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BERGERCO CANADA v. IRAQI STATE CO.

April 12, 1996

BERGERCO CANADA, A DIVISION OF CONAGRA, LTD., Plaintiff,
v.
IRAQI STATE COMPANY FOR FOOD STUFF TRADING, et al., Defendants.



The opinion of the court was delivered by: GREEN

 Presently pending are the parties' cross-motions for summary judgment. For the reasons explained below, the plaintiff's motion for summary judgment will be denied as to Count IV and granted in part and denied in part as to Count III; Defendant Bank of New York's motion for summary judgment on Count IV will be granted and judgment shall be entered accordingly in favor of the Bank of New York; and the Office of Foreign Assets Control's ("OFAC") motion for summary judgment on Count III will be denied. Because OFAC improperly applied its amended regulation retroactively, this matter will be remanded to OFAC to consider ConAgra's application for a license under the General License No. 7 regulations of August 15, 1990.

 I. Background

 The following facts are undisputed. Plaintiff Bergerco Canada ("Bergerco"), a Canadian federal corporation, is a division of ConAgra, Ltd. ("ConAgra"). In February 1990, Bergerco and its American affiliate, Bergerco US, entered into a contract with Iraqi State Company for Food Stuff Trading ("Iraqi State Company"), an Iraqi government procurement agency, to sell and ship yellow split peas and white beans from the United States, Australia and Canada to Iraq. Plaintiff Bergerco was the supplier of the split peas shipped from Canada.

 Payment for Bergerco's shipments from Canada was financed through an irrevocable letter of credit, L/C 4659/106 ("Letter of Credit"), which was issued for the account of Iraqi State Company on March 6, 1990, by Rasheed Bank, an Iraqi government-owned bank. *fn1" Bergerco was the beneficiary. The Letter of Credit was advised by the Royal Bank of Canada ("RBC") and provided for payment to be made from funds in Rasheed Bank's account at the Bank of New York ("BNY"), which was designated as the reimbursing bank. *fn2"

 The underlying contract provided for 8,000 tons of yellow split peas to be shipped to Iraq in two shipments. The first shipment and reimbursement proceeded without incident. After the first shipment arrived, Bergerco made conforming presentment, which was accepted by Rasheed Bank and paid through BNY. See Coles Decl., at PP 30-31. Bergerco's present claim arises from the second shipment, which was discharged in Aqaba, Jordan on June 25, 1990. Id. at PP 30-31 & Exhibits 24 & 25. After the Iraqi State Company accepted the goods, Bergerco presented the required documents to RBC, which forwarded them to Rasheed Bank by overnight mail, arriving on July 10, 1990. Id. at P 34, Ex. 28. Rasheed Bank accepted the documents on that date, thereby owing Bergerco, under the terms of the Letter of Credit, the contract amount of US$ 1,964,016.94. Id. On July 12, 1990, RBC advised Bergerco by facsimile transmission ("fax") of two matters relevant to this transaction: that the shipping documents were delivered to Rasheed Bank, and that on July 11, 1990, RBC had telexed BNY requesting the status and date when payment might be expected under the Letter of Credit. *fn3"

 On July 30, 1990, a few days before President Bush issued Executive Order 12722 on August 2, 1990, *fn4" the Iraqi State Company agreed to instruct Rasheed Bank to release the balance due after meeting with Bergerco representatives. See Coles Decl., at P 39. On September 4, 1990, "Rasheed Bank instructed BNY to honor Bergerco's claim of payment of US$ 1,964,016.94." Id. (citing Exhibit 32). BNY contends it first heard from RBC about this request on September 21, 1990, when BNY received a telex from RBC. See Affidavit of Constance Thatcher ("Thatcher Affidavit"), at P 11, attached to BNY's Motion for Summary Judgment. The telex stated in relevant part:

 
The following is a copy of a message sent to your reimbursement Dept.
 
Negotiated documents for USD1,964,016.94 drawn under L/C 4659/106 issued by Rasheed Bank, Baghdad, Iraq. Kindly credit USD1,964,016.94 to our Toronto A/C Nbr 218-715-1 with our NY office quoting Manitoba International Trade Centre Ref We 3150.
 
This reimbursement claim is effected on the strength of a tested telex authority dated Sept 4/90 received from Rasheed Bank, Baghdad.

 RBC telex of Sept. 21, 1990, attached to Coles Decl., at Exhibit 32 (emphasis added).

 On September 24, 1990, in response to RBC's telex of September 21, BNY advised RBC that it was barred from releasing the funds because of President Bush's executive order, which froze Iraq's property and interests in property in the United States. See Coles Decl., at P 42 & Exhibit 33; BNY's Memorandum of Points and Authorities in Support of its Motion for Summary Judgment Against Plaintiff Bergerco Canada ("BNY's Memorandum"), at 3.

