Article

Note: Tenant, Utar Scientific Inc., with Jaymount Holdings Ltd. acting as co-applicant, applied to The Hong Kong Bank of Canada for a standby LC for CA$191,760 for issuance in favor of Beneficiary, Commerce Court International Holdings Ltd., Tenant's landlord. The LC was issued as a security deposit for the lease.

Beneficiary drew the balance remaining on the LC, CA$79,280. Issuing Bank paid the proceeds into trust, and debited that amount against Co-Applicant's account.

Tenant subsequently was placed in insolvency and its trustee disclaimed any interest in the lease. Trustee awarded Beneficiary a preferred claim for three months rent, the maximum available under the applicable Bankruptcy and Insolvency Act. However, Applicant's trustee deducted from this amount the CA$79,280 payment on the LC. The trustee took the position that payment on the LC, in effect, was used as a security deposit payment toward the Applicant's lease obligations. Beneficiary, arguing that payment on the LC was independent of the lease, appealed that deduction to the British Columbia Supreme Court.

Co-Applicant also made a claim in Applicant's bankruptcy for funds it reimbursed to the issuer for the LC. That claim was unresolved.

Relying on the "autonomy of documentary letters of credit," the court ruled that Applicant's trustee could not deduct payment on the LC from Beneficiary's claim.

The court also considered the impact of the claim by Jaymount, the Co-Applicant that reimbursed the issuer. The court found that Co-Applicant's claim in the Applicant's bankruptcy did not "give trustee the right to assert [Co-Applicant's] position indirectly, by disallowing [Beneficiary's] claim within the bankruptcy."

The court found that:

if [Beneficiary] realized a "windfall" or a form of double recovery, the question among the parties to the letter of credit transactions should be whether the terms of the lease contemplate indemnity beyond the limitations imposed by the bankruptcy. If not, that issue should be sorted out among [Beneficiary] and [Issuing Bank] (if it matters to [Issuing Bank]) and [Co-Applicant].

[JEB/bso]

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