Article

Note: In 1992, Jugoscovenska Izovzna I Kreditna Banka (Issuer), located in the Federal Republic of Yugoslavia, failed to honor a letter of credit for US$2,500,000 in favor of Nugent Establishment Industrie (Beneficiary), a Lichtenstein corporation, because U.S. Executive Order 12808 froze assets of all Yugoslav nationals at that time. In that same year, Beneficiary brought suit in New York against Issuer for wrongful dishonor for the amount of the letter of credit and obtained a default judgment.

After the executive order was lifted in February 2003, Zoran Milovanovic (Trustee) filed a petition under 11 USC § 304 of the Bankruptcy Code in the United States Bankruptcy Court to recognize the foreign insolvency proceeding of Issuer and for an order restraining the disposition of US$848,000 in assets of Issuer and moved for summary judgment on the issue. Beneficiary sought dismissal of the § 304 petition or maintenance of the status quo on the ground that Serbian law was not entitled to recognition under the applicable section because it does not afford priority to LC obligations and moved for summary judgment. The US Bankruptcy Court for the Southern District of New York, Gropper, J., granted Issuer's motion for summary judgment and ordered that the funds be released for delivery to Issuer's Serbian insolvency estate.

Beneficiary argued that Serbian law did not treat LCs "appropriately", thereby failing to meet the requirement of 11 USC §304 that there be "just treatment of all holders of claims" in the foreign proceeding before it can be recognized.

While the court observed that it "recognizes the fundamental role letters of credit play in international business transactions", it noted that there was no provision under US law affording a priority to LC debts. The court observed that the decision in Murphy v. FDIC, 38 F.3d 1490 (9th Cir. 1994), on which Beneficiary relied, stood for the proposition that the possible illegality of the issuance of a letter of credit "did not void the letter of credit since, among other things, its beneficiary was not aware of any wrongdoing. Murphy, 38 F.3d at 1503. However, the court in Murphy did not hold that letters of credit receive a priority payout in a bank insolvency proceeding or a Bankruptcy Code proceeding; rather, it held that 'a letter of credit remains enforceable despite irregularities in the underlying transaction.' Id. at 1502"

[JEB/tjb]

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