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Docket Number

No. 886, Docket 94-7717.

Attorney(S)

Michael H. King, Chicago, IL (Kurt H. Feuer, Chicago, IL and Philip Goldstein, Ross Hardies, New York City, on the brief), for plaintiffs-appellees. Michael E. Norton, New York City (Stefan W. Engelhardt, King Spalding, on the brief), for defendant-appellant.

Judges

James Lowell Oakes
Amalya Lyle Kearse
Pierre Nelson Leval

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Smart Summary

Case Summary: Semetex Corp. & Eaton Corp. v. UBAF Arab American Bank

Factual and Procedural Background

Plaintiffs Semetex Corporation and Eaton Corporation (collectively "Semetex") obtained a letter of credit issued by an Iraqi bank that UBAF Arab American Bank ("UBAF") had confirmed. Semetex sought payment under UBAF's confirmation of that letter of credit. The district court (Judge Leonard B. Sand, S.D.N.Y.) granted plaintiffs summary judgment on their claim for payment. UBAF appealed, arguing principally (1) that Presidential Executive Orders and federal Iraqi Sanctions Regulations (the "Freeze Orders") and a denial of a transaction license by the Treasury Department's Office of Foreign Assets Control ("OFAC") barred payment, and (2) that Semetex failed to deliver the underlying equipment and presented false shipping documents.

Procedurally, this is an appeal from the United States District Court for the Southern District of New York. The Court of Appeals heard argument on March 20, 1995, and issued its decision on March 24, 1995.

Legal Issues Presented

Whether the Presidential Executive Orders and federal Iraqi Sanctions Regulations (the "Freeze Orders"), together with OFAC's denial of a transaction license, precluded Semetex from recovering payment on UBAF's confirmation of the letter of credit.
Whether Semetex failed to deliver the underlying equipment and presented false shipping documents, and if so, whether that alleged fraud bars recovery under the letter of credit or otherwise defeats plaintiffs' claim against UBAF.
Whether UBAF may assert fraud defenses when it previously represented to OFAC that the drawing and documents satisfied the letter of credit, and whether UBAF waived its right to assert such defenses.

Arguments of the Parties

Defendant-Appellant (UBAF)'s Arguments

The Freeze Orders (Presidential Executive Orders and federal Iraqi Sanctions Regulations) expressly prohibited the payment of the confirmed letter of credit and OFAC had denied Semetex's application for a transaction license, which should bar recovery.
Semetex did not deliver the equipment to the Iraqi air carrier as required by the letter of credit and presented false shipping documents misrepresenting that delivery had occurred; this alleged fraud defeats plaintiffs' claim for payment.

Plaintiffs-Appellees (Semetex)'s Arguments

Semetex obtained from OFAC a litigation license permitting them to bring suit to enforce the letter of credit confirmation and OFAC issued a clarifying letter stating the litigation license permits enforcement of any resulting judgment against UBAF funds not blocked by the Freeze Orders.
Semetex seeks judgment to be satisfied out of UBAF's assets that were not blocked by the Freeze Orders; therefore the Freeze Orders do not foreclose recovery under the litigation license and related OFAC clarification.
UBAF waived its right to assert fraud defenses by representing to OFAC that the drawing and documents satisfied the letter of credit and by asking OFAC to grant a transaction license before litigation.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Alaska Textile Co., Inc. v. Chase Manhattan Bank, N.A., 982 F.2d 813, 820 (2d Cir. 1992)	Principle that a party to a letter of credit who knows the existence of rights thereunder may voluntarily waive those rights by failing to assert them; intention to relinquish a right may be established as a matter of law or fact.	The court relied on this precedent to support its conclusion that UBAF waived its right to assert fraud defenses by having affirmatively told OFAC that the drawing request and documentation satisfied the letter of credit.
Voest-Alpine International Corp. v. Chase Manhattan Bank, N.A., 707 F.2d 680, 685 (2d Cir. 1983)	Similar authority regarding waiver of rights under letters of credit and the establishment of intent to relinquish rights as a matter of law or fact.	The court cited this case alongside Alaska Textile to support the waiver analysis and to show that intention to relinquish rights may be established as a matter of law.
Judge Sand's Opinion, reported at 853 F. Supp. 759 (S.D.N.Y. June 2, 1994)	District court opinion granting summary judgment to plaintiffs and providing the detailed reasoning that this Court affirmed substantially.	The Court of Appeals affirmed substantially for the reasons stated in Judge Sand's Opinion and adopted his analysis regarding the Freeze Orders, OFAC licenses, and UBAF's waiver of fraud defenses.

Court's Reasoning and Analysis

The court affirmed the district court's grant of summary judgment to plaintiffs for the primary reasons articulated in Judge Sand's Opinion and explained in the per curiam decision:

