Article

Prior History: New England Dairies, Inc. v. Dairy Mart Convenience Stores, Inc. (In re: Dairy Mart Convenience Stores, Inc.) 272 B.R. 66 (S.D.N.Y. 2002), abstracted at 2003 Annual Survey 239.

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. On appeal, the U.S. Court of Appeals for the Second Circuit, Jacobs, J., affirmed the judgment of the District Court.

The District 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 District Court had based its denial on the round that renewal of the LC would confer a voidable post-petition preference in its favor to the prejudice of other creditors. The Circuit Court disagreed, stating that "[i]t is the nature of a letter of credit (as well as its utility) that the obligation to the beneficiary ... runs from the bank."

The Circuit Court concluded that the Beneficiary is not entitled to adequate protection because it is not a secured creditor as defined by the Bankruptcy Code.

The Circuit Court also noted that the LC "creates a conditional claim on the assets of the bank; it does not create a security interest in the assets of [the Beneficiary]."

[JEB/ees]

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