Article

Note: Liberate Technologies (Lessee/Applicant) leased office space from Circle Star Center Associates (Lessor/Beneficiary). As security for the lease, Lessee/Applicant provided Lessor/Beneficiary with a security deposit in the form of a standby LC for US$8,787,609 that, among other things, permitted drawings for defaults on the lease.

To secure a development loan from Teachers Insurance and Annuity Association of America (Lender), Lessor/Beneficiary pledged the proceeds of this LC as collateral and entered into a "Letter of Credit Pledge Agreement". Under the agreement, custody of the LC was given to Northmarq Capital Inc. (Agent 1) who was, at Lessor/Beneficiary's request, authorized to present the LC at the bank where the pledge account was located, and to allow Lessor/Beneficiary to draw on it. The terms of the loan provided that any drawings against this LC would be placed in a pledge account managed by Agent 1.

Subsequently, after default on the lease, Lessee/Applicant sought bankruptcy protection; Lessor/Beneficiary drew on the LC as agreed. Lender gave Lessor/Beneficiary conditional permission to service the loan from the proceeds of the LC held in the pledge account. Lender later sold its interest in the loan and the LC to Pami MidAtlantic (Second Lender). Second Lender expressed concerns about the propriety of remittance of funds from the pledge account and filed papers in the bankruptcy proceeding seeking clarification. Before a ruling had been given, Second Lender replaced Agent 1 with Trimont (Agent 2), and closed the account, placingthe funds, as well as unrelated funds, in an account to which Lessor/Beneficiary had no access. At Lessor/Beneficiary's objection, Second Lender restored the previous arrangement.

Although Second Lender had returned the funds to Agent 1 and re-opened the original account, Lessor/Beneficiary sued Second Lender and Agents 1 and 2for declaratory relief, breach of contract, intentional interference with contractual relations, intentional interference with prospective economic advantage, conversion, exoneration of guarantees, accounting, and redemption. Lessor/Beneficiary claimed that it was prevented from drawing on the LC and utilizing the proceeds. Subsequently, the bankruptcy proceedings were dismissed.

Second Lender filed a special motion under California civil procedure rules to strike the complaint on the grounds that it arose from the exercise of the right of free speech in seeking clarification from the bankruptcy court. The San Mateo County (California) Superior Court granted the motion to dismiss with respect to the intentional interference claims but otherwise denied it. Second Lender appealed.

Division Three of the First Appellate District of the Court of Appeal of California, Pollak, J., affirmed. The appellate court noted that the remaining claims arose not out of seeking clarification from the bankruptcy court but from its actions regarding the LC and the proceeds.

[JEB/dgd]

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