Petition for Writ of Certiorari — Pablo Calderon, Petitioner v. United States

Supreme Court briefAug 6, 2020

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No.

In The

Supreme Court of tfje ®ntte& States:

Pablo Calderon,

Petitioner,

United States of America,

Respondent.

On Petition For A Writ Of Certiorari

To The United States Court Of Appeals

For The Second Circuit

PETITION FOR A WRIT OF CERTIORARI

Pablo Calderon

Pro Se

7 Old Parish Road

Darien, CT 06820

(203) 613-6748

sxallc@gmail.com

August 6, 2020

QUESTION PRESENTED

The rights and obligations of parties in a letter of credit are subject to the

statutory provisions of the Uniform Commercial Code Article 5. In particular,

the conditions that allow a party to dishonor a letter of credit presentation is

black letter law. By ignoring statutory law in this criminal case, the Second

Circuit created a property right that is non-existent in civil fraud litigation.

The question presented is:

Can a party in a criminal fraud action have a property right that applicable

statutory law denies in a civil action?

PARTIES TO THE PROCEEDING

Pablo Calderon is the petitioner here and was a defendant-appellant below.

The United States is the respondent here and was the appellee below.

TABLE OF CONTENTS

Page

QUESTION PRESENTED

PARTIES TO THE PROCEEDING

RELATED CASES

TABLE OF CONTENTS

TABLE OF AUTHORITIES

INTRODUCTION

OPINIONS BELOW

JURISDICTION

STATUTORY PROVISIONS INVOLVED

STATEMENT OF THE CASE

Factual Background

Indictment and Trial

The Decision Below

.... 11

REASONS FOR GRANTING CERTIORARI

The Statutory Obhgation to Honor a LC Presentation

The Second Circuit Decision Conflicts With the Plain

Language and the Intent of UCC...................................

The Second Circuit Disregarded the Rules of Decision Act

CONCLUSION

APPENDIX

Appendix A

Opinion, United States Court of Appeals for the Second Circuit,

United States v. Calderon, et al., No. 17-1956 (Dec. 3, 2019)......

App.l

Appendix B

Order, United States Court of Appeals for the Second Circuit,

United States v. Calderon, et al., No.17-1956 (Mar. 10, 2020).

App.55

Appendix C

18U.S.C. §1343

App.56

Appendix D

28 U.S.C. §1652

App.56

Appendix E

C.R.S.A. § 4-5-107(a)

App.57

Appendix F

C.R.S.A. § 4-5-108(a)

App.57

Appendix G

C.R.S.A. § 4-5-109(a)

App.58

Appendix H

Terms and Procedures for Letter of Credit Refinancing

App.61

Appendix I

Calderon’s Reply Brief in the instant case

App.65

TABLE OF AUTHORITIES

Page(s)

Cases

3Com Corp. v. Banco do Brasil, S.A.,

171 Fd.3d 739 (2d Cir. 1999)..................................................................

ACE Am. Ins. Co. v. Bank of the Ozarks,

No. ll-cv-3146(PPG), 2014 WL 4953566 (S.D.N.Y. Sept. 30, 2014)

Ada-Es v. Big Rivers Elec. Corp.,

No: 4:18-CV-00016-JHM (W.D. Ky. June 9, 2020)..............................

Alaska Textile Co. v. Chase Manhattan Bank, N.A.,

982 F.2d 813 (2d Cir. 1992).................................................................... 19, 20, 21

Banco Espanol de Credito v. State St. Bank & Tr. Co.,

385 F.2d 230 (1st Cir. 1967)...................................................................

Bank of Cochin, Ltd. v. Mfrs. Hanover Tr. Co.,

808 F.2d 209 (2d Cir. 1986)....................................................................

20, 21

Banque Worms, New York Branch v. Banque Commerciale Privee,

679 F. Supp. 1173 (S.D.N.Y. 1988) affd. 849 F.2d 787 (2nd Cir.

1988)...........................................................................................................

BasicNet S.p.A. v. CFP Services Ltd.,

127 A.D.3d 157, 4 N.Y.S.3d 27 (N.Y. App. Div. 2015)........................

Colo. Nat'l Bank v. Bd. ofCty. Comm,

634 P.2d 32 (Colo. 1981)..........................................................................

Erie Railroad Co. v. Tompkins,

304 U.S. 64 (1938)....................................................................................

Ground Air Transfer v. Westates Airlines,

899 F.2d 1269 (1st Cir. 1990).................................................................

In re Tabernash Meadows, LLC,

No. 03-24392 SBB, Adversary No. 03-1899 HRT, 2005 WL 375660

(Bankr. D. Colo. Feb. 15, 2005)..............................................................

Intraworld Industries, Inc. v. Girard Trust Co.,

461 Pa. 343, 336 A.2d 316 (1975)...........................................................

Itek Corp. v. First National Bank of Boston,

730 F.2d 19 (1st Cir. 1984)......................................................................

Mago International v. LHB AG,

833 F.3d 270 (2d Cir. 2015).....................................................................

20, 21

McNally v. United States,

483 U.S. 350 (1987)..................................................................................

1, 13

New York Life Insurance Co. v. Hartford National Bank & Trust Co.,

173 Conn. 492, 378 A.2d 562 (1977).......................................................

Recon/Optical, Inc. v. Government of Israel,

816 F.2d 854 (2d Cir. 1987)......................................................................

Roman Ceramics Corp. v. Peoples National Bank,

714 F.2d 1207 (3d Cir.1983)....................................................................

Sztejn v. Henry Schroder Banking Corp.,

Ill Misc. 719, 31 N.Y.S.2d 631 (Sup. Ct. 1941)...................................

