Opinion
No. 00 Civ. 6739 (CBM)
November 30, 2001
MEMORANDUM OPINION AND ORDER
The parties in the above-captioned breach of contract action have expressed their intent to file cross-motions for summary judgment. Because they dispute which law — New York or Thai — applies to the various claims and defenses at issue, and because it would be unnecessarily burdensome to require the parties to brief their motions under both New York and Thai law if Thai law does not in fact apply, the court directed the parties to brief the choice of law issues in advance of briefing the merits of their summary judgment motions. This preliminary round of choice of law briefing is now complete.
The parties' briefs reveal that the merits of their motions will raise three separate questions, each of which presents its own distinct choice of law issues: (1) whether defendant is liable to plaintiff under the ISDA Master Agreement and the related derivative transactions; (2) whether plaintiff is liable to defendant under the Bills of Exchange (that is, whether defendant acquired its interest in the Bills of Exchange in bad faith, whether there was adequate consideration, whether the Bills of Exchange are due and payable, etc.); and (3) whether defendant may assert in this proceeding plaintiff's liability to it, if any, under the Bills of Exchange through the affirmative defense of setoff. Because this is a diversity action, the court determines which law governs these questions by applying New York's choice of law rules.See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941).
The schedule incorporated into the ISDA Master Agreement contains an express choice of law clause: "This agreement will be governed by and construed in accordance with the laws of the State of New York (without reference to choice of law doctrine)." Compl. Ex. 1, Sched. ¶ 4 (h). Because this choice of law clause is enforceable under New York's choice of law regime, see N Y Gen. Oblig. Law § 5-1401, New York law governs the first question — whether defendant is liable to plaintiff under the ISDA Master Agreement and the related derivative transactions.
Unlike the ISDA Master Agreement, the Bills of Exchange contain no express choice of law provision. Therefore, in order to determine which law governs whether plaintiff is liable to defendant under the Bills of Exchange, the court applies New York's choice of law rule for contracts: "[T]he interpretation and validity of a contract is governed by the law of the jurisdiction which is the "center of gravity' of the transaction."Alderman v. Pan Am World Airways, 169 F.3d 99, 103 (2d Cir. 1999) (applying New York law). Under this approach — which is also referred to as the "grouping of contacts" approach — the court "may consider a spectrum of significant contacts, including the place of contracting, the places of negotiation and performance, the location of the subject matter, and the domicile or place of business of the contracting parties." Lazard Freres Co. v. Protective Life Ins. Co., 108 F.3d 1531, 1539 (2d Cir. 1997) (applying New York law). Here, the Bills of Exchange are denominated in Thai baht and were issued in Thailand by a Thai company to Thai companies. Accordingly, the court finds that the "center of gravity" of the Bills of Exchange is Thailand, and that Thai law therefore governs whether plaintiff is liable to defendant under the Bills of Exchange.
Applying section 214 of the Restatement (Second) of Conflicts of Laws — which provides that "[t]he obligations of the maker of a note and of the acceptor of a draft are determined . . . by the local law of the state designated in the instrument as the place of payment" — would yield the same result because the Bills of Exchange designate that their place of payment is Bangkok.
It is far less clear which law governs whether defendant may assert in this proceeding plaintiff's liability to it under the Bills of Exchange through the affirmative defense of setoff. This question is complicated by the fact that there are at least three possible sources of defendant's putative setoff right: the ISDA Master Agreement itself, statutory law, and general common law equitable principles.
To the extent that defendant is arguing that it has an express contractual right to setoff under the ISDA Master Agreement, there is no doubt that the agreement's choice of law clause governs and that New York law therefore applies. In other words, when briefing the issue of whether the language contained in paragraph 6(e), paragraph 14, or any other provision of the ISDA Master Agreement entitles defendant to assert the Bills of Exchange as a setoff, the parties should rely on New York law — for example, by parsing the contractual language through the lens of canons of construction utilized by New York courts.
Though the court will reserve judgment until the parties' motions have been briefed in full, the court notes that plaintiff's argument that the ISDA Master Agreement does not arm defendant with a contractual setoff right appears to have merit.
Even if the ISDA Master Agreement itself creates no setoff right, however, defendant still may enjoy a setoff right by operation of law — perhaps under statutory law see e.g., N.Y. Debt. Cred. Law § 151, perhaps under common law equitable principles, or perhaps based on some other source of law. The thorny question is: Which jurisdiction's law governs whether defendant enjoys an extra-contractual setoff right by operation of law?
