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Note: To partially secure a lease of office space, OneCast Media, Inc. (Tenant), obtained an LC in favor of First West Building 00, LLC (Landlord). When Tenant filed for bankruptcy, Nancy James (Trustee) rejected the lease in accordance with applicable bankruptcy law. Landlord drew on the LC and retained and applied the proceeds as a security deposit.

Trustee sued Landlord to recover the proceeds. The Bankruptcy Court ruled that the portion of the security deposit representing the LC proceeds was not property of the bankruptcy estate and denied a motion for reconsideration. Trustee appealed and United States District Court for the Western District of Washington, Zilly, J., reversed and remanded. On appeal, United States Court of Appeals for the Ninth Circuit, in an opinion by Schwarzer, J. affirmed.

The appellate court stated that the Bankruptcy Court was clearly erroneous in its understanding of the independence principle and contractual relationships involved in LC practice. "There is no issue concerning the bank's performance under the letter of credit. Indeed, the Landlord, the beneficiary, has drawn down the full amount of the letter of credit. What is at issue here is simply the controversy between the Landlord and the Trustee over how much of the funds held by the Landlord it is entitled to retain."

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