2010 WI 76
|
Supreme Court of |
|
|
|
|
Case No.: |
2007AP2791 |
|
Complete Title: |
|
|
|
ADMANCO, