Article

Factual Summary: When landlord and tenant settled pending litigation that arose from tenant's rejection of its lease, tenant posted a standby for US$3,500,000 in favor of landlord. The LC was payable upon presentation of certificates signed by both Applicant (tenant) and Beneficiary (landlord) acknowledging that certain conditions had been satisfied.

When Applicant filed for bankruptcy, the conditions required for the certification necessary for payment on the LC occurred. Beneficiary therefore requested that Applicant sign a certificate stating that the conditions had been satisfied. Applicant, however, refused.

Beneficiary then filed an adversary proceeding in Bankruptcy Court, seeking specific performance of Applicant's obligation to provide a signed certification. The Bankruptcy Court dismissed Beneficiary's adversary proceeding, finding that a signature to facilitate a drawing would be improper since Beneficiary's claim was subject to the regular bankruptcy priorities.

Subsequent to the dismissal of Beneficiary's adversary proceeding, Applicant and its creditors reached a Joint Plan of Reorganization. Though most unsecured creditors received stock for their claims, banks that had issued LCs, including the one that issued the LC in the case at bar, were provided cash collateral for 105% of the value of the face amount of Applicant's outstanding letters of credit.

Beneficiary subsequently appealed the dismissal of its adversary proceeding. The district court remanded for reconsideration.

Legal Analysis:

1. Insolvency, Equitable Claim: The bankruptcy court had concluded that under the laws of some states Beneficiary's equitable claim to specific performance would have been satisfied by an alternative right to payment, thus making it a "claim" for purposes of the Bankruptcy Code. It noted that, "[w]hether a right to an equitable remedy for breach of performance may be satisfied by an alternative right to payment is a matter of state law."

Since the settlement agreement was subject to the laws of Rhode Island, the court considered whether such a remedy could be satisfied by an alternative award under Rhode Island law.

2. Insolvency, Atypical: Noting that the LC in the case at bar was "atypical," the district court noted that by its terms the beneficiary could draw on it without an action by the applicant. Accordingly, the district court concluded that Applicant would violate its duty to other creditors by signing the documents because the bank that honored the LC would be given a higher secured claim that would adversely affect the position of other unsecured creditors.

3. Insolvency, A.J. Lane: Seeking to avoid the rule of In re A.J. Lane Co., Inc., 115 B.R. 738 (Bankr. D. Mass. 1990), which reached this result, Beneficiary argued that the amount owed by Applicant in the case at bar was liquidated and undisputed in contrast to A. J. Lane. The district court, however, pointed out that the A. J. Lane claim was also liquidated and undisputed.

4. Insolvency, Priority: Beneficiary also argued that the A. J. Lane decision "was animated, 'most importantly,' by a concern that the bank's claim, which was secured by a real estate mortgage, would have priority over other creditors' claims." Although the LC in the case at bar secured an unsecured claim, the cash collateral of the LC with the issuer, it was argued, changed the effect of a drawing. The district court remanded for consideration of these arguments.

[JEB/bso]

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