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BANCO DE VIZCAYA v. FIRST NAT. BANK OF CHICAGO

May 26, 1981

BANCO DE VIZCAYA, S.A., A SPANISH BANKING CORPORATION, PLAINTIFF,
v.
THE FIRST NATIONAL BANK OF CHICAGO, A NATIONAL BANKING ASSOCIATION, DEFENDANT.



The opinion of the court was delivered by: Grady, District Judge.

MEMORANDUM OPINION

Plaintiff Banco de Vizcaya brings this suit to recover on an irrevocable letter of credit issued by the Abu Dhabi branch of the First National Bank of Chicago ("FNBC-AD"). Before the court is the motion of defendant First National Bank of Chicago ("FNBC") to dismiss the complaint or, in the alternative, for summary judgment. Because we look beyond the pleadings, we treat the motion as one for summary judgment. For reasons discussed below, we grant summary judgment in plaintiff's favor.*fn1

I. Facts

The material facts, while somewhat complex, are undisputed. In May of 1978, Consolidated Investment & Contracting Company ("Consolidated"), a partnership doing business in Abu Dhabi, issued a purchase order to Mundus Estructuras Metalicas, S.A. ("Mundus"), a Spanish corporation, for scaffolding to be shipped from Spain to Abu Dhabi. In order to guarantee payment to Mundus, Consolidated obtained an irrevocable letter of credit in the amount of $716,619.00 from FNBC-AD. The letter of credit provided that payment would be effected in dollars in Chicago at FNBC ("FNBC-C") 350 days after Consolidated received the pertinent documentation and presented it to FNBC-AD. In the margin, the letter of credit bore the following legend: "This credit is subject to the Uniform Custom and Practice for Documentary Credits (1974 Revision), International Chamber of Commerce Publication No. 290."

In reliance on the letter of credit, plaintiff advanced Mundus $592,957.43 in six separate payments between October 25, 1978, and November 15, 1978. By February 7, 1979, FNBC-AD had accepted and confirmed all the drafts plaintiff had submitted to it. However, before the first maturity date arrived, Consolidated, apparently unhappy with the quality of goods delivered, obtained an injunction in the Abu Dhabi Civil Court, blocking payment on the drafts and requiring the money it had deposited with FNBC-AD to be placed in a "suspense account." Defendant's Motion for Summary Judgment, Ex. A. FNBC-AD immediately notified plaintiff of the entry of the order and, on October 17, 1979, instituted an appeal. The appellate court affirmed the lower court's order, apparently on the mistaken theory that the money Consolidated had deposited with FNBC-AD was for the benefit of Mundus and was therefore an available source of funds from which to satisfy a judgment against the Spanish company. We have before us a translation of the court's opinion, which is somewhat difficult to follow. In justifying its attachment of the funds, the court stated

  Nobody says that the non-seizure on the sum of
  the letter credit, vide a judicial order, is one
  of the conditions of the letter of credit or is
  incorporated in the unified rules and
  conventions, to enable us to say that such
  seizure would expose the executor to any
  contractual responsibility or otherwise, and the
  reason is that no contract or agreement shall be
  made on a matter which may undermine the powers
  of the concerned state courts as being a matter
  relating to the supremacy of the state.

While something may have been lost in the translation, we discern two theories behind the court's judgment. First, it believed that funds deposited to secure a letter of credit are not, under international law, immune from attachment. Further, the court reasoned that even if the inherent qualities of an irrevocable letter of credit prohibit attachment, such prohibition would be void as an impermissible restriction on the power of the Abu Dhabi state court.

In the wake of this ruling, FNBC-AD countermanded authorizations for plaintiff's reimbursement which it had previously sent to the FNBC office in Chicago.*fn2 Plaintiff then demanded payment from FNBC-AD and was refused. This lawsuit is the result of plaintiff's efforts to obtain payment from FNBC's home office. In its complaint and supporting memoranda, plaintiff sets forth two principal theories for recovery against the bank. First, it argues that according to the terms of the letter of credit, FNBC-C was a "confirming bank" and was thereby directly obligated on the credit. Plaintiff also argues that even if FNBC-C was not a confirming bank, it is still liable on the theory that the home office is ultimately responsible for the wrongful refusal of its branches to make good on their obligations.*fn3 Defendant takes issue with both theories and further argues that the case should be dismissed on the ground that plaintiff has failed to join Consolidated, which, while an indispensible party to the suit, is outside the jurisdiction of this court.