Freeze Orders and OFAC Licensing: The court concluded that the Freeze Orders did not preclude plaintiffs' recovery because Semetex had obtained an OFAC litigation license permitting them to bring suit, and OFAC issued a clarifying letter stating that the litigation license authorized enforcement of any resulting judgment against UBAF funds that were not blocked by the Freeze Orders. The court noted it was undisputed that the judgment sought by Semetex would be satisfied from UBAF assets not subject to blocking under the Freeze Orders.
Waiver of Fraud Defenses: The court rejected UBAF's fraud defenses on two independent grounds: first, that the defenses lacked merit for the reasons set forth in the district court's opinion; and second, that UBAF had waived the right to assert those defenses. The waiver analysis rested on established Second Circuit authority that parties to letters of credit may waive rights by failing to assert them and that intent to relinquish a right can be established as a matter of law.
Factual Basis for Waiver Finding: The court pointed to objective documentary conduct by UBAF as demonstrating waiver. Before litigation, UBAF joined Semetex in urging OFAC to grant a transaction license that would have enabled Semetex to draw under the letter of credit. In a May 7, 1991 letter to OFAC, UBAF confirmed that plaintiffs' drawing request and documentation satisfied the terms of the letter of credit. Although UBAF may have raised questions later, on August 19, 1991, UBAF expressly confirmed and reconfirmed to OFAC that the drawing request satisfied the L/C. Given (a) UBAF's opportunity to examine the submitted documents before making its representations to OFAC, (b) UBAF's failure to identify any new facts acquired after making those representations, and (c) its formal confirmations to a federal regulatory entity, the court held UBAF could not later assert that the documents were fraudulent.
Overall Disposition: After considering all contentions raised by UBAF, the Court found them to be without merit and affirmed the district court's judgment.

Holding and Implications

Affirmed. The Court of Appeals affirmed the judgment of the district court granting summary judgment to plaintiffs Semetex Corp. and Eaton Corp.

Implications and direct effects:

Semetex may enforce the district court judgment against UBAF assets that are not blocked by the Freeze Orders, consistent with the OFAC litigation license and OFAC's clarifying letter.
UBAF may not prevail on its asserted fraud defenses because the Court rejected them on the merits and found that UBAF waived the right to assert those defenses by its prior representations to OFAC.
The Court affirmed substantially for the reasons given by Judge Sand; the opinion does not purport to establish a novel rule of law beyond applying existing waiver principles and the effects of OFAC licensing in this context.

This summary is based exclusively on the text of the provided appellate opinion (per curiam, March 24, 1995) and does not include information outside that document.

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SEMETEX CORPORATION AND EATON CORPORATION, PLAINTIFFS-APPELLEES, v. UBAF ARAB AMERICAN BANK, DEFENDANT-APPELLANT.

PER CURIAM:

Defendant UBAF Arab American Bank ("UBAF") appeals from a judgment of the United States District Court for the Southern District of New York, Leonard B. Sand, Judge, granting plaintiffs Semetex Corp. and Eaton Corp. (collectively "Semetex") summary judgment on their claim for payment under UBAF's confirmation of a letter of credit issued by an Iraqi bank. On appeal, UBAF contends principally that the district court erred because (1) Presidential Executive Orders and federal Iraqi Sanctions Regulations (collectively the "Freeze Orders") expressly prohibited the payment, and the United States Treasury Department's Office of Foreign Assets Control ("OFAC") had denied an application by Semetex for a license to complete the underlying commercial transaction ("transaction license"); and (2) Semetex had failed to deliver the underlying equipment to an Iraqi air carrier as required under the letter of credit, and had presented false shipping documents misrepresenting that the delivery had occurred. We affirm substantially for the reasons stated in Judge Sand's Opinion dated June 2, 1994, and reported at 853 F. Supp. 759.

The district court's conclusion that the Freeze Orders did not foreclose plaintiffs' recovery is supported by a license obtained by Semetex from OFAC permitting plaintiffs to bring suit ("litigation license"), along with OFAC's clarifying letter stating that the litigation license permits plaintiffs to enforce any resulting judgment against UBAF funds not blocked by the Freeze Orders. It is undisputed that Semetex seeks a judgment against UBAF to be satisfied out of UBAF's own assets that were not blocked by the Freeze Orders.

We reject UBAF's fraud defenses on the ground that they lack merit, for the reasons stated in the court's Opinion, and on the ground that UBAF waived the right to assert such defenses. A party to a letter of credit who knows the existence of his rights thereunder may voluntarily waive those rights by failing to assert them. See, e.g., Alaska Textile Co., Inc. v. Chase Manhattan Bank, N.A., 982 F.2d 813, 820 (2d Cir. 1992); Voest-Alpine International Corp. v. Chase Manhattan Bank, N.A., 707 F.2d 680, 685 (2d Cir. 1983). "The intention to relinquish a right may be established either as a matter of law or [as a matter of] fact." Id. Such an intention was shown here as a matter of law. Prior to the present litigation, UBAF joined Semetex in urging OFAC to grant a transaction license, which would have permitted Semetex to draw funds under the letter of credit and enabled the Iraqi purchaser to receive the underlying equipment (to which it already had received title). In a letter to OFAC dated May 7, 1991, UBAF confirmed that plaintiffs' "drawing request and . . . documentation satisfy the terms of the Letter of Credit." Although between that date and August 7, 1991, UBAF may have raised questions with OFAC concerning the sufficiency of the drawing documents, in an August 19, 1991 letter UBAF expressly "confirm[ed]" and "reconfirm[ed]" to OFAC the position "that the drawing request satisfies the L/C." Since UBAF (a) had ample opportunity to examine the documents submitted with the drawing request before representing to OFAC that the documents were satisfactory, (b) has failed to point to any pertinent facts it acquired since making that representation, and (c) expressly confirmed the satisfactoriness of the drawing documents in its formal supplication to a federal regulatory entity, UBAF cannot now be heard to claim that the documents were in fact fraudulent.

We have considered all of UBAF's contentions on this appeal and have found them to be without merit. The judgment of the district court is affirmed.

SEMETEX CORP. v. UBAF ARAB AMERICAN BANK