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Note: Suffolk County National Bank (Issuer) issued a US$50,000 letter of credit in favor of the Electrical Industry Board of Nassau and Suffolk Counties and Local 25 of the International Brotherhood of Electrical Workers (Beneficiaries) on behalf of Elemco Testing Company, Inc., Elemco Electrical Construction Co., Inc., and Elemco Industries, Inc. (Applicants/Debtors). Beneficiaries moved for judicial certification that Applicants/ Debtors had failed to satisfactorily remit funds owed to Beneficiaries. The United States Bankruptcy Court, Alan S. Trust, J., granted the motion.

Applicants/Debtors' argument was based on a cash collateral order entered by the United States Bankruptcy Court prior to the current dispute. The applicable terms of the cash collateral order stated:

2. From and after the Petition Date through the Termination Date (as defined in the DIP Loan Agreement), and subject to the terms and conditions of this Order and the DIP Loan Agreement, the [Applicants/]Debtors are authorized to borrow, up to $200,000 pursuant to the terms and provisions of this Order, as follows:

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(c) a $50,000 irrevocable Letter of Credit for the benefit of [Beneficiaries] in consideration of the [Applicants/]Debtors' bonding obligations under the Collective Bargaining Agreement to be terminated upon either (i) a sale of the [Applicants/]Debtors' assetts pursuant to § 363 of the Bankruptcy Code; (ii) the [Applicants/ ]Debtors obtaining a union bond as specified in the Collective Bargaining Agreement, or (iii) December 31, 2009 (the "Union Letter of Credit"). Should the [Applicants/]Debtors fail to cure a 72 hour notice by [one of the Beneficiaries], [either of the Beneficiaries] may then make an application to the Bankruptcy Court for an expedited hearing for a determination [of this proceeding] . . . . within two business days after it is issued;

Applicants/Debtors were subsequently authorized to close a sale of a majority of their assets free of liens, claims, and encumbrances under § 363 of the United States Bankruptcy Code, thus fulfilling the requirements for early termination of the letter of credit under § 2(c)(ii) of the cash collateral order. However, Beneficiaries argued that, "while [Issuer] could have provided a termination event on the face of the LC prior to its stated expiry . . . [Issuer] varied from this Court's Cash Collateral Order by omitting the termination events that were authorized by the Cash Collateral Order."

The Judge found only that Applicants/Debtors had "failed to satisfactorily remit funds due to [Beneficiaries]". The Judge stated that no sufficient evidence of the LCs termination had been presented, and that the issue was irrelevant to the motion at hand. The Judge observed that Beneficiaries only requested judicial certification of Applicant's/Debtor's default and ordered that "the rights and remedies of [Beneficiaries] and [Issuer] otherwise related to the LC" be remanded to a different court of more competent jurisdiction.

[JEB/kmw]

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