Article

Note: To satisfy a statutory requirement in a state governmental scheme for self-insurance intended to protect workers from losses due to workplace accidents (known in the U.S. as Workers' Compensation), Phar-Mor, Inc. (Applicant) obtained a standby LC in the amount of US$880,000 issued by Fleet National Bank (Issuing Bank) in favor of Florida Self-Insurers Guaranty Association, Inc. (Beneficiary), a non-profit corporation created by Florida statute in order to ensure the payment of selfinsured workers' compensation claims by insolvent employers. Subsequently, the Applicant filed for bankruptcy protection under Title 11 of the Bankruptcy Code.

There were eight outstanding Workers' Compensation claims from Florida. Applicant and Beneficiary disagreed regarding the maximum amount due on them, with Applicant claiming that US$322,000 was due and Beneficiary claiming that US$400,000 was due. Seeking return of the funds in excess of the amount required to settle outstanding claims for use by the bankruptcy estate, the Debtor / Applicant brought an adversarial proceeding against Beneficiary in the bankruptcy court. Beneficiary filed a motion to dismiss. The U.S. Bankruptcy Court for the Northern District of Ohio, Woods, J., denied the motion.

Beneficiary argued that since LC's are not property of the Estate, it was able to draw on the LC. The court noted, however, that what was at issue was not the LC but its proceeds. The court stated that "[t]he issue in the instant case is whether (Beneficiary) is holding more than it needs to satisfy Debtor's obligation (i.e., the Excess Proceeds) and if so, what the amount is." It noted that "[a] dispute over proceeds of a letter of credit is different from a dispute about the underlying contract on such a letter." It ruled that Beneficiary "is only entitled to retain sufficient proceeds from the Letter of Credit to satisfy Debtor's obligation..."

Beneficiary also argued that Applicant failed to state a claim to relief. The court rejected this argument, noting that since the amount drawn appeared to exceed the amount needed to satisfy all outstanding claims, Applicant "is entitled to an accounting to determine if there are any Excess Proceeds and turnover of such Excess Proceeds, if any."

Comments:

1. The court properly rejected arguments based on the independence of the LC. While the LC itself is independent, once it is honored, the proceeds are not independent.

[JEB/bain]

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