Article

Factual Summary: Pursuant to a purchase agreement to supply retail merchandise, applicant issued four purchase orders for the merchandise and Issuer issued three LCs at Applicant's request. Beneficiary manufactured the goods, and delivered them to Applicant's consolidating agent in Hong Kong, who inspected the goods and shipped them to Applicant, providing the Beneficiary with the necessary documents to draw under the LC.

Beneficiary presented documents on 27 December 2000, seven days after the LCs expired. On the following day, Applicant filed for Chapter 11 protection. Issuer then dishonored the presentations because the LCs had expired and because of discrepancies between the LCs and the bills of lading and other documents "such as different factory names, addresses and merchandise descriptions". Despite the dishonor, Applicant's customs broker delivered the goods to Applicant and they were sold by Applicant.

Beneficiary then sued Applicant, its customs broker, and a party named as the consignee, possibly a financier, to recover the payments, alleging breach of contract, conversion, and other counts. Despite Applicant's notice that the suit violated the automatic stay, Beneficiary continued the action. Applicant then initiated the present proceeding against Beneficiary, alleging violation of the automatic stay provisions which stay all actions against the debtor. On cross motions for summary judgment, judgment was entered in favor of the applicant as to the contract claim.

Legal Analysis:

1. Beneficiary had a Right to Payment before Applicant Filed for Chapter 11 Protection: The automatic stay provisions of 11 U.S.C. § 362 forestall all efforts by creditors to collect on antecedent debts when a debtor files for bankruptcy outside of the context of the bankruptcy proceedings. The stay applies to any judicial proceeding that was or could have been commenced before the filing and to claims against the debtor that arose before commencement of the case. Under the Bankruptcy Code, a creditor has such a claim if it has a right to payment or an equitable remedy for breach of performance, giving rise to a right to payment.

Thus, the court considered whether Beneficiary had a pre-petition right to payment. The court concluded that a party to a contract has a right to payment when it fully performs the contract. Under applicable sales law, the court ruled that Beneficiary performed when it tendered conforming goods, several weeks before the bankruptcy filing.

2. Tender of Documents: Beneficiary argued that where the contract called for payment by presentation of documents under a letter of credit, tender occurred on the presentation of the documents. Without accepting this argument, the court noted that tender of the documents had occurred prior to the bankruptcy filing.

Beneficiary, however, argued that the terms of the LC which allowed the issuer up to seven banking days in which to refuse the documents. In fact, the refusal did occur after the filing of the petition. The court rejected this argument.

It concluded that the provisions of the LC allowing the issuer seven business days "do not give the beneficiary any rights" but merely indicated what constituted a reasonable time for a decision as to whether or not to honor. The court also noted that, because a letter of credit is not a contract, the beneficiary was not obligated to do anything. Moreover, the court noted that the argument confused the right to payment with the time and place for payment.

The court also rejected the argument that the right to payment did not arise until Applicant took physical possession of the goods. The court noted that the only relevant fact was whether or not the right to payment existed under the contract which was when the goods were tendered or when the documents were tendered. Since both these events occurred pre-petition, a bankruptcy claim arose and prevented the assertion of a claim based on subsequent actions by Applicant even if it was a "bad act" such as conversion of the goods. "[Beneficiary] cannot accrue a second claim based on the same contract or goods, nor can it transform a pre-petition claim into a post-petition claim by focusing on events that occurred after its right to payment arose."

The court ruled that Beneficiary's breach of contract claim was void ab initio. It also determined that the violation of the stay was willful because Beneficiary filed the original suit regardless of its knowledge of the automatic stay. Applicant was therefore entitled to actual damages, including attorney's fees and costs.

Comments:

Because the court concluded that tender of both documents and the goods occurred pre-petition, its determination of which was applicable is not decisive. Nonetheless, the contract appears to fall squarely within the provision of the sales law that provides for a contract that requires the seller to deliver documents and that tender occurred when the documents were presented. Where the parties have agreed to payment by means of a letter of credit, tender of the goods, even if it occurs prior to payment, does not constitute the requisite tender for purposes of the credit. In suggesting that the presentation of the documents under the credit only goes to the means of payment, the court is wrong. Tender of the documents is a condition of the sales contract that provides for this mechanism for payment and, as such, is tender for purposes of the contract and for placing the buyer in a position of default.

The court is correct in its statement that a letter of credit is not a contract and that it imposes no duties on the beneficiary.

[JEB/jam]

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