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Note: Following the lifting of sanctions against Beogradska Banka, A.D. Beograd (Beogradhka), an insolvent state owned Yugoslavian Bank in 2002, the US Office of Foreign Assets Control (OFAC) released US$100 million of its assets and that of another Yugoslavian bank to the Superintendent of Banking of the State of New York. As a result of a settlement with the Former Yugoslavian Deposit Insurance Agency (DIA), the Superintendent sought approval of the New York courts to transfer 40% of the assets to the DIA. Montor Joint Stock Company (Beneficiary), the beneficiary of a standby letter of credit issued by Beogradska initiated proceedings under applicable regulations to enjoin the Superintendent from transferring the assets. On Beneficiary's motion for summary judgment and DIA's cross motions to dismiss the proceedings, the New York Supreme Court, New York County, Ramos, J., denied Beneficiary's motion and granted that of DIA.

When Beneficiary drew on Beogradska's LC, it indicated that its assets had been suspended several months before and its assets blocked by OFAC. Beneficiary argued that it was entitled to the LC proceeds in light of the drawing and, as such, they were not part of the Beogradska's estate. The Judge noted that the failure to honor an LC gave rise to a claim against the issuer and that any funds are the property of the issuer until paid. The Judge rejected the notion that funds of the applicant constituted a debt owed by the applicant to the beneficiary. He stated that "[c]ontrary to its unsupported assertion, title to the proceeds of the [standby] did not automatically pass to Monter at the moment it attempted to draw down on the SLC, either by virtue of its status as being a beneficiary of the [standby], as the result of the lifting of the sanctions against Beogradska, or otherwise. The SLC and its proceeds remained assets of Beogradska, and became a debt of Beogradska when it failed to honor Monter's draw down request."

In addition, Beneficiary argued that Beogradska was obligated to pay the obligation under the applicable federal regulation, 31 CFR Section 500.205(c)(2)(i) notwithstanding the Executive Order blocking the payment. The Judge noted that the regulation only related to check and drafts and construed it not to apply to other obligations such as letters of credit.

As such, the Judge observed that Beneficiary's status was that of creditor and that accordingly, it must participate in the liquidation proceedings of the bank.

[JEB]

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