Sheerbonnet, Ltd. v. American Exp. Bank Ltd.

Decision Date22 February 1994
Docket NumberNo. 262,D,262
PartiesSHEERBONNET, LTD., Plaintiff-Appellant, v. AMERICAN EXPRESS BANK LTD., Defendant-Appellee. ocket 93-7330.
CourtU.S. Court of Appeals — Second Circuit

Jack P. Levin, New York, NY (Lawrence A. Darby, III, David W. Haller, Howard Darby & Levin, New York, NY, of counsel), for Plaintiff-Appellant.

Joseph T. Baio, New York, NY (John J. Halloran, Jr., Carl L. Stine, Joanne M. Chormanski, Willkie Farr & Gallagher, New York, NY, of counsel), for Defendant-Appellee.

Before: VAN GRAAFEILAND, PRATT, and WALKER, Circuit Judges.

GEORGE C. PRATT, Circuit Judge:

This is one of many cases arising out of the seizure in July 1991 of the assets of the Bank of Credit and Commerce International ("BCCI"). Despite its having secured one of the most reliable methods of payment--an irrevocable letter of credit from a Swiss bank--Sheerbonnet, Ltd., stymied by the chance convergence of its "payment due" date with the shutdown of BCCI's worldwide operations, never was paid for work it did. While the payment was on its way from New York to Sheerbonnet's bank account in London, it was swept up in the state regulations that govern the assets of failed banking institutions. By a diversity action in the United States District Court for the Southern District of New York, Loretta A. Preska, Judge, Sheerbonnet seeks damages from American Express, one of the banks through which Sheerbonnet's payment was being transferred. The district court dismissed the complaint in deference to ongoing state proceedings under the abstention principles of Burford v. Sun Oil Co., 319 U.S. 315, 63 S.Ct. 1098, 87 L.Ed. 1424 (1943). For the reasons set forth below, we reverse.

FACTS AND BACKGROUND

In October 1990 Sheerbonnet, a British company, entered into a contract to sell troop carriers to Hady Establishment ("Hady"), a Saudi Arabian company, for the Allied forces to use in the Persian Gulf War. To pay for the carriers, Hady obtained an irrevocable letter of credit in favor of Sheerbonnet from a Swiss bank, Banque Scandinave. The $14,080,000 purchase price was to be paid in two installments--10 percent as a down payment and the remaining 90 percent due 60 days after the bill of lading date.

Sheerbonnet received the down payment and fulfilled all of its obligations under the contract. As a result, the final installment of $12,441,600 was due on July 5, 1991. Sheerbonnet wanted the payment, which was to be made in American dollars, deposited to its account with BCCI in London ("BCCI London"). Accordingly, on July 3, 1991, Banque Scandinave informed BCCI London that $12,441,600 would be credited to BCCI London's account 52985 with the American Express Bank in New York ("American Express" Due to an ill-timed turn of events, however, Sheerbonnet never received the final installment. Early in the morning of July 5, 1991, regulators in England and Luxembourg suspended the operations of BCCI, S.A. On the same day in the United States, before the start of business on the East Coast, the Federal Reserve Bank advised several banks, including American Express, that BCCI worldwide had been closed and that BCCI's New York Agency would be seized. At 9 a.m. E.D.T., the Superintendent of Banks of the State of New York ("Superintendent") closed the New York Agency of BCCI and announced the seizure of all BCCI "business and property" located within New York.

) for value on July 5, 1991. Banque Scandinave then directed its correspondent bank in New York, Northern Trust International ("Northern Trust"), to make the transfer on July 5.

Less than a quarter of an hour later, American Express received from Northern Trust a payment message for the transfer of $12,441,600 through American Express to BCCI London, in accordance with Banque Scandinave's July 3 telex. Although it already knew that BCCI's operations, in New York and elsewhere, had been suspended, American Express accepted the message and "credited" BCCI London's account 52985. Because BCCI's New York assets had been frozen, the money remained in New York.

