Note: To assure payment on a computer equipment lease, lessee obtained a standby LC for US$ 600,000 in favor of the assignee of the lease. After the applicant/lessee became insolvent, it continued lease payments but due to error missed one payment. The assignee/beneficiary claimed that it gave notice of.45 2001 LC CASE SUMMARIES default and acceleration which the debtor claimed that it did not receive. The beneficiary then drew on the LC which was honored and applied the proceeds to the pre-petition rent that was outstanding and which was classified differently and with a lower priority under local law than postpetition rent. It then filed claims in the bankruptcy proceeding for the balance of the rent due prior to the insolvency and, because of the acceleration, for the balance of the rent due after the commencement of the bankruptcy proceedings. The beneficiary sued applicant to compel payment of the postpetition rent after applicant denied payment asserting that postpetition rent had been paid by the LC proceeds. The U.S. Bankruptcy Court for the District of Delaware, Walsh, J., denied the beneficiary's claims. The court noted that "once a beneficiary complies with the terms of the letter of credit, an account party may generally not prevent the issuing bank from distributing proceeds," citing In re Graham Square, Inc., 126 F.3d at 827 (6 th Cir. 1997). However, the court determined that the beneficiary did not have a claim to accelerate the rent at the time it drew on the LC: "[Applicant's] failure to pay postpetition rent without five days written notice from [beneficiary] is not an event of default." Therefore, it could only have applied the LC proceeds to its claim for postpetition rent; it being the only claim existing at the time.


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.