Note: In order to secure a line of credit for its ongoing operations, Model Imperial Liquidating Trust arranged for a US$ 65 million revolving credit facility with NationsBank, BankBoston, and South Trust, the lenders, that was secured by all of Model's assets including inventory. Model fraudulently structured its records to obtain cash advances from the lenders. When the lenders refused to increase Model's credit line, it approached Hamilton Bank, N.A., although the facility restricted Model's ability to borrow from others. Model suggested that Hamilton deal with Jennico, a "paper company" created to borrow money from Hamilton which knew that Jennico had no assets. When Model approached Hamilton for issuance of a LC to enable it to purchase perfume "gift sets" for the Christmas season, it agreed to do so. This relationship evolved into a US$ 4 million line of credit whereby the ownership of the products was transferred to Jennico and financed by Hamilton. The court noted that "Hamilton has extensive experience in financing goods acquired abroad through the use of letters of credit financing secured by warehouse receipts. Such a financing arrangement affords a means by which the goods acquired through the financing of Hamilton also serve as the collateral for the loan because the goods are deposited in a bonded warehouse and released only with the written authorization of Hamilton." This approach was used with respect to the Jennico transactions and Hamilton filed a UCC 1 financing statement in order to obtain a security interest in the goods. At no time did it inform the lenders of these arrangements although the lenders know that Jennico was purchasing goods from Model using funds advanced by Hamilton. After the lenders discovered the arrangement between Jennico and Hamilton, Model reported losses in excess of US$ 20 million and the lenders declared their loan with Model to be in default. The lenders entered into a forbearance agreement with Model that included Jennico as a party. There was no reference that the Jennico agreement was a ground of default under the forbearance agreement. Subsequently, Hamilton entered into a forbearance agreement with Jennico that permitted Hamilton to take possession of the goods in the bonded warehouse if the indebtedness was not cured by a date certain. When Model filed for protection under Chapter 11 (reorganization) of the U.S. Bankruptcy Code, Hamilton liquidated and sold the inventory, receiving US$ 1, 268,152.90. After the filing for bankruptcy protection, Hamilton also extended short term credit to Model including LCs and bankers acceptances. Hamilton filed a proof of claim in the bankruptcy proceeding and the trustee objected, filing an adversary proceeding, on the ground that the transfers were made with the intent to hinder, delay, and defraud creditors and were avoidable and recoverable. It also asserted that certain post-petition transfers were avoidable and that any claim of Hamilton should be equitably subordinated. The United States Bankruptcy Court, Hyman, J., overruled the objection to the claim, but stated that since Hamilton's claim might have been contractually subordinated, had it acted according to industry standards, "it is certainly consistent with the policies of the Bankruptcy Code to equitably subordinate Hamilton's allowed claim, if any, to Model's allowed unsecured claims..." The court further found that the trustee was not entitled to recover any post-petition transfers 2001 LC CASE SUMMARIES


The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.