Article

Note: A group of Indonesian companies (Indonesian Importers) issued promissory notes to pay for the import of U.S. soybeans. To finance the transaction, AWB (USA) Ltd. (Exporter) assigned the promissory notes to Standard Chartered Bank (Financier) without recourse at a discounted rate of LIBOR plus 45 basis points. Financier required that the promissory notes be fully collateralized; this was accomplished through a combination of U.S. government guarantees and standby letters of credit. Most notably, Exporter certified to Financier that it had complied with all necessary regulations and requirements to maintain the full force of the U.S. government guarantees. Exporter also indemnified Financier against losses resulting from any breach by Exporter that resulted in less than the full coverage from the U.S. government guarantees.

As part of its program to encourage U.S. exports of farm products, the U.S. Department of Agriculture guaranteed 65% of the value of agricultural exports through the Commodity Credit Corporation (CCC). The guarantees were regulated by the Supplier Credit Guarantee Program (SCGP) which specified that "in the event that monies for a defaulted payment are recovered by the exporter or the exporter's assignee from the importer or from any other source whatsoever, such monies shall immediately be paid to the Treasurer, CCC". The CCC maintained the right to recover its 65% pro-rata share of any amount recovered toward the defaulted payments.

At the request of Exporter, an affiliate, AWB (Geneva) (Applicant), obtained standbys from AZN Bank (Issuer) in favor of Financier to cover the remaining 35% of exposure. Issuer required full indemnification from Applicant, which Applicant provided and secured against "independent" letters of indemnity from the Indonesian Importers. In effect, Indonesian Importers were indirectly collateralizing the standby LCs.

When Indonesian Importers defaulted on the outstanding promissory notes in the amount of US$99,607,870, Financier drew on the standbys for $34,862,755, or 35% of the total default. Issuer honored the drawing and demanded reimbursement from Applicant. Applicant liquidated the collateral from Indonesian Importers and reimbursed Issuer.

Financier then demanded reimbursement from the CCC of $64,745,115, the remaining 65% under the U.S. guarantees. When the CCC realized that the standbys were secured with assets of Indonesian Importers, CCC set off its right to a 65% share of the recovery and remitted payment on the balance. That is, the CCC deducted 65% (or $22,660,790) of the $34,862,755 recovered under the standbys. As a result, Financier sustained an unsecured loss of $22,660,790 plus interest.

Financier then sued Exporter for indemnification under the Agreements. The U.S. District Court for the Southern District of New York, Hellerstein J., gave judgment for Financier in the amount of $23,859,775, inclusive of interest to November 20, 2007, plus interest thereafter and costs.

The Judge stated that:

[Exporter] concealed from [Financier] that its substitution of [Applicant] as the procurer of the letter of credit, or the arrangements made by [Applicant] with [Issuer] and the Indonesian [I]mporters, materially impaired the protections that [Exporter] had assigned to [Financier] and which were the basis of the bargain that advanced the full sales price to [Exporter]. [Applicant] secured its obligation to [Issuer] by taking security from the [Indonesian] [I]mporters, the soybeans they purchased from [Exporter] but which they had not yet paid, or proceeds from their sale, or other cash or commodities.

Although [Applicant] sought to create an obligation which was distinct from the [Indonesian] [I]mporters' obligations under the promissory notes, the capacity of the [Indonesian] [I]mporters to pay both [Applicant] and the promissory notes that [Exporter] had assigned to [Financier] was impaired. The [Indonesian] [I]mporters, after paying [Applicant] and funding [Issuer's] letter of credit to [Financier], had little or nothing left with which to pay [Exporter] or its assignee, [Financier], and, through [Exporter] and [Financier], the CCC.

[JEB/sdc]

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