Article

Note: To assure Builders Transport, Inc.'s (Lessee) obligations under a sale-leaseback transaction, Dai-Ichi Kangyo Bank (Issuer) issued a standby letter of credit for US$1,600,000 in favor of Two Trees (Lessor). CIT Group/Business Credit, Inc. (Lender) provided financing to Lessor to facilitate Lessor's purchase of the property and Lessor/ Beneficiary "secured its obligation to [Lender] with...an assignment of its interest in...the letter of credit..." When Lessee filed for Chapter 11 (reorganization) of the Bankruptcy Code, "[Lender], as lender to and assignee of [Lessor], submitted to [Issuer] a completed "Default Draft" for $1.6 million" which Issuer honored.

Lessee filed a turnover action in bankruptcy alleging that the Lender was not entitled to the entire proceeds of the LC. The bankruptcy court granted partial summary judgment to Lessee on the issue of the Lender's liability and established the amount of damages. The United States District Court for the Northern District of Georgia affirmed. On appeal, the United States Court of Appeals for the Eleventh Circuit, Birch, C.J., affirmed, ruling that the Lender was not entitled to the entire amount of the LC and, in retaining the proceeds, the Lender incurred damages payable to Lessee.

Lender argued that, under the independence doctrine, the LC proceeds were not property of the estate, or, alternatively, the LC proceeds were not property of the estate under South Carolina contract law. The appellate court rejected both arguments.

The appellate court noted that the doctrine of independence protects only the right of a beneficiary to draw upon a letter of credit. Quoting Resolution Trust Corp. v United Trust Fund, Inc., 57 F.3d 1025, 1034-35 (11th Cir. 1995), the court stated "[o]nce the proceeds of a letter of credit have been drawn down, the underlying contracts become pertinent in determining which parties have a right to those proceeds." Accordingly, the proceeds of the LC were not protected by the doctrine of independence and were considered property of Lessee's estate. The provisions of the lease between Lessee and Lessor determined whether or not the Lender could retain the proceeds of the LC.

As to the argument that the LC proceeds were not property of the estate under South Carolina law, the court held that, per the language of the lease and LC itself, the proceeds of the LC were property for purposes of 11 U.S.C. §542(a).

Comment:

Although the appellate court stated that the LC was "assigned" and that the assignee "drew" on the LC, the opinion does not discuss the transaction so as to permit an understanding of whether or not the "assignment" was a transfer of drawing rights.

[JEB/aee]

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