United Bank Ltd. v. Cambridge Sporting Goods Corp.,

41 N.Y.2d 254, 392 N.Y.S.2d 265, 360 N.E.2d 943 (1976)................

Voest-Alpine Int’l Corp. v. Chase Manhattan Bank, N.A.,

707 F.2d 680 (2d Cir. 1983).........................................................

20, 21

Statutes

18 U.S.C. § 1343....................

2, 9, 13

18 U.S.C. § 3663....................

28 U.S.C. § 1254....................

28 U.S.C. § 1652....................

passim

Colo. Rev. Stat. Ann. § 4-5-107

Colo. Rev. Stat. Ann. § 4-5-108

3, 16, 22

Colo. Rev. Stat. Ann. § 4-5-109

passim

Regulations

7 C.F.R. § 1493.120

Other Materials

International Chamber of Commerce,

Uniform Customs and Practice for Documentary Credits (2007 rev.)

(UCP 600).....................................................................................................

vii

INTRODUCTION

The mail and wire fraud statutes are “limited in scope to the protection of

property rights”, McNally v. United States, 483 U. S. 350, 360 (1987). In most,

if not all, of the criminal fraud case law of the past three decades the

determination of a proposed property right has relied primarily on the

application of common law principles. This case presents the unusual

prosecutorial technique of dressing an issue of statutory law in common law

clothing. So far, the tactic worked. The Second Circuit affirmed convictions

below by creating a new property right replacing a black letter statutory

obligation. The decision below sets an unacceptable precedent in violation of the

Judiciary Act of 1789 and of basic principles of federalism, separation of powers

and due process. Yet there is a simple remedy: order the court below to not

ignore applicable statutes and instead apply them.

This prosecution arose out of Pablo Calderon’s and co-defendant Brett

Lillemoe’s participation in the GSM-102 Program (“Program”) of the United

States Department of Agriculture (“USDA”). The Program’s mission is to

promote U.S. agricultural exports by providing credit guarantees on loans

issued to foreign banks. The Defendants were not exporters of physical products,

instead they participated in the Program as financial intermediaries for U.S.

agricultural exporters that lack the expertise in banking and in the rules of a

complex federal program. The Defendant’s business model is neither illegal nor

at issue in this case.

Based on expected shipments, the Defendants obtained guarantees from

the USDA. Foreign banks issued letters of credit (“LC”) with the Defendants as

beneficiaries and upon presentation of copy shipping documents, the Defendants

transferred the foreign banks’ obligations under the LCs to the U.S. confirming

banks. The guarantees were assigned to the U.S. banks that issued guaranteed

loans financing the foreign banks’ LC obligations.

One of Calderon’s convictions was for fraud on a U.S. bank by presenting

changed copies of shipping documents under a LC (the “Cool Express”

transaction)1. 18 U.S.C. § 1343. The Second Circuit ruled based on witness

testimony that the changes exposed the U.S. confirming bank to the risk that

the foreign issuing bank would repudiate its LC obligation or that the USDA

would repudiate a claim on the guarantee. Further, it ruled based on witness

testimony that the U.S. bank would have declined to go through with the Cool

Express LC (“dishonored the presentation”) had it known that documents were

changed. In other words, the alleged misrepresentations were material. The

USDA paid a claim for loss in the transaction of more than $6,000,000. The

district court imposed the full amount as restitution for the USDA. On appeal,

the

restitution

was

reversed

based

finding

that

Calderon’s

misrepresentations were not a proximate cause of the USDA’s loss.

1 Cool Express is the name of the vessel on which the product was shipped.

The Second Circuit, however, ignored a critical clause of the LC contract

that limited the jurisdiction of any claim to either a court of the State of Colorado

or the U.S. District Court for the District of Colorado, where LC contracts are

subject to the Colorado Revised Statutes Title 4 Uniform Commercial Code

Article 5 (“UCC”). The opinion lacks a single reference to the UCC. Under the

Judiciary Act of 1789, the laws of the states are superseded only by the

Constitution and treaties of the United States or Acts of Congress. 28 U.S.C.

§1652. The decision affirming the Cool Express conviction creates an absurd

Second Circuit precedent tantamount to abrogating part of 28 U.S.C. § 1652 or

to denying the existence of the UCC.

Given the undisputed facts of this case, the findings in the Second Circuit

opinion, the UCC text and case law, there are sufficient merits such that

disregard of the UCC infringes on Calderon’s due process rights.

A LC contract is a payment mechanism for an underlying commercial

transaction by which payment is made upon the presentation of prescribed

documents. The obligation to honor the presentation is plainly stated in the

statute: the confirmer or issuer shall honor a presentation that is complying “on

its face” with the terms and conditions of the LC. UCC § 4-5-108. The exception

to this rule is codified in UCC § 4-5-109: to dishonor a facially complying

presentation, the LC issuer or confirmer carries the burden of showing “material

fraud”, i.e. there must be fraud in the underlying transaction as per universal

statutory interpretation.2 The decision below relies on a holding clearly at odds

with the statute: it holds that a presentation containing documents that were

changed in order to facially comply with the terms and conditions of the LC, are

actually non-complying and the confirmer and issuer have the right to dishonor

the presentation, free from the burden of showing underlying fraud. The Second

Circuit affirmed the Cool Express conviction despite reversing the restitution

which is inconsistent with fraud in the underlying transaction.

LC contracts are ubiquitous in domestic and international trade and are

covered by standardized statutes in the 50 states. The Cool Express decision

conflicts with statutory obligations markets have relied on for decades. Yet the

overarching reason to grant review of the Cool Express decision is to preserve

the requirement of the Judiciary Act of 1789 that federal courts shall base

decisions on state law when it applies.

OPINIONS BELOW

The district court’s opinion denying acquittal or a new trial is reported at

United States v. Lillemoe, 242 F. Supp. 3d 109 (D. Conn. 2017). The Second

Circuit’s opinion is reported at United States v. Calderon, et al., 944 F.3d 72 and

reprinted at App.1-54.

2 Section 5-109 of the Colorado UCC has equivalents in the Uniform Commercial

Code of the other 49 states.

JURISDICTION

The Second Circuit issued its opinion on December 3, 2019 and denied a

timely petition for rehearing en banc on March 10, 2020. On March 19, 2020,

this Court issued an order extending the period to file petitions for certiorari

from 90 to 150 days, making the deadline for this petition August 7, 2020. This

Court has jurisdiction under 28 U.S.C. § 1254(1).

STATUTORY PROVISIONS INVOLVED

18 U.S.C. § 1343

28 U.S.C. § 1652

Colo. Rev. Stat. Ann. § 4-5-107

Colo. Rev. Stat. Ann. § 4-5-108

Colo. Rev. Stat. Ann. § 4-5-109

STATEMENT OF THE CASE

Factual Background

Calderon was convicted of mail fraud and conspiracy as a result of his

participation in the GSM-102 Program. The Program — which is administered

by the USDA — is designed to encourage U.S. agricultural exports to developing

countries by providing credit guarantees to U.S. banks that finance foreign

banks in connection to the export transactions. The seller in such an export

transaction enjoys immediate payment and the domestic bank’s credit exposure

to the foreign bank is covered by the Program guarantee. App.10.

In a transaction covered by the Program, the link between the export sale

of physical goods and the loan to the foreign bank is established by a LC

contract, a payment mechanism in the sale of the goods. In a LC, the foreign

bank (the “LC issuer”) assumes the foreign importer/buyer’s obligation to pay

the exporter/seller (the “LC beneficiary”) subject to the presentation of

documents related to the sale. The role of the domestic bank in the overall export

transaction is two-fold. First, the U.S. bank is the “LC confirming bank” (or “LC

confirmer”) and as such it is a party to the LC contract. The LC confirmer

assumes the LC issuer’s obligation to pay the LC beneficiary upfront on receipt

of the beneficiary’s documents (the confirmer “honors the presentation”). When

the confirmer pays the beneficiary, the confirmer acquires the right to be

reimbursed upon forwarding the presentation to the issuer (the issuer “honors

the presentation”).

Second, having acquired the right to reimbursement, the U.S. bank

finances the foreign bank’s obligation. The U.S. bank lends the obligation

amount to the foreign bank that pays back the loan, in time and with interest.

But the U.S. bank is only exposed to a minimal portion of the credit risk on the

loan, a Program guarantee covers 98% of the risk of default. Before the issuance

of the LC, the U.S. exporter/seller applies for the Program guarantee with the

USDA. Based on specific and qualifying characteristics of the shipment sold but

not-yet delivered, the Program guarantee is issued to the benefit of the

seller/exporter. When the U.S. bank honors the seller/exporter’s LC

presentation, the Program guarantee is assigned to the U.S. bank and apphed

to the loan, covering default risk. If the foreign bank defaults on its loan

obligation, the U.S. bank makes a loss claim on the guarantee and the USDA

reimburses 98% of the loss.

The GSM-102 Program is technically complex, but the ultimate effect is

straightforward: the credit guarantees enhance the economic value of the

export-linked loans and that value in turn creates an incentive to purchase U.S.

agricultural products, making them more accessible to foreign buyers. The

undesired effect of the Program design, however, is to limit direct access to only

few U.S. exporters that have the capability of “lining up the sun, the moon and

the stars”, necessary to arrange Program-backed transactions. App.12. To meet

the demand for Program benefits of smaller exporters, which otherwise would

not have access to those benefits, some participants act as financial

intermediaries in “structured trade transactions”. Calderon and Lillemoe were

not exporters of physical goods; they exclusively arranged structured

transactions in the Program as intermediaries. App.ll.

In a structured transaction, the financial intermediary contracts with a

physical exporter and acquires the exclusive right to use the physical exporter’s

shipment to obtain a Program guarantee — a shipment related to a sale that

qualifies for the Program and that would allow the physical exporter to obtain

a Program guarantee if the exporter participated directly. In exchange for that

right and the delivery of the copy shipment documents required by the related

LC, the financial intermediary pays the physical exporter a fee. In this

arrangement the intermediary “rents the trade flow”. App.ll. The intermediary

generates the fee by monetizing the value of the Program guarantee that it

obtains from the USDA based on the export sale.

The court below found that “[participating in the GSM-102 program as a

financial intermediary is not itself illegal.” App.12. The nature of Calderon’s

business model was not at issue in his convictions. Calderon was convicted of

one count of wire fraud and one count of conspiracy to commit wire and bank

fraud for presenting allegedly falsified bills of lading (“BL”) to the U.S.

confirming banks. This Petition requests the review of the substantive wire

fraud conviction, which was based on the Cool Express transaction.

The only alleged basis of fraud in the Cool Express transaction was that

the exporter sent Lillemoe copies of BLs stamped “copy non-negotiable” and that

Lillemoe “whited out” the stamps and placed “original” stamps instead.

Calderon was convicted of fraud on CoBank of Denver, Colorado, the confirming

bank of the LC, for presenting the changed copy BLs. The alleged purpose of

changing the stamps was “in order to make them appear to be compliant with

the terms of the governing letters of credit.” App.29.

The Government does not dispute that State of Colorado law applies to the

Cool Express LC. By incorporation of the “Terms and Procedures for Letter of

Credit Refinancing” in the LC (JA 1852), the jurisdiction of any claims related

to the LC is limited to the courts of the State of Colorado and the U.S. District

Court for the District of Colorado. App.63.

In 2010, the LC issuer defaulted on the Cool Express loan of over

$6,000,000. CoBank filed a claim for loss and the USDA reimbursed 98% of the

full loan amount. App.13.

Indictment and Trial

On February 20, 2015, a grand jury returned a twenty-three count

indictment against Calderon. It charged Calderon with one count of conspiracy

to commit wire fraud and bank fraud, nineteen counts of wire fraud, 18 U.S.C.

§ 1343, one count of bank fraud, one count of money laundering and one count

of making a false statement. The Indictment alleged, in part, that Lillemoe and

Calderon conspired to commit bank fraud and wire fraud by materially altering

shipping documents. App.14.

At trial, the Government submitted evidence that Lillemoe whited out

“copy non-negotiable” stamps and added “original” stamps on the Cool Express

copy BLs and that Calderon presented the changed copies to CoBank. App.15.

Witness Holly Womack, a CoBank representative, and a witness from another

confirming bank testified that they would not have honored Calderon’s

presentations had they known that copy BL stamps had been changed from

“copy non-negotiable” to “original”. App.16. Further, Womack testified that the

BL modifications exposed the confirming bank to the risk of non-reimbursement

by the foreign LC issuer. App.30.

The conspiracy charge was based on several transactions, one of which was

the Cool Express. App.41. In two of the other transactions underlying the

conspiracy charge, the Government introduced evidence that Lillemoe changed

the “onboard date” of three copy BLs from October 5, 2008, to October 6, 2008.

The Government argued that those shipments did not qualify for the Program

guarantees that Lillemoe obtained. Witness Jonathan Doster, a USDA official,

testified to that effect. App.17-18. Notably, Doster was not asked, nor did he

testify that any of the shipments with changed stamps on the copy BLs did not

qualify for the guarantees, including the Cool Express. Doster also testified that

according to a Program regulation, 7 C.F.R. § 1493.120 (e)3, the U.S. confirming

banks were holders in due course of Program guarantees. See JA610 (“Q. So

even if a shipment never existed, if the bank took the documents in good-faith

and the documents complied on their face, the USDA is not going to come back

to them later and say, tough luck, we're not paying? A. Our regulations state we

would pay it.”). It was undisputed during the proceedings in this case that the

U.S. confirming banks dealt in good faith.

On November 9, 2016, the jury returned a verdict of guilty for Calderon on

3 In the Program regulations currently in effect, the corresponding clause is 7

C.F.R. § 1493.180(e).

the conspiracy count and on one wire fraud count based on the Cool Express.

Calderon was acquitted of the other twenty-one counts of wire fraud, bank fraud,

money laundering and false statement. After the verdict, the court denied

Calderon’s motion for acquittal or a new trial. United States u. Lillemoe, 242 F.

Supp. 3d 109 (D. Conn. 2017). The court sentenced him to five months’

imprisonment and $63,509.97 in forfeiture. App. 19,46. Post judgment, the

district court ordered Calderon to pay $18,501,353 in restitution to the USDA,

jointly and severally with Lillemoe, under the Mandatory Victims Restitution

Act, 18 U.S.C. § 3663A. App.20. Of the full restitution amount to the USDA,

$6,053,647 was attributed to the Cool Express and the remainder to other

transactions related to the conspiracy charge. The district court granted

Calderon bail pending appeal.

