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LEONARD A. FEINBERG, INC. v. CENTRAL ASIA CAPITAL

May 1, 1997

LEONARD A. FEINBERG, INC. t/a MR. NOAH
v.
CENTRAL ASIA CAPITAL CORPORATION, LIMITED and FASHION WILL, LIMITED



The opinion of the court was delivered by: PADOVA

 Padova, J.

 May 1, 1997

 Table of Contents

 I. Factual Background

 II. Standard of Review

 III. Discussion

 
A. Choice of Law
 
B. Letters of Credit
 
1. Generally
 
2. The Independence Principle
 
C. Article 5
 
1. Scope of Article 5
 
2. Definitions
 
(a). Bank Classifications
 
(b). Obligations Imposed
 
(c). Central Asia's Classification
 
3. Does Article 5 Apply?
 
(a). Central Asia's Position
 
(b). Feinberg's Position
 
(c). Applicability Conclusion
 
D. Feinberg's Case
 
E. Common Law Claims
 
1. Fraud
 
2. Conversion
 
3. Civil Conspiracy
 
4. Tortious Inducement (Interference With Contractual Relations)
 
5. Negligent Misrepresentation
 
F. RICO
 
1. RICO Analysis
 
(a). Predicate Acts
 
(b). Continuity
 
(c). "Enterprise"
 
(d). Injury
 
(e). Fraud
 
(f). Conspiracy

 IV. Conclusion

  Plaintiff, Leonard A. Feinberg, Inc. ("Feinberg"), a Pennsylvania corporation, brings suit against two Hong Kong corporations, Central Asia Capital Corporation, Limited ("Central Asia") and Fashion Will, Limited ("Fashion Will"). *fn1" Before the Court is Central Asia's Motion for Summary Judgment filed pursuant to Fed. R. Civ. P. 56(c). For the following reasons, the Court will grant in part and deny in part Central Asia's Motion.

 The Court remarks preliminarily that it faces an issue of first impression: specifically, whether the customer of a letter of credit may maintain statutory and common law causes of action against a bank authorized by the issuing bank under a red clause to advance funds to the beneficiary of that letter of credit.

 I. Factual Background

 Feinberg imports and sells clothing in the United States, and Fashion Will supplies Feinberg with both raw materials and finished garments. In March, 1995, Feinberg contracted with Fashion Will to purchase 30,000 dozen cotton rompers. *fn2" Fashion Will requested that Feinberg obtain a letter of credit naming Fashion Will as the beneficiary. On March 28, 1995, Feinberg caused Meridian Bank ("Meridian"), located in Philadelphia, Pennsylvania, to issue a letter of credit ("Letter 1") in the amount of $ 1,000,000, naming Fashion Will as the beneficiary. (See Pl.'s Mem. Opp. Def.'s Mot. Summ. J. Ex. 9 ("Pl.'s Mem.")). Under the terms and conditions of Letter 1, after Fashion Will presented specific documents to Meridian indicating that Fashion Will was making a shipment of merchandise to Feinberg, Meridian would provide Fashion Will with the purchase price for the merchandise. Under Letter 1, Feinberg remained ultimately liable to Meridian.

 On March 30, 1995, Fashion Will asked Feinberg to modify Letter 1 by adding a "red clause." Fashion Will told Feinberg that Fashion Will could not complete Feinberg's order without the red clause. The red clause provided:

 
UNDER "OTHER TERMS / INSTRUCTIONS, " PLEASE INCLUDE 'RED CLAUSE' TERMS: NEGOTIATIONS UNDER THIS LETTER OF CREDIT ARE RESTRICTED TO CENTRAL ASIA CAPITAL CORP. LTD., HONG KONG. RED CLAUSE FACILITY: CENTRAL ASIA CAPITAL CORP. LTD. HONG KONG AUTHORIZED TO MAKE SIXTY PERCENT ADVANCES UNDER THIS LETTER OF CREDIT (SUCH ADVANCES REDUCE AVAILABLE BALANCE HEREUNDER) TO FASHION WILL LTD. ONLY (NOT TRANSFEREES) AVAILABLE BY FASHION WILL LET. SIGHT DRAFT ON CENTRAL ASIA CAPITAL CORP. LTD. HONG KONG FOR THE AMOUNT OF THE ADVANCE AND FASHION WILL LTD. WRITTEN UNDERTAKING ADDRESSED TO LEONARD A. FEINBERG, INC. STATING 'WE HEREBY ACKNOWLEDGE RECEIPT OF USD600000.00 REPRESENTING AN ADVANCE PAYMENT UNDER LETTER OF CREDIT NO. 00499573 ISSUED BY MERIDIAN BANK. WE HEREBY CERTIFY THAT THESE FUNDS WILL BE USED TO PURCHASE RAW MATERIAL OF FINISHED PRODUCTS TO ENABLE US TO EFFECT SHIPMENTS OF LADIES WEARING APPAREL AND FURTHER UNDERTAKE TO DELIVER CONFORMING SHIPPING DOCUMENTS. AS PER THE LETTER OF CREDIT, TO AUTHORIZE CENTRAL ASIA CAPITAL CORP. LTD. HONG KONG OR BEFORE JULY 30, 1995 AND PROCEEDS SIXTY PERCENT OF EACH DRAWING PLUS INTEREST TO RETIRE THE PRINCIPAL AND INTEREST AMOUNTS DUE AND OWING TO THEM.'
 
