Article

Note: To repay a Canadian Bank (Lender/ Beneficiary) for financing the production of three bondage pornographic films, "Omega Force (also known as Bound Heat), Forgotten Kingdom (also known as Against Her Will), and Sacred Duty (also known as Final Victim)", Sports Pool Distributors Inc. (Issuer) issued three letters of credit for US$360,000 in its favor on behalf of North American Releasing Inc. and its parent, 598721 BC Ltd. (Borrower/Applicant). While the role of Issuer was said to be that of a guarantor in the opinion, it appeared that the letter of credit was the expected means of repayment rather than a protection against default.

Issuer's right to reimbursement was set forth in a Guarantee Agreement with Borrower/ Applicant. It was expected that revenue from pre-production orders made by established distributors in certain countries, namely Japan, the Benelux Countries, the United Kingdom and Republic of Ireland, and the Republic of South Africa, would be sufficient to cover the amount due on the letter of credit. In addition, Issuer was entitled to a percentage of the revenues on the films.

A critical concern of the Issuer was assurance that the payments from the distributors would be made to Issuer directly. The Guarantee Agreement provided that

7. Assignment of Contracts

...

7.2 As security for the repayment of the Guarantee, the [Borrower/Applicant] each hereby assigns to the Guarantor all their respective right, title and interest in and to the Assigned Contracts, including without limitation, the right to receive and retain for the Guarantor's own account all amounts payable pursuant to the Assigned Contracts until such time as the Guarantor has received in the aggregate Three Hundred Sixty Thousand U.S. Dollars ($360,000USD). 7.3 In addition, promptly following execution of this Guarantee Agreement, the [Borrower/ Applicant] agrees to draft and issue for execution Notices of Assignment and Directions to Pay and to use best efforts after thereafter [sic] to have all of the parties to all of the Assigned Contracts execute and return same to the Guarantor.

Borrower/Applicant, however, failed to issue notices of the assignment to the distributors who made payments totaling US$240,046.70 directly to Borrower/Applicant which wrongfully appropriated the funds paid. When the films were completed, Lender/Beneficiary drew on the three LCs and was paid by Issuer.

Having discovered that the pre-production funds had been spent and that Borrower/Applicant was insolvent, Issuer sued its attorney, Kenneth Dangerfield (Solicitor), for negligence in negotiating the Guarantee Agreement. The British Columbia Supreme Court, H. Groberman, J. found Solicitor liable.

The Judge concluded that Solicitor had failed to act as a reasonably competent solicitor in drafting the agreement so as to place on the Borrower/ Applicant the burden of giving notice of the acknowledgments without alerting the client as to the need to monitor the situation or providing a workable alternative. The Judge stated "there were a number of steps that Mr. Dangerfield could have taken to ensure that notice of the assignments was served on the subdistributors."

Comment:

1. One of the provisions of the Guarantee Agreement was that Beneficiary "could not draw on the letter of credit put up for a particular film until the film was ready for distribution, but could do so as soon as the film was ready for distribution". One wonders how this requirement was captured in a documentary condition. Perhaps the examiner was required to view copies of the films.

2. This letter of credit may give rise to a new letter of credit category of financial standbys, bondage credits.

[JEB/mcb]

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