The Decision Below

On appeal Calderon argued that there was no underlying fraud in

transactions where only copy BL stamps had been changed and there was no

dispute that the shipments qualified for the guarantees. In those transactions

the U.S. confirming hanks could not dishonor facially complying presentations

as a matter of law. UCC § 5-109. App.94. He also argued that by the same clause

of the statute, the foreign issuing bank could not repudiate its obligation to

reimburse the U.S. confirming banks. App.81. The Second Circuit affirmed

Calderon’s Cool Express conviction based on witness testimony and its own

interpretation of the contractual language. The opinion did not address

Calderon’s arguments of statutory law. Indeed, the court did not cite the statute

at all.

The Second Circuit held that a LC presentation that was changed by the

beneficiary and that otherwise would not strictly comply on its face with the

conditions of the LC, is not “complying” and consequently the confirming and

issuing banks have the right to dishonor such a presentation for non-compliance.

App.25. As a result, the changes exposed the U.S. banks to the risk of non

reimbursement by the foreign bank. App.30. Further, the court ruled that the

changes that were the basis of the convictions, were per se fraudulent. App.25.

The court ignored the UCC requirement that the party that dishonors a facially

complying presentation make a showing of “material fraud” or “fraud in the

underlying transaction”. The court explicitly found that changed BL onboard

dates exposed the U.S. banks to the risk that the USDA would decline to pay

loss claims. App.32. The court was silent on the risk that the USDA repudiate a

loss claim for changed stamps, as in the Cool Express.

The opinion briefly explains LC contracts, relying in part on civil case law.

App.6-10. However, all the cases cited in the opinion involved disputes on the

facial compliance of presentations or on the notice required to dishonor facially

non-complying presentations. The Court did not address the case law relating

to allegations of fraud that Calderon cited in his reply brief. App.76-79. Indeed,

the Court did not address any precedent on the fraud-in-the-transaction

exception.

Finally, the Court reversed the restitution in its entirety because Calderon

did not proximately cause the USDA’s losses. App.45-54. The Court held that

the economic risks to the U.S. banks due to Calderon’s misrepresentations did

not materialize, namely the risks that the issuer repudiate reimbursement or

the USDA not pay a loss claim. The risk that did materialize was the default of

the foreign bank. Calderon did not the affect either the USDA’s or the confirming

bank’s decision to assume credit exposure to the foreign bank because the credit

decisions were made before Calderon’s misrepresentations. App.51.

The Second Circuit denied Calderon’s petition for rehearing or rehearing

en banc on March 10, 2020. App.55.

REASONS FOR GRANTING CERTIORARI

This case resembles most other criminal property fraud litigation since

McNally where the central question is the extent of property rights. The review

sought here is of a conviction under the criminal wire fraud statute 18 U.S.C. §

1343. However, property being by nature a civil right, the question to be decided

is essentially one of civil law. The thesis of this petition is that the limiting

principles of property rights in the criminal fraud context and in civil litigation

are indistinguishable. If this Court generally agrees with the thesis, this case

presents a good vehicle to explicitly state the principle. If the Court does not

agree with the thesis, it must accept the creation of a new area of law, criminal

property law, distinct from civil property law. The decision below is a concrete

step in that direction. It creates a property right that civil statutory law

explicitly denies. The decision below affords LC confirming and issuing banks

the right to dishonor a facially complying LC presentation in circumstances

where both banks have the obligation to honor according to applicable civil

statutory law.

Here the limiting principle in civil law is stated in the Rules of Decision

Act, part of the Judiciary Act of 1789, currently codified in 28 U.S.C. § 1652:

The laws of the several states, except where the Constitution or treaties of

the United States or Acts of Congress otherwise require or provide, shall

be regarded as rules of decision in civil actions in the courts of the United

States, in cases where they apply.

The apphcable state law is the UCC. The decision below, in so much as it creates

a property right, estabhshes federal common law that supersedes state

statutory law, contrary to the consistent interpretation of Rules of Decision Act

since inception.4

The Cool Express wire fraud conviction is based on a finding of fraud

specifically in the LC contract, App.12, and both the materiality and

contemplated harm elements of the charge are based on the Second Circuit’s

4 Since Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938) state common law

supersedes federal common law, when it applies.

right to dishonor a facially complying LC presentation. The court rehed on

testimony by CoBank officer Holly Womack that CoBank would have exercised

the right to dishonor if it had known that the stamps were changed. App.26.

The right to dishonor was also a basis of the contemplated harm element of the

charge. Again, the court relied on testimony by Womack that the LC issuer could

have exercised its right to dishonor the presentation and refuse to reimburse

CoBank. App.30. If the confirming and issuing banks did not have the Second

Circuit right to dishonor and they actually had the UCC obligation to honor,

multiple elements of the charge fail as a matter of law and the Cool Express

charge must be reversed.

The reason for granting review of the Cool Express conviction, however,

does not directly concern the ultimate ramifications of the UCC in this case. The

reason is the Second Circuit’s refusal to consider the UCC at all. The court

dehberately set aside and ignored the UCC which Calderon’s reply brief

addressed in detail and created a federal common law property right contrary

to the UCC statute and contrary to the Judiciary Act of 1789. App.56.

The Statutory Obligation to Honor a LC Presentation

This section and the following one show that while CoBank and the LC

issuing bank had the right to dishonor Calderon’s Cool Express presentation

according to the Second Circuit, they had the obligation to honor according to

UCC.

