Article

Factual Summary: Reinsurers, including an agent and members of a reinsurance pool, undertook to reinsure insurers. To spread the risk of reinsurance, Reinsurers re-reinsured the members of the pool by means of reinsurance treaties. The treaties required Re-Reinsurers to secure their obligation. Accordingly, they applied for LCs in favor of pool members to the Sydney Branch of Issuer and another bank as Collateral Agent.

Bank was permitted to issue the LC through an affiliate, which also became the "issuer" in the treaties and to whom Applicants were obligated to make reimbursement.

Under the LC agreement, Collateral Agent was required to maintain in collateral accounts in favor of issuer U.S. Treasury Securities equivalent in value to Applicants obligations under outstanding LCs. Applicants were required to make additional deposits prior to the issuance of a new LC.

Within the applicable preference period, the LCs were issued, drawn on, and paid to Beneficiaries by Issuer's New York affiliate, which requested reimbursement from Applicants. One of the Applicants became insolvent and applied for protection under applicable law. Claiming improper preference, insolvent Applicant brought an action against Beneficiaries to recover LC proceeds. On a motion by Beneficiaries, the trial court denied summary judgment.


Legal Analysis:

1. Insolvency: Beneficiaries argued that their payment under the LC was unrelated to any contract with Applicant since the only contract to which they were both parties was the reinsurance treaty. The court found that serious arguments could be raised that:

If the applicants' acceptance of payment on the letters of credit as discharging the first respondent's indebtedness to them required the authorisation of the [Beneficiaries' Agent], there was a transaction between the [Applicant] and the [Beneficiaries], albeit it was but part of the entire transaction under which the Issuing Bank ... [was] the [instrument] for payment.

2. Reimbursement; Advance Depletion of Funds: The court noted that it could be argued that, "[t]o concentrate, as the [Beneficiaries] have done, on the Issuing Bank's right to reimbursement and right of recourse under the security, ignores the fact that the [Applicant's] funds were depleted in advance of payment on the letters of credit." As a result, the court concluded that summary judgment was inappropriate.

[JEB/bso]

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