 Even before Rasheed Bank issued its September 4th directive, Bergerco sought relief from OFAC, requesting a license that would permit BNY to pay the amounts due Bergerco from funds in Rasheed Bank's account at BNY. On behalf of Bergerco, ConAgra made its first such request on August 21, 1990. Waters Decl., at P 4 & Exhibit A. After a series of communications, id. at PP 5-9, OFAC denied the application, stating that Bergerco's request for repayment from BNY "rested solely on an unconfirmed reimbursement." Id. at Exhibit B (Letter of November 20, 1990, from R. Richard Newcomb, Director, Office of Foreign Assets Control to Ms. Waters, ConAgra, Inc.).

 On February 4, 1992, May 26, 1992, and August 10, 1992, ConAgra applied to OFAC for a license that would authorize BNY to release the funds to Bergerco. See Declaration of Neil E. McDonell ("McDonell Decl."), at P 2, Exhibits C, E, & G, attached to Bergerco's Motion for Summary Judgment. OFAC denied each application. Id. at Exhibits D, F & H.

 On December 10, 1992, Bergerco filed its complaint in this matter, seeking damages, injunctive and declaratory relief against the Iraqi State Company, Rasheed Bank, OFAC, BNY and RBC. Against the Iraqi State Company and Rasheed Bank, Bergerco sought damages arising from Iraqi State Company's breach of contract for failing to pay the monies due and from Rasheed Bank's failure to pay under the irrevocable letter of credit. (Counts I and II). Against OFAC, the plaintiff seeks a declaration that it is entitled to a specific license under the Iraqi Sanctions Regulations ("ISR"), 31 C.F.R. Part 575. (Count III). Against BNY and RBC, Bergerco seeks injunctive and declaratory relief directing the release of the funds in Rasheed Bank's account to the plaintiffs. (Count IV).

 On July 26, 1994, this Court granted Bergerco's motion for a default judgment against the Iraqi State Company and Rasheed Bank. The cross-motions for summary judgment by Bergerco on Counts III and IV, by BNY on Count IV and by OFAC on Count III followed.

 II. Discussion.

 In its motion for summary judgment, Bergerco offers two principal arguments in an attempt to obtain release of the frozen funds. The first argument turns on whether Iraq had an interest in the Rasheed Bank account at BNY on August 2, 1990, when the President froze Iraq's assets in the United States. Bergerco essentially argues that Iraq had no interest in the account, because Bergerco had made conforming presentment to Rasheed Bank well before the account was frozen. See Bergerco's Memorandum of Law in Support of Plaintiff's Motion for Summary Judgment, at 6, 11, 16 & 36. Thus, Bergerco contends that BNY must release the funds and that OFAC exceeded its authority "[by blocking indefinitely a payment under an irrevocable letter of credit in which Iraq no longer had an interest." Id. at 13. Second, Bergerco challenges OFAC's regulations as contrary to the underlying statutory authority, claiming the OFAC improperly applied an amended regulation retroactively and that OFAC's decisions denying Bergerco's license applications were arbitrary and capricious. Id. at 10-33.

  The standard of review.

 Summary judgment is appropriate when there is "no genuine issue as to any material fact and . . . the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). "The inquiry performed is the threshold inquiry of determining whether there is a need for trial--whether, in other words, there are any genuine issues that properly can be resolved only by a finder of fact because they may reasonably be resolved in favor of either party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S. Ct. 2505, 2510, 91 L. Ed. 2d 202 (1986). In considering a motion for summary judgment, the "evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in [its] favor." Id. at 255. At the same time, however, Rule 56 places a burden on the nonmoving party to "go beyond the pleadings and by [its] own affidavits, or by the 'depositions, answers to interrogatories, and admissions on file,' designate 'specific facts showing that there is a genuine issue for trial.'" Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S. Ct. 2548, 2553, 91 L. Ed. 2d 265 (1986). In determining whether genuine issues of material fact are present, courts are not strictly limited to the evidentiary materials listed in Rule 56(c), but may consider other materials if those materials would be admissible at trial. E.g., Hughes v. Joliet Correctional Center, 931 F.2d 425, 428 (7th Cir. 1991) (medical records appropriate evidentiary materials for consideration in connection with motion for summary judgment, because such materials are admissible under FRE 803(4) & 803(6)). See generally 10A Wright, Miller & Kane, Federal Practice and Procedure: Civil 2d § 2724, at 73. Thus, unless the nonmovant can demonstrate a genuine issue for trial through its "pleadings, depositions, answers to interrogatories and admissions on file, together with [any] affidavits," Fed.R.Civ.P. 56(c), or through other evidentiary material that would be admissible at trial, summary judgment is appropriate. Celotex, 477 U.S. at 324, 106 S. Ct. at 2553; 10A Wright, Miller & Kane, supra, § 2721, at 40 (citing cases).

 Because there are no genuine issues as to any material facts underlying Bergerco's claims, summary judgment is appropriate. Since BNY's summary judgment motion ultimately prevails, Bergerco will be viewed as the nonmovant and, as such, will receive all justifiable inferences in its favor.

