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Note: Stone & Webster Engineering Corporation (Applicant) obtained a series of commercial insurance policies from Aetna Casualty and Surety Co. between 1979 and 1996 and from its successor in interest, Travelers Indemnity Company (Beneficiary/Insurer), between 1996 and 2001. The policies contained a retrospective premium provision, under which an initial premium is paid with subsequent premiums based on loss experienced. To assure payment of subsequent increases, Applicant obtained standby letters of credit in favor of Beneficiary/Insurer. Beneficiary/Insurer drew USD 1,986,482 on the standby letters of credit when Applicant failed to pay the money owed for past premiums.

After Applicant filed for bankruptcy, Beneficiary/Insurer asserted its claim for Applicant’s ultimate premium obligation, calculated at USD 7,604,232. Applicant’s assets were transferred to SWE&C Liquidating Trust (Applicant’s Trustee) as part of bankruptcy reorganization, and Applicant’s Trustee objected to Beneficiary/Insurer’s calculation of its claim. Beneficiary/Insurer then filed an amended proof of claim for USD 8,181,492.82. Applicant’s Trustee argued that claim should be reduced by USD 1,986,482 to reflect the amount Beneficiary/Insurer drew on the standby letters of credit before Applicant filed for bankruptcy. The United States Bankruptcy Court for the District of Delaware, Walrath, J., ruled that proceeds from the letters of credit should not reduce Beneficiary/Insurer’s claim.

The Judge ruled that neither a letter of credit nor its proceeds are the property of a debtor’s estate and cannot therefore be used to reduce the value of a creditor’s claim unless double-recovery by the creditor is likely. In this instance, there was insufficient evidence to conclude that the distribution of Applicant’s assets among the unsecured creditors was sufficient to risk Beneficiary/Insurer’s double recovery on the amount secured through the letters of credit.

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