Acting under the authority granted him by section 606(4)(a) of New York's Banking Law, the Superintendent initiated a liquidation proceeding in the Supreme Court of New York ("Liquidation Court") to dispose of BCCI's assets. In March 1992 the Superintendent petitioned the Liquidation Court for an order compelling several New York banks, including American Express, to turn over funds of BCCI that they held on deposit, net of the banks' setoffs. After the Superintendent and the banks reached a settlement agreement, the Liquidation Court entered a turnover order on April 27, 1992, which directed the banks to remit to the Superintendent funds in the New York accounts of BCCI, net of claimed setoffs and American Express did not turn over to the Superintendent any of the funds from the BCCI London account, because it claimed a right to those funds as a setoff against debts owed to it by BCCI. Thus, the money originally destined for Sheerbonnet ended up not in the hands of the buyer or the seller, but of a bank whose only role was to transfer the funds.

debits. Upon such remittance, the turnover order provided, the banks would be "discharged from liability with respect to claims for funds of BCCI, S.A. located in New York".

In October 1992 Sheerbonnet sued American Express in the United States District Court for the Southern District of New York, alleging conversion, tortious interference with contract, and unjust enrichment. In essence, Sheerbonnet claimed that American Express should not, without notifying either the sender or the intended recipient, have accepted the funds from Northern Trust or "credited" them to BCCI London's account when it knew that the BCCI assets had been frozen. In addition, Sheerbonnet argued that American Express "made a conscious decision to turn its knowledge and position [in the transfer transaction] to its own advantage", because American Express knew that under New York law it would be able to retain the funds as a setoff against BCCI's debts to American Express.

Judge Preska dismissed Sheerbonnet's complaint, holding that under Burford v. Sun Oil Co., 319 U.S. 315, 63 S.Ct. 1098, 87 L.Ed. 1424 (1943), abstention was required in deference to the state liquidation proceedings. Sheerbonnet now appeals.

DISCUSSION

At the outset, we note that we review the decision to abstain for abuse of discretion. The underlying legal questions, however, are subject to plenary review. De Cisneros v. Younger, 871 F.2d 305, 307 (2d Cir.1989).

American Express urges us to affirm the district court's decision to abstain under the Burford doctrine or, in the alternative, to hold that abstention was proper under the principles articulated in Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976), and Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983). We address each contention in turn.

A. Burford Abstention

The Burford doctrine requires federal courts to abstain from deciding questions of state law when federal review would disrupt a state's efforts to establish a coherent policy on a matter of substantial importance to the state. See Colorado River, 424 U.S. at 814, 96 S.Ct. at 1244; City of Hartford v. Chase, 942 F.2d 130, 136 (2d Cir.1991); Alliance of Am. Insurers v. Cuomo, 854 F.2d 591, 599 (2d Cir.1988).

In New Orleans Public Service, Inc. v. Council of New Orleans, 491 U.S. 350, 109 S.Ct. 2506, 105 L.Ed.2d 298 (1989), the Supreme Court capsulized the principles underlying the Burford doctrine.

Where timely and adequate state-court review is available, a federal court * * * must decline to interfere with the proceedings or orders of state administrative agencies: (1) when there are "difficult questions of state law bearing upon public problems of substantial public import whose importance transcends the result in the case at bar"; or (2) where the "exercise of federal review of the question in a case and in similar cases would be disruptive of state efforts to establish a coherent policy with respect to a matter of substantial public concern."

Id. at 361, 109 S.Ct. at 2514 (quoting Colorado River, 424 U.S. at 814, 96 S.Ct. at 1244).

In deciding to abstain, Judge Preska adopted Judge Sand's reasoning in Bankamerica International v. Bank of Credit & Commerce International S.A., No. 91 CIV 4913, 1992 WL 88204, 1992 U.S.Dist. LEXIS 5137 (S.D.N.Y. Apr. 17, 1992) (Bankamerica ) another case that...

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