Article

Note:Northern Apparels, Inc., Beneficiary of an LC issued for the account of Forman Enterprises, Inc., the now-bankrupt Applicant, sued PNC Bank, Issuer, in the U.S. District Court for the District of New Jersey for wrongful dishonor. On the motion of Issuer, the court transferred the case to the U.S. Bankruptcy Court for the Western District of Pennsylvania where the Applicant's bankruptcy was situate, considering it to be "related".

When Applicant's case was converted from one involving reorganization to liquidation, Beneficiary moved to re-transfer the case to the original venue. In a Memorandum Opinion, Markovitz, J., denied the motion.

The bankruptcy court concluded that the case was within its jurisdiction since it was a related proceeding, noting that the test was whether "the outcome of [this] proceeding could conceivably have an effect on the estate being administered in bankruptcy."

Since Applicant was obligated under a credit agreement to indemnify Issuer for any damages incurred in relation to the letter of credit, the court held that resolution of Beneficiary's case against Issuer could still "conceivably affect" Applicant's ability to administer its estate by reducing the amount of funds available to creditors other than Issuer even though the proceeds had been converted into a liquidation case. Further, Beneficiary's assertion that a ruling in its favor would only minimally affect Applicant's estate was found to be irrelevant since even if the effect would only amount to "a mere trifle," any effect would suffice to maintain "related to" jurisdiction.

The judge also noted that by honoring Beneficiary's motion to transfer, the court would be in effect reconsidering an issue previously decided by another court. The court found that there are only three "extraordinary circumstances" which would warrant such an action, including new evidence, supervening law, or the earlier decision was "clearly erroneous and would create a 'manifest injustice' if not rectified." The court found that none of these issues applied in this case and denied the motion to transfer.

Comment:

While the court may be within the letter of the statute conferring jurisdiction, such decisions should be exercised with restraint where they impact commercial devices that allocate the risk of insolvency. The purpose of the LC was to shift the credit risk to the issuer and away from the beneficiary. Such uses of LCs are not only common but are commercially reasonable. As a result, there is no reasonable relationship between an action for wrongful dishonor by the issuer of its LC and the ordering of the Debtor/Applicant's estate in bankruptcy.

To imply, as does this court, that such litigation should be conducted within the purview of the bankruptcy court because an adverse decision could indirectly affect the estate through the exercise of rights by the issuer suggests that the decision on the LC issues may be affected by bankruptcy considerations. Such a result would be unacceptable. Whether the issuer has rightfully dishonored has nothing to do with bankruptcy and should not be considered in the context of marshaling assets of the estate for the benefit of creditors.

Moreover, the beneficiary justifiably assumes that it can bring an action against a bank that is obligated on the LC in the jurisdiction in which it conducts business. This factor affects business decisions and costs and should not be lightly disregarded.

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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.