Article

Prior History: Rafool v. Evans (In re Cent. Ill. Energy, L.L.C.), No. 07-82817, 2010 Bankr. LEXIS 1814 (Bankr. C.D. Ill., June 16, 2010) noted in 2011 ANNUAL REVIEW OF INTERNATIONAL BANKING LAW & PRACTICE at 543.

Note: To assure construction of an ethanol production facility and a waste-coal fired co-generation facility, Lurgi PSI, Inc. (Contractor/Applicant) obtained two standby letters of credit in favor of Central Illinois Energy, L.L.C. (Developer/Beneficiary), issued by DZ Bank and Commerzbank (Issuers), in the total amount of USD 8.8 million. According to the opinion "[t]he expiration date of both letters of credit was December 15, 2007, although the letters of credit were automatically renewable for one year periods unless the respective banks received notice from [Developer/Beneficiary], as beneficiary, along with the letter of credit, instructing the issuing bank to terminate the letter of credit, or unless the issuing bank had sent notice to [Developer/Beneficiary] of at least 30 days, but no more than 45 days, that the letter of credit would not be extended. Both letters of credit provided that if the letter of credit was not extended beyond the expiration date and was not renewed or replaced by [Contractor/Applicant], [Developer/Beneficiary] could make a draw within the last fifteen days prior to the current expiration date."

One month later, Contractor/Applicant abandoned the project before completion. Developer/Beneficiary/Debtor filed for bankruptcy under U.S. Bankruptcy Code 11 U.S.C. Chapter 11 (reorganization), which was subsequently converted to Chapter 7 (liquidation). Beneficiary/Debtor's attorney, Michael E. Evans (Attorney), failed to advise Beneficiary at that time to draw on the standby LCs before filing for bankruptcy.

Developer/Beneficiary/Debtor sued Attorney for malpractice for failing to advise it to draw on the LCs prior to the bankruptcy filing and failing to advise that LCs were "financial accommodations" which cannot be assumed by [Developer/Beneficiary] in bankruptcy under 11 U.S.C. § 365(c)(2). Although the court denied Attorney's Motion to Abstain, the U.S. Bankruptcy Court for the Central District of Illinois, Perkins, B.J., granted Attorney's Motion for Summary Judgment.

The Judge ruled that § 365(c)(2) was not applicable to an LC where the beneficiary filed for bankruptcy relief, and did not bar debtor from acting as debtor in possession or the trustee from drawing on the LC. The Judge concluded that the right to draw upon an LC was property of the estate that could be used by a debtor in possession. 11 U.S.C. § 365 (c)(2) provides: "The trustee may not assume or assign any executory contract or unexpired lease of the debtor, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties, if . . . such contract is a contract to make a loan, or extend other debt financing or financial accommodations, to or for the benefit of the debtor, or to issue a security of the debtor . . .". The Judge ruled that standbys were not contracts of the debtor, nor executory, and were not financial accommodations to the debtor, so that §365(c)(2) was not applicable.

In addition, the Judge ruled that Beneficiary/ Debtor had the right to draw upon the standbys after filing for bankruptcy. Lastly, the Judge ruled that as a result of the bankruptcy filing not affecting Beneficiary/Debtor's right to draw upon the standbys, even if Attorney breached a duty by failing to make the attorney that Beneficiary/Debtor later hired for purposes of its bankruptcy proceedings aware of the standbys, that breach could not have been the proximate cause of any harm to Beneficiary/Debtor.

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