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Note: In order to close landfills, EnCap Golf Holdings, LLC (Developer) "received financing through . . . a series of bonds issued by the New Jersey Environmental Infrastructure Trust (NJEIT) . . . ." To assure repayment of the bonds, Wachovia Bank National Association (Issuer) issued a standby letter of credit in favor of The Bank of New York Mellon (Bond Indenture Trustee). The Trustee operated under an indenture which granted the Trustee and the Issuer "security interests in the bond proceeds and in the funds and accounts created under the indenture."

When Developer defaulted, "the bonds were called for mandatory purchase funded by draws on the letter of credit." Consequently, Issuer became the sole bondholder. The residual bond proceeds were placed in a bank deposit account under a deposit agreement that authorized Insurer to make payments for work done in connection with the project. Issuer sued Trustee, Developer, and Lexington Insurance Company (Insurer) for a declaration that it was entitled to the bond proceeds. Trustee cross-claimed against Insurer and Developer for a declaration that it was entitled to use the bond proceeds to pay the bondholder (Issuer). Insurer cross-claimed against Issuer and Trustee seeking a declaration "[prohibiting them] from removing bond proceeds from [the] deposit account."

The United States District Court for the Southern District of New York, Crotty, J., granted partial summary judgment to Issuer, in effect giving it access to the residual bond proceeds. The Judge also granted partial summary judgment to Trustee, permitting it to pay itself and to use the bond proceeds to pay Issuer. The Judge denied Insurer's motion for partial summary judgment. The Judge reasoned that Issuer and Trustee had security interests in the bond proceeds and had superior rights than Insurer.

[JEB/jds]

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