In addition to being subject to the UCC, the vast majority of LCs

incorporate the standardized language of the Uniform Customs & Practice for

Documentary Credits (“UCP 600”), as does the Cool Express LC. JA1851. SA78128. Under UCP 600 rules, both the confirming and issuing banks must examine

the documents of the LC presentation and determine “ whether or not the

documents appear on their face to constitute a complying presentation”

(emphasis added). UCP 600 art. 14.a. SA105. “When an issuing bank determines

that a presentation is complying, it must honour.” UCP 600 art. 15a. “When a

confirming bank determines that a presentation is complying, it must honour”

UCP 600 art. 15b. SA106. The contractual obligation to honor documents that

“appear on their face” to constitute a complying presentation, is mirrored by the

plain language of UCC and though the contractual language contemplates no

exception to this obligation, the statute does have an exception.

Except as otherwise provided in section 4-5-109, an issuer shall honor a

presentation that, as determined by the standard practice referred to in

subsection (e) of this section, appears on its face strictly to comply with the

terms and conditions of the letter of credit.

(Emphasis added). UCC § 4-5-108. App.57. By UCC § 4-5-107 the confirming

bank has the same obligations as the issuer. App.57. The exception in UCC § 45-109 is commonly called the fraud-in-the-transaction exception or defense5:

(a) If a presentation is made that appears on its face strictly to comply with

the terms and conditions of the letter of credit, but a required document is

5 The expression “fraud in the transaction” comes from the language of UCC §

4-5-114(2) in the revision of UCC preceding the current revision adopted by

Colorado in 1996 (bill number SB 132).

forged or materially fraudulent, or honor of the presentation would

facihtate a material fraud by the beneficiary on the issuer or applicant:

(1) The issuer shall honor the presentation, if honor is demanded by [ ...]

(ii) a confirmer who has honored its confirmation in good faith [...]; and

(2) The issuer, acting in good faith, may honor or dishonor the presentation

in any other case.

App.58. The statute does not define the term “material” fraud; the meaning is

to be found in the official comments of the section and in the extensive case law.

Courts have some degree of discretion in deciding “materiality”. For example, if

the sale invoice is for 1,000 barrels of salad oil, and only 998 barrels are

delivered,

the beneficiary's act, though possibly fraudulent, is not materially so and

would not justify an injunction. Conversely, the knowing submission of

those invoices upon delivery of only five barrels would be materially

fraudulent. The courts must examine the underlying transaction when there

is an allegation of material fraud, for only by examining that transaction

can one determine whether a document is fraudulent or the beneficiary has

committed fraud and, if so, whether the fraud was material.

Material fraud by the beneficiary occurs only when the beneficiary has no

colorable right to expect honor and where there is no basis in fact to support

such a right to honor.

(Emphasis added). Official Comment to § 4-5-109, 1. App.58-59. The case law

preceding and following the adoption of the current UCC revision uniformly

affirms the meaning of the comment above.

Fundamentally, "fraud in the transaction," as referred to in section 4-5114(2), must stem from conduct by the beneficiary of the letter of credit as

against the customer of the bank. [...] It must be of such an egregious

nature as to vitiate the entire underlying transaction so that the legitimate

purposes of the independence of the bank's obligation would no longer be

served. Intraworld Industries, Inc. v. Girard Trust Co.,[461 Pa. 343, 336

A.2d 316 (1975)]; New York Life Insurance Co. v. Hartford National Bank

& Trust Co., 173 Conn. 492, 378 A.2d 562 (1977); Sztejn v. Henry Schroder

Banking Corp.,[Ill Misc. 719, 31 N.Y.S.2d 631 (Sup. Ct. 1941)];

Colo. Nat'l Bank v. Bd. ofCty. Comm, 634 P.2d 32, 39 (Colo. 1981).

Thus, courts have stated that the “fraud in the transaction” exception is

available only where the beneficiary's conduct has “so vitiated the entire

transaction that the legitimate purposes of the independence of the issuer's

obligation would no longer be served.” Roman Ceramics Corp. v. Peoples

National Bank, 714 F.2d 1207, 1212 n. 12, 1215 (3d Cir.1983) (quoting

Intraworld Industries, Inc. v. Girard Trust Bank, 461 Pa. at 359, 336 A.2d

at 324-25 (1975)).

Itek Corp. v. First National Bank of Boston, 730 F.2d 19, 25 (1st Cir.1984), an

opinion by then Judge Breyer.

The [fraud in the transaction] exception, as we also explained in Itek, 730

F.2d at 24—25, concerns “fraud” so serious as to make it obviously pointless

and unjust to permit the beneficiary to obtain the money. Where the

circumstances “plainly” show that the underlying contract forbids the

beneficiary to call a letter of credit, Itek, 730 F.2d at 24; where they show

that the contract deprives the beneficiary of even a “colorable” right to do

so, id. at 25; where the contract and circumstances reveal that the

beneficiary's demand for payment has “absolutely no basis in fact,” id.

Ground Air Transfer v. Westates Airlines, 899 F.2d 1269, 1272—73 (1st Cir.

1990), another opinion by then Judge Breyer.