Defendant argues that the choice of law clause in its contract with plaintiff is sufficiently broad to cover its asserted setoff right arisingoutside of the contract, and that New York law therefore governs whether it enjoys an extra-contractual setoff right. Defendant relies on Turtur v. Rothschild Registry Int'l, Inc., 26 F.3d 304 (2d Cir. 1994), in which the Second Circuit held that the choice of law clause at issue in that case — which covered any controversy "arising out of or relating to" the contract — was sufficiently broad to encompass tort claims related to the contract, not just the contract claim itself See id. at 309-10. Unlike in Turtur, however, the choice of law clause at issue here does not contain the broad "arising out of or relating to" language, but rather states simply that the contract "will be governed by and construed in accordance with the laws of the State of New York." The Second Circuit has squarely held — in cases decided after Turtur — that identical choice of law clause language is too narrow to control which law applies to alleged extra-contractual rights. See Krock v. Lipsay, 97 F.3d 641, 654 (2d Cir. 1996); Valley Juice Ltd., Inc. v. Evian Waters of France, 87 F.3d 604, 611 (2d Cir. 1996). Accordingly, this court holds that the choice of law clause contained in the schedule to the ISDA Master Agreement has no bearing on which law governs any extra-contractual setoff right that defendant may enjoy by operation of law.
Plaintiff urges the court to follow a well-established line of bankruptcy court cases holding that the availability of setoff is determined according to "the law of the state where the relevant facts transpired." E.g., In re Westchester Structures, 181 B.R. 730, 740 (Bankr. S.D.N.Y. 1995). These bankruptcy cases are inapposite, however, because none of them even purports to divine this choice of law rule from the law of the state in which the bankruptcy court sits. Unlike in the instant diversity action — in which the court is required underKlaxon to apply New York's choice of law rules — in the bankruptcy cases cited by plaintiff the courts, in construing the federal bankruptcy code, were free to follow their own federal common law choice of law regime. Because here the court is constrained to use New York's choice of law rules, this federal common law choice of law regime cannot apply.
Plaintiff correctly observes that the bankruptcy code does not create an independent federal setoff right, but rather incorporates existing state setoff rights. See 11 U.S.C. § 533. The court imagines, however, that once incorporated into the bankruptcy code, such setoff rights essentially become creatures of federal law — if only for conflicts purposes — thus enabling courts interpreting them to employ federal common law choice of law principles. This is the only way to explain why bankruptcy courts consider themselves free, unlike this court, to decide which jurisdiction's setoff rules apply without regard to the choice of law principles of the state in which they sit.
The question thus remains: Which choice of law rule would New York courts employ in determining which jurisdiction's law governs whether defendant enjoys an extra-contractual right to assert a setoff in this proceeding? The parties have neither cited any New York cases addressing choice of law in the setoff context nor did the court's independent research reveal any. In the absence of controlling authority, the court concludes that it should apply New York's "interest analysis" choice of law regime, which identifies and applies the law of the jurisdiction with the greatest interest in the dispute. See e.g., Cooney v. Osgood Machinery, Inc., 81 N.Y.2d 66, 72 (N.Y. 1993) (interest analysis seeks "to effect the law of the jurisdiction having the greatest interest in resolving the particular issue"). The New York Court of Appeals has made clear that interest analysis is appropriate where public rights are at stake (such as in tort disputes) versus where private rights are at stake (such as in contract disputes). See Allstate Ins. Co. v. Stolarz, 81 N.Y.2d 219, 225-26 (N.Y. 1993). Because defendant's putative extra-contractual setoff right — which can only arise by operation of law — sounds more in public law than in private law, the court concludes that New York courts would resolve this choice of law issue through interest analysis.
Of course, determining which jurisdiction — New York or Thailand — has a greater interest in whether defendant enjoys a setoff right arising outside of the ISDA Master Agreement requires in part a careful and detailed analysis of the law of both jurisdictions with respect to extra-contractual setoff rights. Because the parties' briefs did not focus on the nature and scope of New York and Thai law in this regard — indeed, the parties were not asked to — the court unfortunately is not fully equipped at this juncture to resolve this particular choice of law question. Accordingly, the parties are hereby instructed to include in their forthcoming briefs an analysis of which jurisdiction has the greater interest in the application of its setoff law.
The parties need not devote any further attention to the other choice of law issues discussed in this opinion. The court has decided that New York law controls whether defendant is liable to plaintiff under the ISDA Master Agreement; that Thai law controls whether plaintiff is liable to defendant under the Bills of Exchange; and that New York law controls whether the ISDA Master Agreement — as opposed to some other source of law — affords defendant a right to assert the Bills of Exchange as a setoff in this proceeding. The question of which law controls whether defendant enjoys an extra-contractual setoff right by operation of law remains unanswered for the moment, and the court will resolve this issue by applying New York's interest analysis.
It is hereby ORDERED that:
1. Plaintiff shall move for summary judgment and file and serve a supporting brief (not to exceed 25 pages) on or before January 11, 2002;
2. Defendant shall file and serve a single brief (not to exceed 30 pages) in opposition to plaintiff's motion for summary judgment and in support of its cross-motion for summary judgment on or before February 1, 2002;
3. Plaintiff shall file and serve a brief (not to exceed 20 pages) in opposition to defendant's cross-motion on or before February 22, 2002; and
4. Defendant shall file and serve a reply brief (not to exceed 15 pages) on or before March 15, 2002.
The cross-motions will be taken on submission, and the court will decide them without oral argument.