REIMBURSEMENT INSTRUCTION: UPON RECEIPT OF CONFORMING DOCUMENTS WE MAKE ADVANCE PAYMENT AS INDICATED IN THE RED CLAUSE FACILITY ABOVE AND DEDUCT FROM THE PROCEEDS OF PAYMENTS MADE BY US AND ALL AMOUNTS DUE TO YOU. IN THE EVENT SUCH DOCUMENTS ARE NOT PRESENTED TO YOU ON OR PRIOR TO JULY 30TH 1995 THEN YOU MUST SEND US TESTED TELEX NOT LATER THAN THE SPECIFIED L/C EXPIRY DATE INDICATING THE SAME AND THE AMOUNT OF OUTSTANDING ADVANCES PLUS INTEREST DUE AND WE WILL REIMBURSE YOU IN ACCORDANCE WITH YOUR INSTRUCTIONS.
 
All other terms and conditions of the original credit instrument remain unchanged.

 (Def.'s Mem. Supp. Mot. Summ. J. Ex. 1) ("Def.'s Mem."). *fn3"

 On April 4, 1995, the red clause was added to Letter 1, allowing Central Asia to advance Fashion Will money needed to purchase raw materials to fill Feinberg's order without actually requiring Fashion Will to first present the specified documents to Meridian. (See Pl.'s Mem. Ex. 13). In the future, after Fashion Will shipped the merchandise to Feinberg, Central Asia was to present the specified shipping documents to Meridian -- sight drafts and an undertaking by Fashion Will certifying that the advance was being used to purchase raw materials of finished products -- in conjunction with Central Asia's request for reimbursement. Between April 6, 1995 and September 5, 1995, in accordance with Fashion Will's requests, Feinberg induced Meridian to modify Letter 1 to extend certain dates and increase the amount of credit. (See Pl.'s Mem. Exs. 17-18; Exs. 20-24; Ex. 28).

 On April 10, 1995, Central Asia sent a telex to Meridian stating that it had advanced Fashion Will $ 600,000 pursuant to Letter 1's red clause. Central Asia attached the undertaking from Fashion Will. Central Asia repeatedly advised Meridian of its advances to Fashion Will via telex on July 21, 1995, July 25, 1995, September 11, 1995, and September 14, 1995. After Central Asia sent each telex to Meridian, it mailed letters confirming the telexes and enclosing the undertakings by Fashion Will to Meridian's office in Philadelphia. On September 1, 1995, Fashion Will told Feinberg that a typhoon in China had flooded its factory and damaged the merchandise, necessitating a new letter of credit. Feinberg then caused Meridian to issue a second letter of credit ("Letter 2") for $ 310,199.18, which also contained a red clause. (See Pl.'s Mem. Ex. 39).

 On September 27, 1995, Fashion Will informed Feinberg that financial difficulties prevented it from filling Feinberg's orders. At this meeting, Fashion Will also admitted that it used the red clause advances to reduce its indebtedness to Central Asia. According to Fashion Will, the collateral securing its loans from Central Asia had decreased in value, and Central Asia pressured it to use the red clause advances to pay off the loan, instead of purchasing raw materials for Feinberg's order. On December 1, 1995, Central Asia made calls upon Meridian on Letter 1 and Letter 2.

 II. Standard of Review

 Rule 56(c) of the Federal Rules of Civil Procedure provides that summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). An issue is "genuine" only if there is sufficient evidence for a reasonable jury to find for the non-moving party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S. Ct. 2505, 2510, 91 L. Ed. 2d 202 (1986). Furthermore, bearing in mind that all uncertainties are to be resolved in favor of the nonmoving party, a factual dispute is only "material" if it might affect the outcome of the case. Id. Rule 56(c) directs summary judgment "after adequate time for discovery . . . against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S. Ct. 2548, 2552, 91 L. Ed. 2d 265 (1986).

 III. Discussion

 A. Choice of Law

 "A federal court exercising diversity jurisdiction must apply the choice of law rules of the forum state . . . . Pennsylvania Courts generally honor the intent of the contracting parties and enforce choice of law provisions in contracts executed by them." Kruzits v. Okuma Mach. Tool, Inc., 40 F.3d 52, 55 (3d Cir. 1994) (citing, inter alia, Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 497, 61 S. Ct. 1020, 1022, 85 L. Ed. 1477 (1941)). In the instant case, the letters of credit contained the following provision:

 
this agreement, each Credit and all transactions in connection with each Credit shall be interpreted, construed and enforced according to: (i) the 'Uniform Customs and Practice for Documentary Credits' . . . (ii) the laws of the Commonwealth of Pennsylvania, including without limitation the Pennsylvania Uniform Commercial Code; and (iii) the Acts of the Congress of the United States of America.

