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Note: Pursuant to the Packers and Stockyards Act (PASA), 7 USC § 204, a US statute, buyers of livestock may provide a bond for payment. PASA stipulates that unpaid sellers of livestock may be entitled to payment from the purchaser's bond fund, which can be funded from an LC or from a statutory trust imposed on proceeds from livestock sales. Luana Savings Bank ("Creditor") holds Agriprocessors, Inc.'s ("Applicant") bond fund ("Bond Fund") of about US$1,000,000 (disputed) pursuant to a trust agreement and LC. Applicant subsequently filed for protection in bankruptcy, with its debts including US$800,964.38 owed to Creditor for an overdrawn account. Trustee held about US$7,400,000 cash proceeds ("Trust Funds") in trust under PASA. The U.S. Bankruptcy Court for the Northern District of Iowa previously authorized Trustee to pay the PASA claims from the Trust Fund and preserved Trustee's claim for payment from the Bond Funds.

Trustee filed this motion claiming that the PASA Claims should be paid by the Bond Funds held by Creditor. The U.S. Bankruptcy Court for the Northern District of Iowa, Kilburg, J., granted Trustee's motion to pay the PASA claims in part.

Creditor alleged that it was entitled to setoff Applicant's debt against the Bond Funds and that Trustee should use the Trust Funds for payment instead of the Bond Funds. The court ruled that Creditor did not have a right of setoff against the Bond Funds. Reasoning that the right of setoff arises when there is a "mutuality of obligation between the debtor and a creditor," the court concluded that because the Bond Funds were held according to the statutory trust agreement and LC, the funds were held strictly for the benefit of unpaid livestock sellers, such that Applicant did not have a right to the Bond Funds, and there was not a mutual debtor-creditor relationship with respect to the funds. In this regard, the mutuality of obligation that would normally exist with regard to a bank customer's accounts and debts was rebutted.

However, the court also ruled that, under case law and surety law, Trustee must pay PASA claims from its Trust Funds before pursuing the Bond Funds. It further stated that under the trust agreement, Creditor is liable only if Trustee defaults on full payment to the PASA claimants; in such a case, Creditor might be forced to distribute the proceeds of the LC on a pro-rata basis after all claims were finalized.

[JEB/ah/dd/anf]

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