Letters of Credit in Sale and Leaseback Transactions: One Size Does Not Fit All
by Walter Benzija
Halperin Battaglia Raicht LLP; New York
A standby letter of credit, serving as a security deposit to secure the obligations of a lessee, is one of the most useful protections a landlord can obtain – particularly in the event of the lessee’s bankruptcy and subsequent rejection of the lease. In evaluating the protection afforded by the standby letter of credit, however, landlords and lenders need to be aware of a recent case out of the Eleventh Circuit, which determined that under certain circumstances, a beneficiary might be able to draw on the letter of credit, but not keep all of the proceeds. In Two Trees v. Builders Transport Inc. (In re Builders Transport Inc.), --- F.3d ---, WL 3490844 (11th Cir. Dec. 5, 2006), the Eleventh Circuit Court of Appeals, affirming the bankruptcy court and district court, ordered the turnover of the proceeds of a $1.6 million standby letter of credit to the extent that the proceeds exceeded the proven lease-rejection damages. The decision of the appeals court sounds a warning in the context of sale and leaseback transactions: If the letter of credit is meant to secure the lessee’s lease obligations and the landlord’s mortgage obligations, then such intention had better be explicit.
Minutes from 2006 Winter Leadership Conference
On Saturday, Dec. 2, 2006, the committee presented a joint program with the UCC Committee. Featured speakers Leslie A. Berkoff (Moritt Hock Hamroff & Horowitz LLP; Garden City, N.Y.) and David D. Farrell (Thompson Coburn LLP; St. Louis) discussed "Competing Rights of Secured Parties, Landlords & Equipment Lessors in Collateral and Fixtures in Real Estate-Related Transactions." Written materials were distributed at the site and are available on request. The meeting was well attended, and the materials and presentation were excellent.
Committee Co-chair Alec P. Ostrow preceded the presentation by describing the committee's ongoing project of preparing a model annotated contract for the sale of real property by a bankruptcy fiduciary for publication, and requested the participation of members in working on the project. Those interested in participating should contact the co-chairs.
Agenda for 2007 Annual Spring Meeting
At the upcoming Annual Spring Meeting in Washington, D.C., on Saturday, April 14, 2007, the committee will present an educational program, "Interests Impervious to Bankruptcy." We will discuss interests in real property, such as eminent domain powers, unrecorded tenancies in possession, easements and contracts that run with the land and that are impervious to bankruptcy powers such as contract rejection, free-and-clear sales and the avoiding powers. In addition to committee co-chairs John Collen and Alec P. Ostrow, our featured speakers are Scott N. Opincar (McDonald Hopkins Co. LPA; Cleveland) and Patrick E. Mears (Barnes & Thornburg LLP; Grand Rapids, Mich.)