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Note: To secure the costs of importing and distributing plumbing materials into the United States, LDR Industries, LLC (Importer/Debtor) negotiated with Trade Risk Guaranty (Surety Agent) an agent of the Hanover Insurance Company (Surety) to obtain a USD 200,000 annually renewing “continuous entry customs bond” (First Customs Bond). Surety required that Importer/Debtor agree to a “General Agreement of Indemnity” stating that Importer/Debtor would “completely INDEMNIFY [Surety] from and against any liability, loss, costs, attorneys' fees, and expenses whatsoever which [Surety] shall at any time sustain as surety on any of said bonds, or for the enforcement of this agreement.”

Some goods imported by Importer/Debtor were subject to “antidumping and countervailing duties” imposed by the U.S. Customs and Border Protection (CBP); these duties could often be assessed several years after the goods were imported. Subsequently, CBP issued Importer/Debtor a deficiency notice explaining in essence that Importer/Debtor needed to provide additional security to continue importing goods. As a result, Importer/Debtor caused its bank, J.P. Morgan Chase Bank (Issuer), to issue a USD 1,200,000 letter of credit (Original LC) in favor of Surety and Surety issued a USD 1,500,000 continuous entry customs bond in favor of Importer/Debtor (Second Customs Bond). Importer/Debtor signed an indemnity agreement with terms that were practically the same as those regarding the First Customs Bond. The Original LC was renewed several times and ultimately replaced with a final USD 1,200,000 LC being issued by Hinsdale Bank & Trust Company (Second Issuer) in favor of Surety (Wintrust LC).

Eventually, Importer/Debtor declared bankruptcy and CBP filed an amended claim in Importer/Debtor’s proceedings seeking outstanding duties and interest. After Importer/Debtor and CBP entered a negotiated settlement, CBP sent Surety a USD 391,689.75 demand for duties and interest regarding goods imported by Importer/Debtor under the period of the First Customs Bond. Surety paid CBP and in turn sought to draw on the Wintrust LC. Importer/Debtor objected and sued Surety seeking a declaratory judgment that “any obligation it has to [Surety] is not secured” by the Wintrust LC. Both parties motioned for summary judgment. The United States Bankruptcy Court for the Northern District of Illinois, Hollis, J., granted summary judgment in favor of Surety.

The Judge looked to the text of the indemnity agreements that Importer/Debtor signed when it obtained the customs bonds from Surety. After noting that the General Agreement of Indemnity “alone did not collateralize [Importer/Debtor’s] indemnification obligation”, the Judge looked to another clause providing that Importer/Debtor would “deposit current funds with [Surety] in amount sufficient to satisfy any claim against [Surety] by reason of such suretyship.” The Judge concluded that “[s]ince the language of the Indemnity Agreements unambiguously required [Importer/Debtor] to deposit current funds in [an] amount sufficient to satisfy any claim, and noted that collateral might be required for certain bonds, when [Importer/Debtor] posted the Original [LC] it secured [Importer/Debtor]’s indemnity obligation under both the First and Second Customs Bond.”

Excerpts of LCs:

SET[ ] FORTH IN FULL THE TERMS OF OUR UNDERTAKING. SUCH UNDERTAKING SHALL NOT IN ANY WAY BE MODIFIED, AMENDED OR AMPLIFIED BY REFERENCE TO ANY DOCUMENT OR INSTRUMENT REFERRED TO HEREIN OR IN WHICH THIS IRREVOCABLE LETTER OF CREDIT IS REFERRED TO OR TO WHICH THIS IRREVOCABLE LETTER OF CREDIT RELATES AND ANY SUCH REFERENCE SHALL NOT BE DEEMED TO INCORPORATE HEREIN BY REFERENCE ANY DOCUMENT OR INSTRUMENT.

FUNDS UNDER THIS IRREVOCABLE LETTER OF CREDIT ARE AVAILABLE TO [Surety]

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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.