Article

Note: After ATS Products Corporation (Borrower/Debtor) fully utilized a US$5 million loan made by Willow Grove Bank (Lender/Issuer), Lender additionally agreed to provide three standby letters of credit totaling US$1,548,670, two to Banta Catalog Group and one to R.R. Donnelly & Sons (Beneficiaries).

Subsequently, Borrower petitioned for protection under Chapter 11 (reorganization) of the U.S. bankruptcy law. Only afterwards did Lender/Issuer perfect its security interest in collateral. To avoid this security interest as preferential, Borrower/Debtor filed this adversary proceeding. When the proceeding was converted to Chapter 7 (liquidation), Michael Kaliner (Trustee) continued the action. Both sides moved for summary judgment. The U.S. Bankruptcy Court for the Eastern District of Pennsylvania, Fox J., granted summary judgment for the Trustee.

Lender argued that the amount by which Borrower/Debtor was under-secured during the perfection period (90 days before filing for perfection) actually increased, so that it did not improve its net position. The Judge found that Lender did not advance additional funds to Beneficiary/Debtor during the relevant period and that the perfection in effect improved Issuer's position and was avoidable.

[JEB/eml]

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