 1450 to give interlocutory state court orders no greater "force and effect" than they would have obtained had the case remained in state court. 415 U.S. at 436-37, 94 S.Ct. at 1122-23. Rather, by ensuring these orders do not lapse upon removal, the statute facilitates the federal court's taking the case up "where the state court left it off." Id. at 437, 94 S.Ct. at 1123 (quoting Duncan v. Gegan, 101 U.S. (11 Otto) 810, 812, 25 L.Ed. 875 (1882)). The federal court accepts the case in its current posture "as though everything done in state court had in fact been done in the federal court." Savell v. Southern Ry., 93 F.2d 377, 379 (5th Cir.1937) (construing Duncan...

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