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Note: Trustmark National Bank (Issuer) issued a letter of credit to HP Financial Services Venezuela (Beneficiary/Lessor) in the amount of USD 1,986,745 for Beneficiary/Lessor's lease of computer equipment to Stanford companies (Applicant/Lessee), who were also under Receivership of Ralph S. Janvey (Receiver). Issuer also issued a certificate of deposit ("CD") to Applicant/Lessee, who placed cash collateral in Issuer's deposit account.

Beneficiary/Lessor "intervened in the underlying SEC action 'to clarify whether the Receivership Order enjoins or otherwise applies to draws under letters of credit,'" and the U.S. District Court for the Northern District of Texas previously allowed Beneficiary/ Lessor "to present [the] letter of credit to [Issuer] for payment, but refus[ed] to allow [Issuer] to offset the funds" from Applicant/Lessee's cash collateral.

Subsequently, Receiver moved to have Issuer deliver the cash collateral to Receiver, and the district court granted the motion and issued a Turnover Order. Issuer subsequently moved "to modify its order so as to ... tender the funds to the district court registry rather than to the Receiver," but the motion was denied. Issuer ultimately complied with the Turnover Order but appealed on the issue of deprivation of due process. The U.S. Court of Appeals for the Fifth Circuit, in a per curiam opinion, affirmed the Turnover Order. The appellate opinion stated that the cash collateral was Applicant/Lessee's property and thus part of the receivership estate and that Issuer was not deprived of those funds which were not part of its property. Issuer contended that its security interest in the deposit funds constituted a due process property interest, but the appellate court concluded that, even if Issuer's security interest was interfered by the government, Issuer "failed to 'demonstrate that the [district court had] deprived [Issuer]' of that interest."

Issuer also contended that 12 U.S.C. § 91 provides "no attachment, injunction, or execution, shall be issued against [a national bank] or its property before final judgment in any suit, action, or proceeding, in any State, county, or municipal court," and that enforcement of the Turnover Order amounted to an "injunction" in violation of the statute. The appellate court ruled against the contention, stating that the "anti-injunction provision ... [had] a limited scope ... [applying] to prevent state judicial action, prior to final judgment, which would have the effect of seizing the bank's property ... [and not] property belonging to others which happens to be in the hands of the bank." (Emphasis supplied in the opinion)

Comment: Issuers should take note of this decision which can affect rights of reimbursement even if they are secured creditors.

[JL]

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This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.