The [fraud in the transaction] doctrine, however, authorizes dishonor only

where “a drawdown would amount to an outright fraudulent practice by

the beneficiary.” [Recon/ Optical, Inc. v. Government of Israel, 816 F.2d 854,

858 (2d Cir. 1987)] (internal quotation marks omitted). For example, if a

draft is accompanied by documents evidencing shipment of goods under a

contract of sale, the doctrine permits dishonor not where a legitimate

dispute exists concerning whether the goods conform to the underlying

contract, but only where the goods are so obviously defective that the

representation of shipment is plainly false. See, e.g., United Bank Ltd. v.

Cambridge Sporting Goods Corp., 41 N.Y.2d 254, 256, 392 N.Y.S.2d 265,

360 N.E.2d 943 (1976)

3Com Corp. v. Banco do Brasil, S.A., 171 Fd.3d 739, 747 (2d Cir. 1999).

[T]he fraud exception “is limited to situations in which the wrongdoing of

the beneficiary has permeated the entire transaction”, [Banque Worms,

New York Branch v. Banque Commerciale Privee, 679 F. Supp. 1173, 1182

(S.D.N.Y. 1988) affd. 849 F.2d 787 (2d Cir. 1988)].

BasicNet S.p.A. v. CFP Services Ltd., 127 A.D.3d 157, 171, 4 N.Y.S.3d 27 (N.Y.

App. Div. 2015). The fraud-in-transaction doctrine is so well established that

many memoranda and opinions that rely on § 4-5-109 or its equivalent in other

states are no longer reported, often citing cases above. In re Tabernash

Meadows, LLC, No. 03-24392 SBB, Adversary No. 03-1899 HRT, 2005 WL

375660 (Bankr. D. Colo. Feb. 15, 2005); ACE Am. Ins. Co. v. Bank of the Ozarks,

No. ll-cv-3146(PPG), 2014 WL 4953566 ( S.D.N.Y. Sept. 30, 2014); Ada-Es v.

Big Rivers Elec. Corp., No: 4:18-CV-00016-JHM (W.D. Ky. June 9, 2020).

The Second Circuit Decision Conflicts With the Plain

Language and the Intent of UCC

The Second Circuit’s opinion echoes the civil law obligation to honor

“compliant”, or synonymously “conforming”, presentations. “The letter of credit

itself constitutes an ‘irrevocable promise to pay the []beneficiary when the latter

presents certain documents ... that conform with the terms of the credit.’ Alaska

Textile Co. v. Chase Manhattan Bank, N.A., 982 F.2d 813, 815 (2d Cir. 1992).”

App.6-7. The opinion also echoes the right to dishonor a presentation that does

not “strictly” comply.

Indeed, under the law of the majority of jurisdictions (including this one)

if the documents provided by the seller to the confirming bank did not

“strictly” comply with the requirements of the letter of credit, the issuing

bank is entitled to refuse to honor the letter of credit, and the confirming

bank is therefore unable to recover the money “assigned” to it by the seller.

See Voest-Alpine Int’l Corp. v. Chase Manhattan Bank, N.A., 707 F.2d 680,

683—85 (2d Cir. 1983); see also [Mago International v. LHB AG\, 833 F.3d

at 272 (noting that the “absolute duty” to honor the letter of credit “does

not arise unless the terms of the letter have been complied with strictly”

(internal quotation marks and citation omitted)). “This rule [of strict

compliance] finds justification in the bank’s role in the transaction being

ministerial, and to require it to determine the substantiality of

discrepancies would be inconsistent with its function.” Alaska Textile, 982

F.2d at 816. If the documents were nonconforming but honored, an issuing

bank could sue a confirming bank for “wrongful honor.” See, e.g., Bank of

Cochin, Ltd. v. Mfrs. Hanover Tr. Co., 808 F.2d 209 (2d Cir. 1986)

App. 9.

[A] confirming bank must determine if the presentation is compliant with

the terms of a letter of credit, and it can reject non-compliant documents.

This Circuit has emphasized in the civil context that documents’

compliance with the terms of a relevant letter of credit should generally be

analyzed under a standard of “strict compliance,” a standard followed by a

majority of courts. See Mago Int’l, 833 F.3d at 272.

App.30-31.

The opinion did not define the expressions “strictly complying”,

“compliant” or “conforming” in the context of the obligation to honor a LC

presentation but it did articulate a condition that makes a presentation “noncompliant”: a presentation that is compliant on its face but was changed by the

beneficiary and otherwise would not be compliant on its face, is non-compliant.

The opinion deduced that a confirming or issuing bank has the right to dishonor

such a presentation, relying on the general principle that the “absolute duty [to

honor] does not arise unless the terms of the letter have been complied with

strictly.” Mago 833 F.3d at 272. App.9.

The court clearly articulated how this principle applies to the transactions

of this case. “[T]he Defendants falsified documents in order to make them appear

to be compliant with the terms of the governing letters of credit.” App.29. “[T]he

banks could have and would have rejected the bills of lading had they not been

changed or had the banks known of the specific changes at issue”. App.26. “[T]he

banks could have and would have rejected nonconforming documents such as

those at issue here.” App.28.

