the broad proposition that conforming presentment automatically divests an issuing bank of its interest in a general account at a correspondent bank. Bergerco is a general creditor with a default judgment against Rasheed Bank and Iraqi State Company. While Bergerco has a legal claim against Rasheed Bank and Iraqi State Company, absent pledged funds in Rasheed Bank's account or a confirmed credit by BNY, conforming presentment alone did not transfer Iraq's interest in specific assets to Bergerco.
The other cases upon which Bergerco relies are similarly distinguished. In Centrifugal Casting, the Court of Appeals for the Tenth Circuit held Iraq had no interest in funds paid to the plaintiff by the confirming bank, Banco Nazionale del Lavora ("BNL"). 966 F.2d at 1353. The Centrifugal Casting plaintiff entered into a contract with an Iraqi government agency to provide cast ductile iron pipe. Id. at 1349. Payment was to be made through an irrevocable letter of credit confirmed by BNL. Id. at 1350. Under the terms of the letter of credit, before completing performance under the contract but prior to August 2, 1990, the plaintiff withdrew a down payment of $ 2.7 million, which became the focus of the litigation once Iraq invaded Kuwait and the President issued E.O. 12722. Id. The United States intervened in the litigation, contending that Iraq had an interest in the $ 2.7 million drawn under the letter of credit, because Iraq could assert a breach of contract claim against the plaintiff. Id.
The Centrifugal Casting court rejected the government's argument, relying on the nature and operation of international letters of credit. Id. at 1353. The court cited a number of reasons, all of which support the result reached here. First, unlike this case involving Rasheed Bank's Letter of Credit, prior to August 2, 1990, payment was actually made to the beneficiary of the letter of credit. Moreover, the payment was made by a confirming bank that had agreed to substitute its credit for that of the Iraqi bank. Second, Iraq's interest was speculative: the court dismissed the proposition that prior to the commencement of litigation the United States could assert, on behalf of Iraq, a potential breach of contract claim that Iraq had never asserted itself. Id. Finally, the court noted that a contrary ruling would "defeat the principle of independence universally recognized by the courts as crucial to the letter of credit's integrity as a financing device." Id.
The principles of letter of credit law upon which the Centrifugal Casting court relied are the same principles applicable here. Those principles command a different result in this case, however, because the facts are different. If BNY had confirmed the letter of credit and paid Bergerco (via RBC) prior to August 2, 1990, as did BNL, Iraq would no longer have had an interest in the funds in its account. See Centrifugal Casting, 966 F.2d at 1353. Similarly, if BNY had agreed to confirm the credit pursuant to Rasheed Bank's request and if Rasheed Bank had pledged the funds in its account at BNY to satisfy the obligations of the credit, Iraq would have had no viable interest as of August 2, 1990. See Consarc, 27 F.3d at 698 & 702.
While Bergerco suggests that the lack of a confirmed credit is a red herring, the obligations of a correspondent bank that has confirmed a letter of credit under the UCP are substantially different from those of a bank that merely agrees to reimburse requests made pursuant to a letter of credit. The fact that the letters of credit were confirmed was central to the principal cases upon which Bergerco relies for support. See Consarc, 27 F.3d at 698 (BNY agreed in a confirmed reimbursement credit to pay beneficiary out of pledged account); Centrifugal Casting, 966 F.3d 1348 (payment made by a confirming bank); Semetex Corp., 853 F. Supp. at 770 ("the issuing or confirming bank must honor a proper demand even though the beneficiary has breached the underlying contract") (citing Centrifugal Casting, 966 F.2d at 1352); Engel Industries v. First American Bank, 803 F. Supp. 426, 428 (D.D.C. 1992) (confirming bank obligated to pay, because beneficiary is entitled to benefit where it has arranged for a confirmed letter of credit).
Bergerco also attempts to rely upon cases in which an issuing bank was held to the terms of its letter of credit or the UCP. E.g., Alaska Textile v. Chase Manhattan Bank, 982 F.2d 813 (2nd Cir. 1992) (issuing bank sued for wrongful dishonor); Bank of Cochin v. Manufacturers Hanover Trust Co., 808 F.2d 209 (2nd Cir. 1986) (issuing bank estopped by failing to advise the confirming bank of reasons that documents were non-conforming); Kuntal, S.A. v. The Bank of New York, 703 F. Supp. 312 (S.D.N.Y. 1989) (issuing bank waived rights to claim discrepancies due to delay); J. Zeevi and Sons, Ltd. v. Grindlays Bank (Uganda) Ltd., 37 N.Y.2d 220, 371 N.Y.S.2d 892, 333 N.E.2d 168, cert. denied, 423 U.S. 866, 96 S. Ct. 126, 46 L. Ed. 2d 95 (1975) (issuing bank liable for breach by directing reimbursement bank not to pay beneficiary under letter of credit). These holdings are fully consistent with the UCP and, while such holdings may apply equally to correspondent banks that have confirmed an irrevocable credit, see UCP, at Art. 10(b), they do not provide Bergerco with the support it seeks when the correspondent bank is not also a confirming bank. See id. at Art. 11(c).
