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Note: As part of a business agreement to sell pre-built homes, Tri-State Signature Homes, Ltd. (Builder/Applicant) authorized Westpoint Capital Corporation (Issuer)to issue an unspecified number of irrevocable standby letters of credit in favor of Star Prebuilt Homes, Ltd. (Creditor/Beneficiary) as security for payments in the event of a dispute between Builder/Applicant and Creditor/Beneficiary. When Builder/Applicant did not pay Creditor/Beneficiary due to late delivery of the pre-made homes, the parties entered into a Dispute Settlement Agreement. Among other terms, the Dispute Settlement Agreement provided that Creditor/Beneficiary was to place the standbys with an escrow agent under an Escrow Agreement entered into together under the Dispute Resolution Agreement. After the Dispute Settlement, but before beginning arbitration, Builder/Applicant filed under the Canadian Bankruptcy Insolvency Act (BIA) and Creditor/Beneficiary subsequently obtained eleven of the letters of credit from escrow and presented them to Issuer, demanding CAD 1,859,000.

To prevent Creditor/Beneficiary from receiving payment under the standbys, Builder/Applicant applied for an emergency enforcement of the stay of proceedings established by its filing under the BIA. The Alberta Court of Queen’s Bench, Burrows, J., denied Builder/Applicant’s application.

The Judge looked to the statutory language of BIA s. 69.1, which provides that no creditor may bring a “proceeding” against a debtor until the insolvent party becomes bankrupt or a trustee has been discharged. The Judge cited Meridian Development Inc. v. Toronto Dominion Bank (1984), 11 D.L.R. (4th) 576, which held that honoring a letter of credit could be a “proceeding”, but only if the funds were drawn from the insolvent party. This case stated that since the funds were paid from the Issuer, and not from Builder/Applicant, it was not a “proceeding” against the Builder/Applicant.

The Judge suggested that “pursuant to whatever arrangements [existed] between [Issuer] and [Builder/Applicant], [Issuer] [had] no right of recovery against [Builder/Applicant], and [Issuer] either [had] security from some other source, or [had] no right of indemnification at all, the position of [Builder/Applicant’s] other creditors will [have been] improved as a result of [Issuer’s] payment.”The Judge also quoted a portion of the letter of credit which stated that “in the event of any receivership, Bankruptcy, insolvency…including, without limitation, any proceeding under the Bankruptcy and Insolvency Act…the [Creditor/Beneficiary] shall have the right to draw down the full amount of the Letter of Credit and to apply the proceeds in the manner set out in the Agreement”. Issuer’s obligation under the letter of credit was, therefore, independent of Builder/Applicant’s insolvency proceedings. The Judge concluded that any presentation by Creditor/Beneficiary was “not a proceeding taken against [Builder/Applicant] or its assets” under the BIA and denied Builder/Applicant’s application for an emergency stay.

Text of Letter of Credit:

It is understood and agreed by the Lender [Westpoint] that in the event of any receivership, Bankruptcy, insolvency, winding up or other creditor’s proceedings including, without limitation, any proceeding under the Bankruptcy and Insolvency Act (Canada) or the Companies’ Creditors Arrangement Act (Canada) or the surrender, discharge, repudiation or termination of the Agreement [the original contract between Star and Tri-State] the Beneficiary [Star] shall have the right to draw down the full amount of the Letter of Credit and to apply the proceeds in the manner set out in the Agreement.

[JPJ]

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of the ICC or Coastline Solutions.