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Note: To secure sixty monthly payments ofUS$3,673.99 for the lease of two telephone systems from General Electric Capital Corp. (Lessor/Beneficiary), Tricord Systems, Inc. (Lessee/Applicant) obtained a standby LC issued by Wells Fargo, N.A. (Issuer). The LC provided that "failure to comply with the provisions of this Section shall constitute an Event of Default... entitling Lessor[Beneficiary] to exercise its remedies...[and to] draw all amounts available under the LOC but in no event more than an amount equal to Lessor's[Beneficiary's] loss." Subsequently, Lessee/Applicant sought protection under the US Bankruptcy Code. The bank gave notice that the LC would not be renewed upon expiry. Subsequent to that, Lessee/Applicant sold the systems to Adaptec Inc. (Buyer) with court approval. After the Bankruptcy Court agreed to the sale and the sale closed, the goods subject to the lease were delivered to Buyer, which did not provide a replacement LC. On the same day that the sale closed, Lessor/Beneficiary drew on the LC for the full amount payable under the lease, US$194,237, including the amount owed by Buyer, and was paid.

To obtain reimbursement, Issuer obtained permission to charge Lessee/Applicant's account, and did so. Claiming breach of contract by Lessor/Beneficiary in overdrawing the amount to which it was entitled and unjust enrichment of Buyer for the amount overdrawn, as well as seeking subrogation to Lessor/Beneficiary's rights, Lessee/Applicant brought an adversarial proceeding.

After an initial ruling and remand, the U.S. Bankruptcy Court for the District of Minnesota, Kressel, J., awarded US$150,000 in future lease payments to Lessee/Applicant against Buyer, and ruled that Lessor/Beneficiary did not breach the lease contract by drawing down the full amount due under the lease. On appeal, the US District Court for the District of Minnesota, Frank, J., affirmed the decision against Lessee/Applicant but reversed the judgment in favor of Lessor/Beneficiary. The district court ruled that the amount of the drawing was in excess of the amount owed for unpaid lease payments and constituted a breach of the lease agreement.

[JEB/jw]

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