Article

Note: In order to stay execution of a judgment against him for US$198,026.75 pending an appeal, Ken Hodak (Appellant) moved for a stay of proceedings and for approval of a proffered supersedeas standby to be issued by Branch Banking and Trust Company (Issuer) in favor of the prevailing party, UAR GP Services, LLC (Appellee) as beneficiary. Appellee objected that the standby did not provide adequate assurance of payment because the LC had a fixed expiry date that would occur prior to the likely resolution of the appeal, that the amount was inadequate to cover post judgment interest or costs, that in difficult economic times a letter of credit is not the equivalent of a surety bond and that the requirement of an affidavit from Appellee/ Beneficiary. The US District Court for the Eastern District of Kentucky, Central Division, Hood, J., granted the motion in part and denied it in part, imposing several qualifications regarding the standby.

The Judge noted that "[a]s a general matter, the Court sees no reason why it should not permit an appellant to post a supersedeas bond secured by a letter of credit for a sufficient amount of funds to cover a judgment, costs, and any interest thereon, in order to obtain a stay on appeal under Fed.R.Civ.P. 62(d). See LR 65.5.1(a) (providing that the Court may order that other sureties, beyond those enumerated in the Rule, may be accepted as surety on a bond)"

Noting the objections as to the expiration and the amount, the Judge ordered that

(1) [Appellant] must obtain an ILOC [irrevocable letter of credit] which contains an evergreen clause. In other words, the Court will not approve an ILOC as a surety for the bond in this case unless the ILOC will renew automatically at the conclusion of the first and every successive term until the earlier of (1) 60 days after a mandate issues following the decision of the appellate court or (2) such time as the bank gives at least 60 days notice to [Appellant]'s creditor, [Appellee], that the letter of credit will not be renewed.

(2) Further, the ILOC must clearly state that the amount to be paid upon presentation of the letter of credit is the amount of the final judgment plus costs and post-judgment interest.

The Judge also ordered that "No stay will not be in force and effect until such time as [Appellant] provides the original letter of credit to [Appellee] and provides notice to this Court of having accomplished same. In this way, the Court is releasing the letter of credit to [Appellee] for immediate presentment to [Issuer] should the Sixth Circuit Court of Appeals issue a mandate which affirms this Court's judgment, in whole or in part, in favor of [Appellee]."

Appellee expressed concern that it should not have to bear bank risk in light of the fact that LCs were not protected by the US Federal Deposit Insurance Corporation whereas sureties that were able to issue surety bonds were approved by the government. The Judge pointed out that Appellee was only able to offer one news article suggesting in passing some strain on Issuer's creditworthiness. "The Court is not, however, persuaded on so little information that the risk is so great that no letter of credit should ever be approved as surety for a bond on appeal or, indeed, that a letter of credit drawn on BB & T would not be an appropriate surety in this matter."

The standby required "an affidavit 'purportedly signed by an authorized representative of the beneficiary.'". Appellee objected that this requirement would expose it to Issuer refusing the drawing. The Judge responded that this objection "is nonsensical as such language appears to the court as necessary to avoid the need for adjudication of the validity of the signature upon presentation of the ILOC to BB & T for payment."

Comment:

1. The text regarding the evergreen clause could use some improvement. It uses "renew" when what is meant is "extend" and provides that the notice must be given rather than received.

2. Of more interest is the requirement that the amount is to be that of the judgment plus costs and post judgment interest. In effect, such an LC would not be for a fixed amount. Like the oil LCs whose amounts are linked to a plat publication, such provisions are not non-documentary but are risky in that the bank would have to determine how to book the liability and regularly revisit the amount owed on the credit which is, in effect, open-ended.

[JEB]

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