In formulating this new class of “non-compliant” presentations the court

did not adduce a single apposite authority. The dispute in Banco Espanol de

Credito v. State St. Bank & Tr. Co., 385 F.2d 230 (1st Cir. 1967), App.5, and in

Mago was whether the documents were facially compliant. The dispute in

Alaska Textile Co. was whether the issuer fulfilled the notice requirements for

dishonoring a facially non-compliant presentation. The dispute in Voest-Alpine

Int’l Corp. was whether the strict compliance of a facially non-compliant

presentation had been waived. The dispute in Bank of Cochin was whether the

presentation was facially compliant and, if not, whether the notice for

dishonoring was timely. In this case, the parties agree that the presentations

were facially comphant.

According to both the Second Circuit’s new LC law and the UCC,

confirming and issuing banks have the obligation to honor a presentation of

facially complying documents (a presentation that “appears on its face strictly

to comply with the terms and conditions of the letter of credit”. UCC § 4-5108(a).) However, the exception to the rule, namely the specific conditions where

the obligation to honor a facially complying presentation is replaced by the right

to dishonor it, differ radically under the two laws. Under UCC § 4-5-109, the

obligation to honor is extinguished only on a showing of “material fraud” which

requires an examination of the underlying transaction. The Second Circuit

ignores the plain language of UCC and does away with the required examination

of the underlying transaction; an examination of documents suffices to

extinguish the obligation. If the beneficiary changed a document in order to

make it facially complying, the confirming and issuing banks are no longer

obligated to honor, even without a showing of fraud in the underlying

transaction.

The Cool Express LC is an example where the court found that the

confirming and issuing banks had the right to dishonor a facially complying

presentation. Calderon was convicted on the Cool Express charge because his

misrepresentations deprived the banks of exercising their right to dishonor. Yet,

the opinion not only lacks an examination and a finding of fraud in the

transaction underlying the Cool Express LC, it lacks any allegation of fraud in

the underlying transaction.6 To wit, there is no allegation that the exports of the

6 The opinion examines the underlying transactions only where BL onboard

dates were changed. Those transactions relate to the conspiracy charge, not the

Cool Express charge. App.16-18.

Cool Express transaction did not qualify for the Program guarantee obtained

nor is there any allegation of fraud or impropriety in the “rental” contract with

the physical exporter of the Cool Express shipment. There is no allegation of

fraud on the USDA in applying or obtaining the Cool Express guarantee. There

is no allegation that the copy BLs stamped “copy non-negotiable” that Lillemoe

received from the exporter were fraudulent or forged, indeed, there is no dispute

that the copy BLs Lillemoe received were true and correct. There is no allegation

of any discrepancy between the characteristics of the shipment reported on the

guarantee application, those represented by the copy BLs in Calderon’s

presentations, and those of the actual shipments. Under the Second Circuit’s

new LC law, had the shipper delivered copy BLs stamped “original” but

otherwise identical to the ones he actually delivered, and had Calderon

presented those versions, there would be no fraud on CoBank.

But the implications of the Cool Express decision go beyond those above.

According to the court’s decision, there was no fraud in the underlying

transaction . The reversal of the restitution in the Cool Express transaction

amounts to such a finding. The USDA lost more than $6,000,000 in the Cool

Express transaction and the decision to pay the claim was made after Calderon

presented the changed BLs to CoBank. Indeed, the USDA’s decision to pay

CoBank’s claim relied on the changed documents. If Calderon’s alleged

misrepresentations constituted fraud on the USDA, Calderon’s presentation to

CoBank was the proximate cause of the USDA’s loss.7 Inevitably, two

conclusions must be drawn from the reversal of the Cool Express restitution.

Calderon did not commit fraud on the USDA and there was no fraud in the

transaction underlying the Cool Express LC.

The Second Circuit Disregarded the Rules of Decision Act

Calderon’s wire fraud conviction was affirmed for allegedly falsifying the

Cool Express BLs before presenting them to CoBank in order to make the

documents facially comphant with the terms of the LC. Specifically, the Second

Circuit found that Calderon’s misrepresentations deprived CoBank of its right

to dishonor the presentation and that the LC issuing bank’s right to dishonor

the presentation exposed CoBank to the severe economic harm of not being

reimbursed for paying Calderon. In contrast, according to the State of Colorado

UCC statute that applies the determination of civil rights here, neither CoBank

nor the LC issuing bank had the right to dishonor Calderon’s presentation. They

had the obligation to honor it.

The determination of a civil right is subject to the same rules of decision in

criminal actions as it is in civil actions. In this case the Second Circuit

deliberately set aside and ignored the UCC that Calderon explained in his reply

7 As described supra, the court found that the changed BLs were not the

proximate cause of the USDA’s decision to assume credit exposure to the foreign

bank. The opinion is silent on the effect of Calderon’s changes on the decision to

pay the loss claim.

brief. The court disregarded the Rules of Decision Act and created federal

common law contrary to applicable state statutory law.

CONCLUSION

This Court should grant the petition.

Respectfully submitted,

Pablo Calderon

PROSE

7 Old Parish Rd

Darien, CT 06820

(203) 613-6748

sxallc@gmail.com

August 6, 2020

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.