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U.S. Material Supply, Inc. v. Korea Exchange Bank

February 27, 2006

U.S. MATERIAL SUPPLY, INC., PLAINTIFF,
v.
KOREA EXCHANGE BANK, AND KEB NY FINANCIAL CORP., AS SUCCESSOR IN INTEREST TO KOREA EXCHANGE BANK NEW YORK BRANCH, DEFENDANTS.



The opinion of the court was delivered by: Simandle, U.S. District Judge

OPINION

This dispute arises from a letter of credit transaction between Defendant Korea Exchange Bank and Defense Procurement Agency, Ministry of National Defense of the Republic of Korea ("Republic of Korea"), identifying Plaintiff U.S. Material Supply, Inc., located in New Jersey, as the letter's beneficiary. Defendant KEB NY Financial Corp. and Defendant Korea Exchange Bank have each filed motions to dismiss pursuant to Rule 12(b) of the Federal Rules. For the reasons now explained, the Court will dismiss the suit against Defendant Korea Exchange Bank for lack of personal jurisdiction, and deny the motion to dismiss by Defendant KEB NY Financial Corp.

I. BACKGROUND

Plaintiff U.S. Material Supply, Inc., is a corporation organized and existing under the laws of the State of New Jersey. According to the Second Amended Complaint, Plaintiff and the Republic of Korea entered into a purchase and shipment agreement for certain goods to be provided by Plaintiff. On or about September 3, 2003, Korea Bank issued a letter of credit to the Republic of Korea, to cover the contract price of $338,162.40. The letter of credit named Plaintiff as beneficiary and Korea Exchange Bank Business Division as the drawee.

The letter of credit additionally conditioned payment by "any bank" upon presentation of sight draft. Specifically, the letter of credit required the beneficiary to present the following documents upon draft: (1) three original and two copies of the bill of lading consigned to "the Defense Transportation CMD, Republic of Korea" and marked "Freight Collect" which are issued by carrier; (2) one original and four copies of a commercial invoice; and (3) one original and four copies of the detailed packing list. (Sec. Am. Compl. Ex. A.)

On or about April 8, 2005, Plaintiff allegedly mailed from New Jersey the letter of credit and appropriate documentation to Defendant KEB NY Financial Corp. in New York City.*fn1 The invoice submitted by Plaintiff requested payment in the amount of $312,000.00. According to Defendant Korea Exchange Bank, KEB NY Financial Corp. then forwarded all relevant documents by mail to Korea Exchange Bank in South Korea.

Payment was never made to Plaintiff by Korea Exchange Bank, however, as Plaintiff apparently did not present the proper documents. (Def. KEB NY Financial Corp. Ex. C.) Plaintiff subsequently mailed a letter dated April 27, 2005 to Defendant KEB NY Financial Corp. in New York City demanding payment on the letter of credit.

On May 19, 2005, Plaintiff filed a Complaint against Defendant Korea Exchange Bank asserting breach of contract and letter of credit claims. On June 16, 2005, Plaintiff filed an Amended Complaint adding KEB NY Financial Corp. as a defendant. On August 4, 2005, Plaintiff filed the Second Amended Complaint against Defendant Korea Exchange Bank and Defendant KEB NY Financial Corp, as successor in interest to the New York Branch of Korea Exchange Bank. Count I includes a claim for breach of contract against Defendant Korea Exchange Bank; Count II is a "letter of credit claim" against Defendant Korea Exchange Bank; Count III asserts a "successor liability claim" against Defendant KEB NY Financial Corp.

II. DISCUSSION

A. Motion to Dismiss Count III by Defendant KEB NY Financial Corp.

Defendant KEB NY Financial Corp. has moved to dismiss Count III under Rule 12(b)(6), Fed. R. Civ. P., arguing primarily that KEB NY Financial Corp. is an "advising bank" and, thus, cannot be liable to Plaintiff.*fn2

1. Letters of Credit Generally

A letter of credit is "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)." Leonard A. Feinberg, Inc. v. Central Asia Capital Corp., 974 F. Supp. 822, 829 (E.D.Pa. 1997) (quoting Wood v. R.R. Donnelley & Sons Co., 888 F.2d 313, 317 (3d Cir. 1989) (citation omitted)). "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." Central Asia Capital Corp., 974 F. Supp. at 829 (quoting Leney v. Plum Grove Bank, 670 F.2d 878, 881 (10th Cir. 1982)).

In the ordinary letter of credit transaction, there are typically three distinct agreements: 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 ...


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