  International Letters of Credit.

 The transaction at issue was financed by an international letter of credit, which generally involves an account party, an issuing bank and a beneficiary. See, e.g., Arbest Const. Co. v. First Nat'l Bank & Trust Co., 777 F.2d 581, 583 (10th Cir. 1985). The transaction may also include other banks that act as correspondent banks to advise, pay, negotiate or confirm the credit. See, e.g., Consarc Corp. v. Iraqi Ministry, 307 U.S. App. D.C. 245, 27 F.3d 695, 698 (D.C. Cir. 1994). See generally John F. Dolan, The Correspondent Bank in the Letter-of-Credit Transaction, 109 Banking L.J. 396 (1992) ("The Correspondent Bank"). Letters of credit facilitate international transactions by providing for prompt payment by an issuing bank to a beneficiary once the beneficiary complies with the terms of the letter of credit. See Centrifugal Casting Machine Co., Inc. v. American Bank and Trust Co., 966 F.2d 1348, 1352 (10th Cir. 1992); Sound of Market Street v. Continental Bank Int'l, 819 F.2d 384, 388 (3rd Cir. 1987).

 Letters of credit deal in documents, operating independently from the underlying sales contracts: whether the parties have performed under the contract is irrelevant to the obligations of the parties to a letter of credit as long as conforming presentment is made. Uniform Customs and Practice for Documentary Credits (1983) ("1983 UCP"), at Art. 3; U.C.C. § 5-114(1); see Centrifugal Casting, 966 F.2d at 1352; John F. Dolan, The Law of Letters of Credit P 6.01, at 6-1 & P 4.03(6)[a], at 4-14 (2nd ed. 1991). If the beneficiary presents documents that conform to the terms of the letter of credit, the beneficiary is entitled to payment by the issuing bank, 1983 UCP, supra, at Art. 10(a); U.C.C. § 5-114(1), as well as from a correspondent bank, if any, that has undertaken an obligation to honor conforming presentment. 1983 UCP, supra, at Art. 10(b); see U.C.C. § 5-107(2); Consarc, 27 F.3d at 698. See generally Dolan, The Law of Letters of Credit, supra, P 3.03(6), at 3-16 to 3-17.

 In a standard letter of credit transaction, the issuing bank requests a bank in the country of the shipper or beneficiary to advise the letter of credit, acting as an information transmitter. 1983 UCP, at Art. 8; U.C.C §§ 5-103(1)(e); 5-107; see Hawkland & Holland, U.C.C. Series § 5-107:02, at 79 (Art. 5) (1993 & 1995 Cum. Supp.). See generally Dolan, The Correspondent Bank, supra. The issuing bank may also request that a bank serve as a correspondent reimbursing bank, authorized to pay under the letter of credit. 1983 UCP, at Arts. 11(b) & 21(a). However, unless the issuing bank has requested, and the correspondent has given, an irrevocable undertaking to do so, the payment is not on a confirmed basis. 1983 UCP, at Arts. 10(b) & 11(c); see U.C.C. § 5-107; Art. 5(a), U.S. Guidelines and Procedures Governing Bank-to-Bank Reimbursements Under Letters of Credit ("Bank-to-Bank Reimbursement Guidelines"), attached to Bergerco's Motion for Summary Judgment, at Appendix B; Dolan, Letters of Credit, supra, P 8.01[7][a], at 8-16. See generally Dolan, The Correspondent Bank, supra.

 Whether a bank is a confirming bank or a reimbursing bank is a question of intent as expressed in the letter of credit. See Barclays Bank v. Mercantile National Bank, 481 F.2d 1224, 1233, reh'g en banc denied, 481 F.2d 1403 (5th Cir. 1973), cert. dismissed, 414 U.S. 1139, 94 S. Ct. 888 (1974). A confirming bank, as a primary obligor, plays a more prominent role in a letter of credit transaction than the adviser or reimbursing bank. See Dolan, The Correspondent Bank, supra. In a confirmed reimbursement credit, the confirming bank, familiar with the credit worthiness of the foreign issuing bank, agrees to make payment from its own funds or from the issuing bank's pledged funds on account with the confirming bank upon a proper request to the correspondent or based upon instructions from the issuing bank. UCP, at Art. 10(b); U.C.C. § 5-107. See Consarc, 27 F.3d at 698.

 In this case, New York law provides the applicable substantive law. E.g., Alaska Textile v. Chase Manhattan, 982 F.2d 813, 816-17 (2nd Cir. 1992). Under Article 5 of the N.Y.U.C.C. (McKinney 1991), *fn5" the UCP controls, see Sound of Market Street 819 F.2d at 387; Semetex Corp. v. UBAF Arab American Bank, 853 F. Supp. 759, 769 (S.D.N.Y. 1994), aff'd 51 F.3d 13 (2nd Cir. 1995), because Rasheed Bank's Letter ...


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