In re North Shore & Central Illinois Freight Co.
| Decision Date | 08 June 1983 |
| Docket Number | Bankruptcy No. 83 B 3439,83 A 933. |
| Citation | 30 BR 377 |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
| Parties | In re NORTH SHORE & CENTRAL ILLINOIS FREIGHT CO., an Illinois Corporation, Debtor. NORTH SHORE & CENTRAL ILLINOIS FREIGHT CO., an Illinois Corporation, Plaintiff, v. AMERICAN NATIONAL BANK & TRUST COMPANY OF CHICAGO, an Illinois Corporation, and Protective Insurance Company, Defendants. |
Harold Collins, Chicago, Ill., for plaintiff.
Herbert Carlson, Iversen, Carlson & Assoc., Chicago, Ill., for Protective Ins. Co.
The issue presented in this cause of action concerns the right of a beneficiary to collect on an irrevocable letter of credit once a customer has filed a petition in bankruptcy.
On March 3, 1981, North Shore & Central Illinois Freight Company (hereinafter referred to as the debtor), arranged for a $50,000.00 letter of credit (No. 201464) with American National Bank and Trust Company of Chicago (hereinafter referred to as "ANB"). The beneficiary of the letter of credit is Protective Insurance Company (hereinafter referred to as Protective). The letter of credit was issued to provide Protective with adequate security against any liability it might incur while serving as surety for the debtor. The debtor alleges that Protective was terminated as its surety on January 31, 1983.
On March 14, 1983, the debtor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. On March 22, 1983, Protective sought to draw the $50,000.00 from "ANB" as provided for under the terms of the letter of credit No. 201464. The debtor then brought an adversary complaint (83 A 933) seeking to prevent "ANB" from disbursing the $50,000.00 to Protective. A temporary restraining order was granted by the Bankruptcy Court. Protective then filed a motion to dismiss the debtor's complaint and the right to draw upon the letter of credit. Consequently, this court must determine whether the debtor's bankruptcy affects the right of Protective to draw upon the letter of credit.
The debtor contends that upon the filing of a bankruptcy petition, the automatic stay provisions of 11 U.S.C. § 362 (Supp. IV 1980) serve to prevent Protective from drawing upon the letter of credit. Implicit in this argument is the proposition that the letter of credit is property of the bankrupt's estate pursuant to 11 U.S.C. § 541 (Supp. IV 1980). See Globe Construction Co. v. Oklahoma City Housing, 571 F.2d 1140, 1143 (10th Cir.1978), cert. den. 439 U.S. 835, 99 S.Ct. 117, 58 L.Ed.2d 131 (1979) (). Prior to determining whether a letter of credit is property of the debtor's estate pursuant to Section 541, a brief discussion of the purposes served by letters of credit is warranted.
Letters of credit traditionally have served as an important source of financing for commercial transactions. See Baird, Standby Letters of Credit in Bankruptcy, 49 U.Chi.L.Rev. 130 (1982). Essentially, the purpose of a letter of credit is to insure the certainty of payment for services or goods rendered regardless of any intervening misfortune which may befall the other contracting party. Generally, the party who benefits from the provision of the goods or services will arrange for a letter of credit to be issued by a bank. Under the terms of the letter of credit, the provider of the goods or services is named as beneficiary.
The transaction involved in this controversy resembles a standby letter of credit arrangement. Under a standby letter of credit arrangement the bank becomes primarily liable to the beneficiary upon the default of the bank's customer. In return the bank charges the customer a fee based upon the customer's probability of insolvency. It is argued that this arrangement spreads the allocation of risk to the parties who are best able to ascertain the risk. Id. at 134. The success of letter of credit arrangements as a financing tool is demonstrated by the widespread use of letters of credit to facilitate commercial transactions.
Turning to the case at hand, in a recent case involving a surety arrangement, a bankruptcy court held that a letter of credit and its proceeds were not property of the estate within the meaning of Section 541. In re M.J. Sales & Distributing Co., Inc., 25 B.R. 608, 614 (Bkrtcy.S.D.N.Y., 1982). The Court in M.J. Sales allowed a surety to draw upon a letter of credit subsequent to the debtor's filing of a bankruptcy petition. The court based its decision on the notion that a letter of credit represented an "irrevocable obligation by an issuing bank to pay a beneficiary in accordance with its terms." Id. Implicit in this conclusion was the fact that the automatic stay provisions of Section 362 were inapplicable.
Prior to M.J. Sales, several courts reached a similar result regarding the right of a beneficiary to draw upon a letter of credit subsequent to the customer's...
To continue reading
Request your trial