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Note: After VukasovichTrust, C&V Farms and Colendich Trust (Subrogated Creditors) paid off VEC Farms, LLC's (Debtor) promissory notes, Subrogated Creditors moved to be subrogated to the rights of the payee of the note. Another creditor, Mainas Farms, Inc. (Other Creditor), opposed the motion. The United States Bankruptcy Court for the Northern District of California, Grube, J., granted the motion. On appeal, the United States Bankruptcy Appellate Panel for the Ninth Circuit, Brandt, Pappas and Dunn, JJ., affirmed.

Creditors argued that "the provider of security must have done so at the same time as the debtor incurred the obligation to be entitled to subrogation under [11 U.S.C. §] 509(a)." The appellate court stated:

There is very little case law addressing the provision of security as a basis for subrogation, and virtually none with facts analogous to those presented here. Some of the cases involve letters of credit; because of the 'independence principle,' letters of credit generally do not entitle the paying party to subrogation under the secured prong of § 509(a). Hamada, 291 F.3d at 650 (a bank's obligation under a letter of credit is independent of the underlying contract); see also In re Carley Capital Group, 119 B.R. 646, 648-49 (W.D. Wis. 1990) ("[a] letter of credit is an independent and primary obligation of the issuer to the beneficiary and is not the 'pledge' of any asset"); In re Valley Vue Joint Venture, 123 B.R. 199, 204 n.10 (Bankr. E.D. Va. 1991) (notwithstanding general usage that a letter of credit 'secures' an obligation, § 509(a) refers to the granting of a security interest in an asset).

The appellate court noted that "These cases shed little light on the appeal before us".

Comment:

Apparently, the appellate court was not referred to Rev. U.C.C. § 5-117 (Subrogation of Issuer, Applicant, and Nominated Person). References were to case law decided under prior U.C.C. Article 5.

[JEB/sws]

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