Note: To assure payment of rent under a commercial lease in the event of default, the tenant, Farm Fresh, caused a standby LC for US$38,000 to be issued by Signet Bank to the landlord/beneficiary, Arbutus. When applicant became insolvent and an interim bankruptcy trustee was appointed under an involuntary insolvency proceeding, the beneficiary gave notice of default on the lease due to non payment of rent currently due. Although the trustee took the position that a draw on the LC would violate the automatic stay imposed by the U.S. Bankruptcy Code, the applicable insolvency statute, the beneficiary drew the entire LC amount and was paid. The trustee brought this action against the beneficiary to recover the LC proceeds and other funds that it had been paid. The U.S. Bankruptcy Court, District of Maryland, James F. Schneider, J., dismissed the claim for failing to show that the draw down of the LC was an invalid post-petition transfer of property of estate that would require permission of the bankruptcy court. UCP. Even if the English courts are not prepared to recognize that the draft is an anachronism, the UCP has done so with respect to LCs. 2. The issuer was entitled to reimbursement from the applicant and its bank without any question since the documents complied on their face with the terms of the LC. Whether the beneficiary had committed fraud or not is irrelevant.


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.