Article

Note: Various lenders participated in a revolving credit facility for Mirant Corporation (Borrower). The lenders included Credit Suisse First Boston, which acted as Administrative Agent and Wachovia Bank, N.A. Borrower entered into a four year Credit Agreement with the banks as well as a Letter of Credit Agreement which was subject to New York law. Pursuant to these agreements, LCs were issued, some of which were also subject to New York law.

Subsequently, Borrower and its related entities filed for relief under the U.S. Bankruptcy Code and the bankruptcy court issued orders extending the expiration dates of undrawn LCs. On default in the underlying transaction and pending expiration, Beneficiaries drew on certain LCs and were paid. Issuers filed various administrative claims in the proceeding and sought subrogation to Beneficiary's rights in the underlying transactions against Debtors other than Borrower with respect to the LCs that were honored. They also sought to reclaim proceeds from drawings that had been made due to the pending expiration of the LCs and not to default, the proceeds of which were eventually transferred in whole or part to Debtors.

Debtors disputed the Issuers' claims, filing motions for partial summary judgment.

They argued that Issuers were not entitled to assert subrogation claims against debtors other than Applicant and that Issuers cannot claim a reversionary interest in the LC proceeds.

The U.S. Bankruptcy Court for the Northern District of Texas, Fort Worth Division, Lynn, J., denied Debtors' motions for partial summary judgment regarding the subrogation claims, but granted the motion relating to the reversion of drawn proceeds.

Debtors had argued that subrogation was not available due to the independence principle under either the UCP to which the LCs were subject, nor New York law to which some of them were subject because it was preempted by the UCP under Prior NY Section 5-102(4), nor 11 USCA Section 509 of the US Bankruptcy Code which preempts state law regarding subrogation.

Although Issuers called the court's attention to the provisions of Revised UCC Section 5-117 which "rejects the previous majority view that subrogation should be unavailable in the LOC context", the court noted that it was agreed that the revision was inapplicable. The banks also argued that the independence principle ceases to apply after payment on an LC. The opinion, however, did not address any of these issues.

Instead, the court considered whether the provisions of the US Bankruptcy Code precluded assertion of LC subrogation and concluded that in light of the complexity of the issues and the presence of related issues of fact, summary judgment was inappropriate.

It did, however, grant summary judgment in favor of Debtors with respect to the banks' claims to the proceeds of the drawn credits that had been repaid to the Debtors. Noting that the banks had drafted the LCs, the court ruled that "because the credit documents in no way restricted draws made against the LOCs based on impending expiration and because the credit documents in no way restricted the beneficiaries' application of the proceeds once drawn, the court concludes that W&CS may not assert a reversionary interest in said proceeds." It relied on Barclay's Bank PLC v. Dresdner Bank Lateinamerika A.G. (In re Lancaster Steel Co.,Inc.), 284 B.R. 152, 159 (S.D. Fla. 2002) for the proposition that "when a letter of credit did not restrict what the beneficiary could do with the funds, the beneficiary was free to do as it wished".

[JEB/mpp]

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