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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
1996 LC CASE SUMMARIES Case No. 94-60141, Adversary Case No. 96-6021, 1996 Bankr. LEXIS 1539 (Bankr. N.D. Ohio 1996)
Topics:
Insolvency; Preferential transfers.
Type of Lawsuit:
Unsecured creditors against beneficiaries of standby seeking to recover a preferential transfer.
Principals:
Plaintiff/Unsecured Creditors: The Official Committee of Unsecured Creditors of Baja Boats, Inc.;
Defendants/Beneficiaries Northern Life Insurance Company; The North Atlantic Life Company of America; Ministers Life Insurance Company.
Underlying Transaction:
Back-up for the sale of notes.
LC:
Standby for US $6,515,000. Silent as to whether subject to UCP.
Procedural History:
The United States Bankruptcy Court for the Norther District of Ohio, Williams, J., granted beneficiaries' Motions for Summary Judgment.
Rule:
A payment under a letter of credit is not part of the estate of the bankrupt and is not a preferential transfer to the beneficiary.
Article
Factual Summary:
Applicant entered into an agreement with various insurance companies for the sale of notes. As part of the agreement, applicant caused a letter of credit naming the insurance companies as beneficiaries to be issued as security to back up the notes.
When the applicant defaulted on the notes, the beneficiaries made drawings under the standby. Less than three months later, the applicant filed under Chapter 11 (reorganization) of the U.S. Bankruptcy Code for relief. The unsecured creditors then filed this proceeding to recoup the payments under the L/C, terming the payments preferential transfers.
Moving for summary judgment, the beneficiaries argued that the transfer was not preferential since they received no more than they would have been entitled to under Chapter 7 (liquidation). The unsecured creditors argued that a preferential transfer occurs even if the money does not have to go directly to the creditor; it can go to a third party for the creditor's benefit. As such, the creditors argued that the beneficiaries received a direct benefit from the applicant's transfer of funds to the bank to cover its standby obligations.
Legal Analysis:
1. Preferential Transfer: The court first noted that letters of credit are independent obligations and the proceeds are not the property of a debtor's estate. The court then found that the beneficiaries would have been entitled to the proceeds of the standby regardless of any funds that had been transferred to the bank to cover the obligation. Accordingly, the court granted the beneficiaries' motions for summary judgment.
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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 ICC or the other partners in DC-PRO.