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Note: In its action for wrongful repudiation of a supply contract against Dairy Mart, New England Dairies, Inc. applied for a prejudgment remedy due to its concerns about Dairy Mart's ability to pay a judgment. The court granted the request and Dairy Mart posted a one year LC payable to New England Dairies, Inc. for US$2,750,000. Subsequently, the court ordered that it be renewed 60 days prior to its expiry.

Subsequently, Dairy Mart filed for voluntary reorganization under Chapter 11 of the U.S. bankruptcy code. With the LC about to expire Beneficiary requested that the Bankruptcy Court for the Southern District of New York require the debtor to renew the LC or grant relief from the automatic stay to apply to the trial court directly. The motion was denied. On appeal, the United States District Court for the Southern District of New York, Marrero, J., affirmed.

The appellate court concluded that requiring renewal of the LC would require the posting of collateral which would confer a voidable post-petition preference in its favor to the prejudice of other creditors. The court concluded that the effect of the filing for bankruptcy protection was to transfer any claims that Beneficiary had in the case into a monetary claim.

The appellate court rejected Beneficiary's argument that the bankruptcy court should have used its equitable powers to preserve the status quo. The appellate court noted that the bankruptcy court had concluded that the balance of equities did not favor the beneficiary nor did the appellate court find any error in the refusal to lift the automatic stay to permit the beneficiary to seek similar relief in the trial court.

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