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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
2010 LC CASE SUMMARIES 786 N.W.2d 759 (Wis. 2010) [U.S.A.]
Topics: Insolvency Proceeding; Sale-Leaseback; Standby; Independence; Underlying Contract Breach of Contract; Prior US UCC Article 5; Use.
Type of Lawsuit: Applicant sued Beneficiary to return proceeds drawn under the LC.
Parties: Plaintiff/Applicant/Insolvent Tenant's Receiver - Michael Polsky
Applicant/Insolvent Tenant/Debtor - Admanco, Inc. (Counsel: Kevin L. Keeler and Matthew S. Vignali of Beck, Chaet, Bamberger & Polsky, S.C., Milwaukee, WI)
Defendant/Beneficiary/Landlord - 700 Stanton Drive, LLC (Counsel: Valerie L. Bailey-Rihn, Jeffrey O. Davis, and Matthew D. Fortney of Quarles & Brady LLP, Madison, WI)
Issuer - M & I Marshall and Ilsley Bank
Underlying Transaction: Payment of commercial rent.
LC: Two standby letters of credit, each in the amount of US$375,000. Silent as to governing rules.
Decision: The Supreme Court of Wisconsin, Roggensack, J., reversed the decision of the Court of Appeals that had affirmed an award of summary judgment applied by the Circuit Court, Fond du Lac, Grimm, J., in favor of Applicant/Insolvent Tenant/Debtor. Crooks and Bradley, J.J. dissented in an opinion by Bradley, J.
Prior History: Admanco, Inc. v. 700 Stanton Drive, LLC, abstracted in 2010 ANNUAL REVIEW OF INTERNATIONAL BANKING LAW & PRACTICE 420.
Rationale: Because proceeds of standby letters of credit are not the property of Debtor, they are not the property of Debtor's estate subject to the receiver's administration under Wis. Stat. § 128.08 or a statutory cap on recovery.
Article
Factual Summary: To assure payment of rent after a sale-leaseback arrangement, Applicant/Insolvent Tenant/Debtor obtained two standby LCs in favor of Beneficiary/Landlord. They were secured by Applicant/Insolvent Tenant/Debtor's property. When Applicant failed to pay rent due to insolvency, Beneficiary/Landlord drew down the full amount of the two standbys. Issuer was later reimbursed in full for the drawing on the standbys.
Applicant/Insolvent Tenant/Debtor's Receiver sued Beneficiary/Landlord, claiming that Debtor's estate had the right to recoup part of the proceeds drawn under the standbys. Applicant/Insolvent Tenant/Debtor's Receiver asserted that the drawing was in excess of a cap under Wisconsin Law and that there was a breach of the underlying contract.
On Receiver's motion, the trial court entered summary judgment in favor of Applicant/Insolvent Tenant/Debtor's Receiver. On appeal, the intermediate appellate court affirmed. The supreme court reversed and remanded on appeal.
Legal Analysis:
After concluding that the statutory cap applies only to claims against the debtor's estate, not to claims against the property of another, the court ruled that the proceeds under the LCs are not subject to the receiver's administration under Wis. Stat. § 128.08, and thus the statutory cap was not applicable.
2. Independence; Underlying Contract: Both Beneficiary and Applicant moved for summary judgment on the breach of contract claim. The supreme court distinguished a claim on the payment of LC from a breach of contract claim, noting that "payment from a standby letter of credit does not negate any suit for breach of contract against the beneficiary of a letter of credit". Additionally, the supreme court stated that "while the amount of money sought by a receiver subsequent to a drawdown on a standby letter of credit may be the same amount that is proved as damages for breach of contract against a beneficiary, they are not the same property interest and they do not arise in the same way."
After discussing the terms of the underlying lease, the supreme court ruled that Beneficiary did not collect more money in the drawdown than it had a right to under the lease. The supreme court entered summary judgment in favor of Beneficiary/Landlord on its breach of contract claim.
[JEB/mwl]
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