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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
2002 LC CASE SUMMARIES (Bank. M.D. Fla.) [U.S.A.]
Topics:Setoff; Special Purpose Funds; Reimbursement; Insolvency
Type of Lawsuit:Trustee for Applicant sought order designating the estate's entitlement to funds pledged to secure an LC.
Parties:Plaintiff/Trustee for Applicant- Diane L. Jensen (In re: Advanced Golf Design. Inc.) (Council: Diane L. Jensen, Fort Myers, FL) Defendant/ Issuer- Suntrust Bank (Council: Douglas L. Waldorf, Jr., Ft. Myers, FL)
Underlying Transaction:Silent as to underlying transaction.
LC: Standby LCs for US$ 50,000 and US$ 100,000. Silent as to governing rules.
Decision: The United States Bankruptcy Court for the Middle District of Florida, Fort Myers Division, Paskay, J., granted Trustee's motion for summary judgment in part and denied it in part.
Rationale: :Where a beneficiary has lost the right to draw on the LC, a special purpose fund that secures the LC loses its "special purpose" character and is therefore property of the estate and may be subject to general security interests.
Article
Factual Summary:: Applicant pledged a CD in the amount of US$ 50,000 to secure an LC for one year and renewed the LC for an additional year. In a separate transaction, the Merchant's Fund Agreement relating to credit cards, it was agreed "that any chargebacks and repurchases, including overdrafts, are subject to the security interest of [Issuer] on any and all funds of the [Applicant] on deposit with [Issuer]." A second CD in the amount of US$ 100,000 was pledged to secure a separate LC payable to a second beneficiary. Applicant declared bankruptcy 20 months after the first LC was issued. Shortly after commencement of the bankruptcy case, Beneficiary drew US$ 17,000 on the first LC. The second LC was never drawn on and expired.
Applicant's Trustee demanded the balance of the two CDs and brought this adversarial action against Issuer when it refused to deliver the CDs. The bankruptcy court granted Trustee's motion for summary judgment in part and denied it in part.
Legal Analysis:
1.Reimbursement; Insolvency: Applicant contended that the funds on deposit with the Issuer were "special purpose funds" and, because the obligations were not mutual, issuer was not entitled to exercise any right of setoff. Issuer argued that both CDs lost their character because the LCs which they secured cannot be drawn. As a result, it contended that both are charged with a security interest under the charge agreement. In its decision, the court stated, "special funds deposited in the banking institution... are not subject to administration and conversely would not be subject to any claim of any party other than for whose benefits the funds were deposited." The court agreed with Issuer that the CDs lost their "special fund character" when the beneficiaries lost their ability to draw on the LC. The court, therefore, ruled that the funds are property of the trustee "but subject to whatever the extent of the security interest of [Issuer] created by the Merchants Fund Agreement that encumbers the funds in question."
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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.