It is well established in the law that "[a] letter of credit remains wholly executory until the beneficiary complies with its terms." Consarc, 27 F.3d at 702. Once Bergerco made conforming presentment, Rasheed Bank was obligated to pay according to the terms of the Letter of Credit. See Union Planters National Bank v. World Energy Systems Assoc., 816 F.2d 1092, 1098 (6th Cir. 1987). This obligation was reflected in the default judgment that Bergerco obtained in this Court on July 26, 1994. However, the fact of conforming presentment does not, by itself, divest an Iraqi government agency of its interest in unpledged funds in an account at a correspondent bank that has not confirmed the letter of credit.
Having failed to show that Iraq had no interest in Rasheed Bank's account at BNY on August 2, 1990, Bergerco challenges OFAC's regulations, 31 C.F.R. §§ 575.101-575.901 (1995). These regulations are based on the President's authority in the International Emergency Economic Powers Act ("Emergency Powers Act"), 50 U.S.C. § 1701 et seq. (1988 & Supp. V. 1993). OFAC's regulations will withstand Bergerco's attack "unless they contradict express statutory language or prove unreasonable." Consarc Corp., 27 F.3d at 701 (D.C. Cir. 1991) (citing Chevron U.S.A. Inc. v. NRDC, 467 U.S. 837, 844-45, 104 S. Ct. 2778, 2782-83, 81 L. Ed. 2d 694 (1984)).
When Iraq invaded Kuwait on August 2, 1990, President Bush froze "all property and interests of the Government of Iraq, its agencies, instrumentalities and controlled entities and the Central Bank of Iraq that are in the United States." Executive Order No. 12722, § 1, 55 Fed.Reg. 31803 (1990). Executive Order No. 12722 was superseded on August 9, 1990, by Executive Order No. 12724, which, while implementing a United Nations Security Council Resolution imposing economic sanctions against Iraq, did not change the blocking order. Executive Order No. 12724, 55 Fed.Reg. 38089 (Aug. 9, 1990).
Under the Emergency Powers Act, "the President may, under such regulations as he may prescribe, by means of instructions, licenses, or otherwise . . . investigate, regulate, or prohibit . . . transfers of credit or payments between, by, through, or to any banking institution, to the extent that such transfers or payments involve any interest of any foreign country or a national thereof." 50 U.S.C. § 1702(a)(1)(A)(ii). The Emergency Powers Act authorizes the President to issue implementing regulations.
Those regulations include a provision stating that, except as authorized by OFAC, "no property or interests in property of the Government of Iraq . . . may be transferred, paid, exported, withdrawn or otherwise dealt in." 31 C.F.R. § 575.201(a). Thus, funds in a blocked account, defined as "any account or property in which the Government of Iraq has an interest," id. § 575.301, may not be transferred or withdrawn, inter alia, "expect pursuant to an authorization or license from OFAC authorizing such action." Id. Property interests include present, future and contingent interests in letters of credit, bank accounts and deposits. Id. § 575.315; see Consarc, 27 F.3d at 701. OFAC has limited the effect of amendments to its regulations to be prospective in nature. 31 C.F.R. § 575.402 (1995).
Among OFAC's exemptions is General License 7. As initially implemented, this regulation provided in relevant part that "specific licenses may be issued on a case-by-case basis to permit payment, from a blocked account or otherwise, of amounts owed to or for the benefit of a U.S. person for goods or services exported by a U.S. person or from the United States prior to the effective date of" the blocking order, August 2, 1990. General License No. 7 (Aug. 15, 1990), Attachment 1 to Bergerco's Memorandum at Law, supra.
After Bergerco submitted its application for a license, but before a final agency decision was made, OFAC amended General License No. 7. As amended, the regulation provides in relevant part that "specific licenses may be issued on a case-by-case basis to permit payment involving an irrevocable letter of credit issued or confirmed by a U.S. bank, or a letter of credit reimbursement confirmed by a U.S. bank, from a blocked account or otherwise, of amounts owed to or for the benefit of a person with respect to goods or services exported prior to the effective date" of the blocking order, August 2, 1990. General License No. 7, as amended (Oct. 18, 1990), Attachment B to McDonell Decl; see also 31 C.F.R. § 575.510(a) (1991).
On October 2, 1990, OFAC advised Bergerco through ConAgra that its application had been rejected, because Rasheed Bank's letter of credit providing for reimbursement by BNY was on an unconfirmed basis. See Waters Decl., at P 11. On November 20, 1990, OFAC issued its final agency decision, which stated in relevant part:
The financing terms of the Bergerco transaction do not meet the provisions of General License No. 7, amended, because your request for payment from BONY rests solely on an unconfirmed reimbursement. Under the terms of such arrangement, no mandatory legal obligation extends to BONY to remit funds to any part to the letter of credit. Absent an identifiable and binding legal undertaking by a U.S. financial institution, [OFAC] will not require or license the remittance of funds by financial institutions authorized to transact business in the United States.