 (Def.'s Mem. Ex. 5 at 9). The red clauses did not alter this provision in the letter of credit. (See Def.'s Mem. Ex. 2 at 2 (stating that "all other terms and conditions of the original credit instrument remain unchanged")).

 The Court honors this forum selection provision and applies the statutory and common law of the forum state, Pennsylvania. Article 5 of Pennsylvania's Uniform Commercial Code ("UCC") covers letters of credit. See Uniform Commercial Code -- Letters of Credit, 13 Pa. Cons. Stat. Ann. §§ 5101-5117 (West 1984 & Supp. 1996) ("Article 5").

 The forum selection provision also refers to the Uniform Customs and Practice for Documentary Credits (International Chamber of Commerce Pub. No. 500 (1993 Revision)) ("UCP"). "The UCP was drafted by the International Chamber of Commerce for the purposes of establishing uniformity in the treatment of documentary credits and facilitating international trade practices." Tudor Dev. Group, Inc. v. United States Fidelity & Guar. Co., No. 88-758, 1991 WL 353443, at *8 (M.D. Pa. Jan. 7, 1991) (citing In re Glade Springs, Inc., 47 B.R. 780, 783 (Bankr. E.D. Tenn. 1985), aff'd, 826 F.2d 440 (6th Cir. 1987)), aff'd, 968 F.2d 357 (3d Cir. 1992).

 The UCP, however, neither displaces the UCC nor provides the applicable substantive law. "Pennsylvania regards the UCP as a recording of common practice, and not the substantive law of a state which contracting parties may choose under the choice of law provision of the [UCC]." Banco Nacional de Desarrollo v. Mellon Bank, N.A., 726 F.2d 87, 90 n.4 (3d Cir. 1984) (citations omitted). See also Sound of Market St., Inc. v. Continental Bank Int'l, 819 F.2d 384, 388 (3d Cir. 1987) ("assuming that Pennsylvania's choice of law rules dictate the application of Pennsylvania law, a Pennsylvania court would apply Pennsylvania's version of the UCC as the governing law even if a letter of credit has been made 'subject' to the UCP"); Intraworld Indus., Inc. v. Girard Trust Bank, 461 Pa. 343, 336 A.2d 316, 322-23 (Pa. 1975) (noting "the UCP is by definition a recording of practice rather than a statement of legal rules"). While the UCP does not dictate substantive law, the extent to which it may be relied upon for illustration or supplementation remains an open question. See Sound, 819 F.2d at 388 n. 2 (stating "although we see no reason that the UCP may not be incorporated by reference as a term of the letter of credit . . . or be considered as evidence of general banking usage, we need not decide the role of the UCP under Pennsylvania law in the context of this case").

 B. Letters of Credit

 1. Generally

 A letter of credit is basically "a promise by the 'issuer' (commonly a bank) to the 'beneficiary' (usually a seller of goods) to extend credit on behalf of the beneficiary's customer (usually a buyer of goods)." Wood v. R.R. Donnelley & Sons Co., 888 F.2d 313, 317 (3d Cir. 1989) (citation omitted). See Tudor Dev. Group, Inc. v. United States Fidelity & Guar. Co., 968 F.2d 357, 360 (3d Cir. 1992) (defining letter of credit as "an engagement by an issuer, usually a bank, made at the request of a customer for a fee, to honor a beneficiary's drafts or other demands for payment upon satisfaction of the conditions set forth in the letter of credit") (citing Article 5 § 5103(a)); Leney v. Plum Grove Bank, 670 F.2d 878, 881 (10th Cir. 1982) (describing letter of credit as "closely akin to a cashier's check or other negotiable instrument issued by a bank"). Letters of credit have long facilitated the flow of international commerce by providing assurance to the "seller of good[s] (i.e., the 'beneficiary'. . .) of prompt payment upon presentation of the documents. A seller who would otherwise have only the solvency and good faith of his buyer as assurance of payment may, with a letter of credit, rely on the full responsibility of the bank." Intraworld, 336 A.2d at 323.

 "The essential function of this device is to assure a party to an agreement that he will receive the benefits of his performance." Wood, 888 F.2d at 317 (citation omitted). When the seller is unfamiliar with the creditworthiness of the buyer, the bank issues a letter of credit and "substitutes its credit for that of the customer," thereby assuring the seller of receiving payment. Leney, 670 F.2d at 881. See Banco Nacional, 726 F.2d at 91 (referring to letter of credit as an "efficacious arrangement which assures payment for completion of an obligation by placing the duty to pay on an issuer of good financial reputation"). The typical letter of credit transaction involves three distinct relationships:

 
the underlying contract between the customer and the beneficiary which gave rise to their resort to the letter of credit mechanism to arrange payment; the contract between the bank and its customer regarding the issuance of the letter and reimbursement of the bank upon its honoring a demand for payment; ...

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