II. Discussion

Whether FNBC-C was a confirming bank*fn4 is a question of intent of the parties to be derived from the letter of credit itself. See Barclays Bank v. Mercantile National Bank, 481 F.2d 1403 (5th Cir. 1973). The letter of credit itself gives no indication that the parties intended FNBC-C to play such a role. The only mention of FNBC-C in the document is in connection with the instructions to the negotiating bank for obtaining reimbursement. Insofar as the conduct of the parties is relevant in determining their intent,*fn5 it is apparent that both plaintiff and defendant considered FNBC-C no more than a reimbursing agent. In a December 30, 1978, telex to plaintiff, FNBC-AD advised plaintiff that it had received plaintiff's drafts and stated that, ". . . we authorize you to reimburse yourselves through FNBC-C on due date." Complaint, Ex. F. Plaintiff itself adopted this characterization of FNBC-C's role when it telexed defendant that, "we are in possession of duly authenticated instructions from your Abu Dhabi Branch, authorizing us reimbursement from you for the full amounts. . . ." Complaint, Ex. H. While FNBC-C's role as reimbursing bank may not be ipso facto inconsistent with its playing the part of confirming bank, we can find no evidence that it was intended to perform the latter function.

FNBC-C may nevertheless be liable on the credit by virtue of its status as home office. As a general rule of corporate law, obligations undertaken by a branch of the corporation are obligations of the corporation itself. See generally, Heininger, Liability of United States Banks for Deposits Placed In Their Foreign Branches, 11 Law & Policy In International Business 903, 924 et seq. (1979). As applied to banking corporations, this general rule of corporate responsibility is limited by the so-called "separate entity" doctrine. According to this doctrine, a branch bank is "not a mere teller's window" for the home office, but is, for certain purposes, a distinct business entity. Pan American Bank & Trust Co. v. National City Bank, 6 F.2d 762 (2d Cir.), cert. denied, 269 U.S. 554, 46 S.Ct. 18, 70 L.Ed. 408 (1925). The "separate entity" doctrine grew out of the need to protect banks from the burdens and the risks that would result if depositors were able to withdraw funds from any branch. Under such circumstances, the burden would be on the bank to notify all other branches of the withdrawal and failure to do so would create the risk of multiple withdrawals on the same funds. See Heininger, at 934-944. In the international setting, the doctrine is also justified by the fear that banks would suffer double liability on claims against its foreign branches: there is no guarantee that a foreign government will accept the settling of accounts in the United States as a defense to claims against the branch operating within its borders. Id.

In reliance on the "separate entity" doctrine, it has been held that a creditor may not attach assets of his debtor deposited in a branch by serving a writ of attachment on the home office*fn6; that money deposited at one branch is redeemable only at that branch;*fn7 and that one branch may not use a debt which a creditor owes another branch as a set off against a debt it owes the creditor.*fn8 In the instant case, FNBC-C invokes the "separate entity" doctrine in an effort to avoid payment on the letter of credit issued by its Abu Dhabi branch.

The "separate entity" doctrine is not a rigid rule that protects the home office from liability in every instance. Even defendant admits that, the doctrine notwithstanding, a home office may be liable for the "wrongful refusal" of one of its branches to live up to its obligations. Defendant's Reply Memorandum 3. Defendant argues, however, that the conduct of FNBC-AD in failing to authorize payment on the letter of credit may not fairly be characterized as wrongful. Defendant points out that FNBC-AD has been restrained by an order of the Abu Dhabi Civil Court which the branch unsuccessfully appealed. Defendant concludes that its branch's refusal to pay "is not `wrongful' in the United Arab Emirates; and for that reason, it is not `wrongful' in the United States." Defendant's Reply Memorandum 5.

While this reasoning is not without some force, we think that defendant misconstrues the concept of "wrongful refusal." Analysis of the home bank's responsibility for the "wrongful" acts of its branch begins with Sokoloff v. National City Bank, 250 N.Y. 69, 164 N.E. 745 (1927). In that case, plaintiff deposited $30,225.00 in the National City Bank in New York City in June of 1917, upon the bank's promise that it would open an account for plaintiff in its Petrograd branch. The account in Petrograd was duly opened and remained so until November of 1917, when plaintiff requested that the money in the account be transferred through the State Bank to a bank in Kharkoff where plaintiff resided. Upon receiving the request, the Petrograd branch communicated it to the State Bank. A few days later, Sokoloff sent another letter to the Petrograd bank, relating that the money had not yet been received in Kharkoff and advising the branch to hold the funds for Sokoloff's sister who would call for them immediately. The branch then wrote the State Bank to inquire about the transfer and was told that, due to civil disorders, it was impossible to determine whether the transfer had been effected. The branch then advised Sokoloff that the transfer had already been made and that the funds were out of its ...


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