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Note: When Styron LLC (Corporate Purchaser/ Creditor) purchased a division of Dow Chemical (Division/Original Beneficiary) in June 2010, it assumed the division's business relationship with NewPage Corporation (Buyer/Applicant). Buyer/ Applicant had provided a USD 2,000,000 LC issued by Wachovia Bank (Issuer) for the benefit of Original Beneficiary. Applicant later increased the LC to USD 3,000,000 and substituted Corporate Purchaser/Creditor as Beneficiary, in place of Original Beneficiary.

When Buyer/Applicant filed for Chapter 11 Bankruptcy, Pirinate Consulting Group, LLC (Trustee) was appointed as the Liquidation Trustee for Buyer/Applicant. At that time, Corporate Purchaser/Creditor drew on the LC in the amount of USD 1,625,307.35 and later in the amount of USD 338,847.83. Both of these draws on the LC were paid.

To avoid and recover USD 11,788,000.85 in transfers that Buyer/Applicant made to Corporate Purchaser/Creditor during the preference period, Trustee sued Corporate Purchaser/Creditor. The parties filed cross motions for summary judgment. The United States Bankruptcy Court for the District of Delaware, Gross, J., denied both cross-motions for summary judgment to allow for further development of facts and legal arguments.

The bankruptcy trustee sought to "avoid and recover" preferential drawings on the LC made by Beneficiary after Applicant filed for bankruptcy. Corporate Purchaser moved for summary judgment "that it is entitled to use as part of its new value defense all unpaid invoices as of the Petition Date and which were paid post-petition when [Corporate Purchaser] drew on a letter of credit at a third-party bank." The trustee sought summary judgment that because "a creditor that drew on a collateralized letter of credit to satisfy invoices, [Corporate Purchaser] is not entitled to an "unpaid new value" credit because it did not enrich [Applicant's] estate."

The Judge noted that a preference arises during when a debtor makes payment to a creditor immediately prior to filing for bankruptcy. Subsequent new value is a defense to preference and is "money... that is neither void nor voidable by the debtor or the trustee under any applicable law." The Beneficiary admitted that the LC was a security asset. Beneficiary contended that since the LC was a security asset, it was entitled to use the new value defense regarding their two post-bankruptcy filing draws on the LC. Trustee for the Applicant contended that the LC did not enrich the Applicant's estate, and the new value defense does not apply.

The Judge specifically found that "a letter of credit is not property of a debtor's estate." The court also ruled that "payments under a letter of credit, or even a letter of credit itself, [do not] constitute preferential transfers under 11 U.S.C. § 547 (b) or property under U.S.C. § 541." When a LC is issued contemporaneously with a new line of credit, the creditor beneficiary is not subject to an attack for preferential treatment. However, "only when a creditor receives a secured letter of credit to cover an unsecured antecedent debt will it be subject to a preferential attack under 11 U.S.C. § 547 (b)"

[MJS/mjb]

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