Article

Note: At the request of Stanford International Bank Ltd. (Applicant), Trustmark National Bank (Issuer) issued standby letters of credit to companies conducting business with Applicant, including an LC to HP Financial Services Venezuela (Beneficiary) to secure the lease of computer equipment in the amount of USD 1,986,784.

Subsequently the U.S. Securities and Exchange Commission sued Applicant, alleging that it was involved in a multi-billion-dollar Ponzi scheme, recycling new investor's funds to prior investors in order to give the illusion of a profit. The scheme was perpetuated by R. Allen Stanford and involved 130 entities in 14 countries and the sale of Certificates of Deposit with high returns. The trial court entered a Receivership Order, placing Applicant in receivership status, and required court approval of any actions for collection, assessment, or recovery of claims against the Applicant. The Receivership Order also prohibited Issuer from exercising its secured creditor rights over Applicant's cash collateral absent court approval.

When Applicant defaulted on the computer lease, Beneficiary drew on the standby on two separate occasions, Issuer dishonored because payment would have violated the Receivership Order. Subsequently both Beneficiary and Issuer filed requests to clarify or modify the order. Beneficiary "sought to clarify whether the Receivership Order enjoins or otherwise applies to draws under letters of credit issued by [Issuer]. [Issuer] sought 'an order modifying, clarifying, or enforcing the Receivership Order as necessary to grant [Issuer] authority to exercise its rights as a secured creditor' and 'authority . . . to exercise its set-off rights against cash collateral.'"

The United States District Court for the Northern District of Texas, Godbey, J., ruled that the Receivership Order neither prohibited Beneficiary from presenting its claim nor Issuer from honoring the standby. Also, it denied Issuer's request to permit it to set off the payment against cash collateral that it held. On appeal, the US Court of Appeals for the Fifth Circuit in a per curiam opinion affirmed, ruling that the district court did not abuse its discretion.

Issuer claimed that the trial court abused its discretion by (1) authorizing Beneficiary to present and Issuer to honor the LC, and (2) by not balancing Issuer's set-off rights against the interests of the Receivership. The appellate court stated that "the tripartite nature of letter of credit transactions required [Issuer] to pay [Beneficiary] with [Issuer] funds, not Receivership funds." It noted "honoring the letter of credit is exactly the position [Issuer] put itself in by issuing the letter of credit in the first place" and ruled that Issuer could not avoid honoring the LC "simply because its means of recovery from [Applicant] may be frustrated by the Receivership Order." The appellate court also noted that Issuer's set off rights were preempted by the Receivership Order and concluded that the trial court did not err in weighing the factors surrounding modification of the Order. While noting that the Issuer would suffer injury by having its set off right reduced to a claim against the Receivership, the responsibility of the Receivership to marshal estate assets for all conditions is more important.

[rdp]

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

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.