Agricultural Bank of China provides $6 million USD to Foshan Polymarine Engineering Co for the construction of a yacht for the Jaffe Family in the United States in 2004

Project narrative

In early 2004, John and Barbara Jaffe contracted to purchase a 125-foot yacht from FoShan Polymarine Engineering Co. (a Chinese shipyard) for approximately $6 million. The contract required the Jaffes to provide financing security: they had to procure an irrevocable standby letter of credit from Bank of America (“BoA”) in favor of Agricultural Bank of China (“ABC”). This standby letter of credit would serve as collateral enabling ABC to lend funds to FoShan to build the yacht. In June 2004, ABC signed a loan contract roughly equal to the yacht’s price. Bank of America issued the standby credit for up to $6,030,500, slightly above the $6 million contract sum, to cover the loan principal plus any interest or bank fees incurred. The loan’s duration aligned with the yacht’s expected build period (about 18–24 months). The loan was set to mature in 2007, around the time the yacht was supposed to be completed and delivered. In fact, the standby letter of credit had an expiration in late April 2007, which corresponded to the loan’s due date – ABC could call on the letter of credit if FoShan had not repaid the loan by that time. However, despite receiving financing, FoShan never began construction of the yacht. y late 2004, the Jaffes grew concerned – they discovered that no work had been done and, alarmingly, that the “performance bond” meant to secure their advance was fraudulent. Realizing they had been duped by the shipyard and its associates, the Jaffes sought to cancel the standby letter of credit in order to avoid losing $6 million for a yacht that would never be built. In October 2004, Mr. Jaffe asked Bank of America to terminate or not honor the letter of credit, but BoA responded that FoShan’s breach of contract did not affect BoA’s obligation to pay ABC under the independent letter of credit. On April 24, 2007 – just one day before ABC could call the letter of credit – John and Barbara Jaffe filed an emergency lawsuit in the U.S. District Court (S.D. Florida) to block any payout. They sued Bank of America (the issuer) initially, seeking a temporary restraining order and injunction to prevent BoA from honoring the standby letter of credit. The Jaffes’ complaint painted the situation as an outright fraud: FoShan and ABC were accused of conspiring to defraud the Jaffes of the $6 million by misusing the letter of credit for a loan unrelated to any real yacht construction. The Jaffes warned that if Bank of America paid ABC, their $6 million would “vanish into China, beyond the jurisdiction of the Court– leaving them with no yacht and no recourse. A federal judge granted a temporary injunction halting any payment on the letter of credit, pending a hearing. After extensive discovery and a bench trial in late 2009, the court ruled entirely in favor of the defendants (Bank of America and ABC) on all counts: the judge found that, although the Jaffes were unfortunate victims of a fraud by FoShan and the bogus bond issuer, neither of those entities were before the court, and the banks (BoA and ABC) had not engaged in any actionable wrongdoing. Specifically, the evidence showed that ABC did, in fact, make a legitimate loan to FoShan to finance the yacht’s construction. There was no proof that ABC knew about FoShan’s fraudulent intentions or that ABC itself was misusing the letter of credit. In essence, ABC acted as a normal commercial lender: it relied on the BoA standby credit, lent money to the shipyard, and when the shipyard defaulted, ABC sought to recover the debt. The court also ruled in favor of Bank of America, rejecting the Jaffes’ claims that BoA misled them or breached any duty. The evidence on this point boiled down to a factual dispute: Mr. Jaffe testified that BoA’s VP (Mr. Ross) orally told him “we won’t pay unless the boat is delivered,” whereas Mr. Ross denied ever making such a promise. The court found Mr. Ross’s account more credible, essentially concluding that BoA did not make the specific “no boat, no pay” guarantee that Jaffe claimed. Eventually, the Judge ruled that ABC’s draw request was valid and that Bank of America was entitled to honor it. The Jaffes appealed the decision, but met no success. In September 2010, the U.S. Court of Appeals for the Eleventh Circuit affirmed the trial court’s judgment in full. No further appeal was pursued after the Eleventh Circuit’s 2010 ruling. The Jaffes were contractually obligated to reimburse Bank of America once ABC was paid, and indeed the record shows that outcome.