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The Louis Berger Group, Inc v. Jpmorgan Chase Bank

July 18, 2011

THE LOUIS BERGER GROUP, INC., PLAINTIFF,
v.
JPMORGAN CHASE BANK, N.A., DEFENDANT.



The opinion of the court was delivered by: Judge Ronald A. Guzman

MEMORANDUM OPINION AND ORDER

Plaintiff The Louis Berger Group, Inc. ("LBG") filed this action against defendant JPMorgan Chase Bank, N.A. ("JPMorgan") seeking specific performance of a letter of credit issued by JPMorgan on behalf of Progressive Constructions Limited ("PCL"). Before the Court is JPMorgan's motion to dismiss or stay and PCL's motion to intervene. For the reasons provided in this Memorandum Opinion and Order, the Court grants JPMorgan's motion to stay and denies PCL's motion to intervene.

Background

In April 2009, LBG awarded a construction contract to PCL, a construction company incorporated in India, to build part of a road in Sudan. (Compl. ¶ 10.) The contract required PCL to post a guarantee for its performance, which it did by obtaining a letter of credit from JPMorgan in favor of LBG. (Id. ¶¶ 11, 15.) The letter of credit states that JPMorgan will pay LBG "any sum or sums not exceeding . . . [$]3,573,975.00 upon the presentation of a demand" by LBG. (Id. ¶ 19.)

According to LBG, shortly thereafter, PCL defaulted under the construction contract and LBG expelled it from the project site. (Id. ¶ 27.) Thereafter, on November 9, 2009, contrary to an express clause in the contract stating that any disputes were to be determined by arbitration in New Jersey, PCL initiated litigation in the Civil Court of Hyderabad, India and obtained an ex parte preliminary injunction barring JPMorgan from honoring the letter of credit. (Id. ¶¶ 13, 29.) Fifteen months later, the Indian court dismissed the injunction, ruling that it did not have jurisdiction because of the agreed arbitration clause in the construction contract. (Def.'s Mot. Dismiss at 5; Pl.'s Opp'n Def.'s Mot. Dismiss Ex. B, Indian Court's Order Vacating Inj.) PCL appealed and obtained a new injunction pending appeal. (Def.'s Mot. Dismiss Group Ex. E, Indian App. Ct. Orders.) Then, on October 18, 2010, PCL demanded arbitration against LBG in New Jersey seeking damages for, among other things, fraud and breach of contract. (Compl. ¶ 31.)

On December 30, 2010, LBG demanded payment of the letter of credit from JPMorgan due to PCL's default. (Id. ¶ 33.) JPMorgan refused to honor it due to the Indian court's injunction. (Id. ¶ 34.) As a result, LBG filed this action to enforce the letter of credit and for breach of contract because of JPMorgan's refusal to pay. (Id. Counts I-II.)

Discussion

I. JPMorgan's Motion to Stay Pending Arbitration

JPMorgan argues this action should be stayed until the Indian court's injunction is lifted and/or until the resolution of the pending arbitration. The Court agrees. While the Federal Arbitration Act requires a stay for arbitrable issues, a district court also has the discretion to stay nonarbitrable issues while arbitration proceedings are pending. *fn1 9 U.S.C. § 3; see Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 20 n.23 (1983) ("In some cases, it may be advisable to stay litigation among the nonarbitrating parties pending the outcome of the arbitration. That decision is one left to the district court . . . as a matter of discretion to control its docket."); see Volkswagen of Am., Inc. v. Sud's of Peoria, Inc., 474 F.3d 966, 972 (7th Cir. 2007) ("In many instances, moreover, district courts actually may prefer to stay the balance of the case in the hope that the arbitration might help resolve, or at least shed some light on, the issues remaining in federal court."). A district court may actually abuse its discretion in allowing nonarbitrable issues to proceed absent a stay, where "the pending arbitration is likely to resolve issues material to the lawsuit." Volkswagen, 474 F.3d at 972 (citation omitted). In making this determination, the court must consider the risk of inconsistent rulings, the extent to which the arbitrators' decision will bind the parties, and the prejudice that may result from delays. Id.

First, the risk of inconsistent rulings absent a stay is considerable. The Indian appellate court's order appears to enjoin JPMorgan from honoring the letter of credit. (Def.'s Mot. Dismiss Group Ex. E, Indian App. Ct. Orders.) If this action proceeds before that injunction is lifted, JPMorgan could simultaneously be ordered by this Court to honor the letter of credit and barred from doing so by the Indian appellate court. Amica Life Ins. Co. v. Barbor, 488 F. Supp. 2d 750, 756 (N.D. Ill. 2007) (explaining that while the extension of international comity is discretionary, domestic courts generally give effect to the formal acts of a foreign nation). Staying this action would forestall this untenable result.

Even if the Indian court has no basis for enjoining JPMorgan from honoring the letter of credit, this action should be stayed pending the outcome of the New Jersey arbitration. Generally, under the "independence principle," letters of credit are completely independent of the underlying contract on which they are based. Semetex Corp. v. UBAF Arab Am. Bank, 853 F. Supp. 759, 770 (S.D.N.Y. 1994).*fn2 Therefore, the issuing bank must honor a proper demand by a beneficiary, even if the beneficiary has breached the underlying contract. Id. The only exception allowing the customer to intervene in the letter of credit contract between the bank and the beneficiary is when there has been a "fraud in the transaction." N.Y. U.C.C. § 5-109 (McKinney 2000); Rockwell Int'l Sys., Inc. v. Citibank, N.A., 719 F.2d 583, 588-89 (2d Cir. 1983). Under this exception, the customer may seek to "enjoin the bank from honoring the demand for payment." § 5-109(b)(2).

Here, PCL has asserted the "fraud exception" to the independence principle in its arbitration against LBG. If fraud is found, then JPMorgan has no obligation to honor the letter of credit. Id.; see Banque Worms v. Banque Commerciale Privee, 679 F. Supp. 1173, 1182 (S.D.N.Y. 1988) (explaining that the bank has no obligation to honor a letter of credit if there was fraud in the inducement of the underlying contract). Under these circumstances, where the result of the arbitration may substantially resolve the issues in this case (i.e., whether JPMorgan should honor the letter of credit) and save the resources of the parties and the Court, a stay is warranted.

LBG argues that it would suffer prejudice from the stay because it has the right to payment of the letter of credit without delay. But where, as here, there is a possibility of inconsistent judgments because there is a chance that JPMorgan need not honor the letter of credit, the Court finds ...


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