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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
2010 LC CASE SUMMARIES No. 09-0653-CG-M, 2010 WL 749317 (S.D. Ala. March 2, 1010) [U.S.A.]
Topics: Independence, Bankruptcy, Injunction, Automatic Stay
Type of Lawsuit: Applicant sued to enjoin Issuer from honoring a draw on a letter of credit and to enjoin Beneficiary from seeking payment.
Parties: Appellant/Applicant/Shipbuilder - Bender Shipbuilding & Repair Co. (Counsel: Christopher T. Caplinger, Stewart F. Peck, Lugonbuhl, Wheaton, Peck, Rankin & Hubbard, New Orleans, La, Irvin Grodsky, Mobile, AL.)
Appellee/Beneficiary - Seacor Marine, LLC (Counsel: Thomas Julian Butler, of Haskell Slaughter Young & Rediker, LLC, Birmingham, AL; Miranda S. Schiller of Weil, Gotshal & Manges LLP, New York, NY.)
Appellee/Issuer - Regions Bank (Counsel: Joe A. Joseph, Alan D. Leeth, Burr & Forman LLP, Birmingham, AL, David S. Garbett, Joseph D. Perkins, Garbett, Stiphany, Allen & Roza, PA, Miami, FL.)
Underlying Transaction: Contract to build six anchor towing supply vessels.
LC: Standby Letter of Credit for US$5,000,000.
Decision: The U.S. District Court for the Southern District of Alabama, Southern Division, Granade, J., affirmed the decision of the Bankruptcy Court dismissing the Shipbuilder's letter of credit status complaint seeking an injunction.
Rationale: Ipso facto clauses contained in standby letters of credit permitting a drawing when an applicant is in involuntary bankruptcy are enforceable because a letter of credit is not a contract of the debtor. The request for payment under the standby letter of credit does not in itself constitute a violation of an automatic stay under bankruptcy.
Article
Factual Summary: Shipbuilder agreed to manufacture six vessels for Beneficiary. The contract required a performance standby letter of credit in favor of Beneficiary. Issuer issued a letter of credit for $5 million, payable on certification by an officer or authorized official of the Beneficiary that: an undisputed event of default occurred and is continuing, Shipbuilder has been notified in writing of the default, and all applicable cures and/or grace periods have expired.
When Shipbuilder was placed into involuntary bankruptcy, Beneficiary submitted the required certification of default and demanded payment for the full $5 million. The next day, Beneficiary sought a declaratory judgment in the Alabama Federal District Court that Issuer must honor Beneficiary's drawing. Shipbuilder then filed a complaint in Bankruptcy Court requesting declaratory judgment that the notice of default is void and an injunction to prevent Issuer from paying Beneficiary on the letter of credit and a temporary restraining order and preliminary injunction to prevent Beneficiary from seeking payment under the letter of credit. The Bankruptcy Court Judge dismissed the Shipbuilder's complaint and the District Court Judge affirmed.
Legal Analysis:
1. Independence
Shipbuilder argued that 11 U.S.C. §365(e)(1) invalidates the agreement because the letter of credit modifies the rights and obligations of a party in involuntary bankruptcy. 11 U.S.C. § 365(e)(1) can prevent ipso facto clauses from invalidating agreements of the debtor solely based on bankruptcy. However, the Judge noted that letters of credit are wholly independent of the underlying contract. Because letters of credit are not agreements "of the debtor", 11 U.S.C. § 365(e)(1) does not apply directly to the letter of credit.
If the underlying agreement required a change in the rights and obligations upon declaration of default, 11 U.S.C. §365(e)(1) may indirectly prevent Beneficiary from demanding payment on the letter or credit. However, Beneficiary is not prevented from declaring default because this underlying agreement does not require any termination, partial termination or any other change in the rights and obligations upon declaration of default.
2. Automatic Stay
Shipbuilder argued that the notice sent by Beneficiary to collect payment on the LC violated the automatic stay under 11 U.S.C. § 362(a)(6) and therefore was void and without effect. Therefore, the certification provide by Beneficiary with their request for payment would be invalid. However, because a LC is not property of the debtor's estate, the Judge found that the notice to Issuer was not in itself a violation of the stay.
[JEB/mdb]
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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.