Article

Note: In March 2004, Admanco, Inc. (Lessee/ Applicant) entered into a fifteen-year lease for an industrial building (Property) located in Wisconsin with 700 Stanton Drive, LLC (Lessor/Beneficiary). To assure fulfillment of its obligations, Lessee obtained an irrevocable standby letter of credit (M&I Standby) in favor of Lessor/Beneficiary issued by Marshall & Ilsley Bank (Issuer) for US$61,313 and US$375,000. Applicant/Lessee's guarantors also obtained another standby LC in favor of Lessor/Beneficiary in the amount of US$375,000. The LCs "represent[ed] security for the performance by [Lessee/Applicant] of its rental obligations and certain of [Lessee/ Applicant's] other obligations [under the lease]." Under a separate reimbursement agreement between Lessee/Applicant and Issuer, Lessee/Applicant pledged its assets as collateral for the M&I Standby.

In December 2004, Lessee/Applicant entered receivership. The receiver sold Applicant's assets and the purchaser negotiated a new lease of the Property with Lessor/Beneficiary beginning 1 April 2005. However, because Lessee/Applicant had failed to make its January 2005 lease payment, Lessor/ Beneficiary drew on both the LCs for the full amount of US$750,000. Lessee/Applicant then sued Lessor/ Beneficiary for reimbursement of excess lease payments in the amount of US$811,313.66, "less any unpaid amounts that [Lessor/Beneficiary] [could] prove that it [was] owed for rent due for the period prior to 1 April 2005."

The Circuit Court for Fond du Lac County, Wisconsin, entered summary judgment in favor of Lessee/Applicant in the amount of US$513,292.66 which represented the total LC amount drawn less past due rents and rent for occupancy during January 2005. On appeal by Lessor/Beneficiary, the Court of Appeals of Wisconsin, Brown, C.J., Anderson, P.J., and Neubauer, J., in an opinion by Neubauer, J., affirmed.

Lessor/Beneficiary argued, among other points, that it was a secured creditor and that the LC proceeds were not property of the estate. With regard to Lessor/Beneficiary's status, the appellate court emphasized the independence principle and noted that Beneficiary's argument that it was a secured creditor "overlook[ed] the independent nature of the relationships which exist between the three parties."

With regard to Lessor/Beneficiary's second argument, that the LC assets were excluded from the estate, the appellate court ruled that "[Wisconsin's] statutory limit on a landlord's claim applies to proceeds from a letter of credit to the extent that the proceeds reflect amounts that were secured with the debtor's assets in the separate reimbursement agreement between the issuer and the debtor." Thus finding that the LC was "essentially a security deposit under the lease," the appellate court concluded that Beneficiary could only recover up to the statutory limit allowed for landlords under Wisconsin law which limited recovery to actual loss.

[JEB/mcb]

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.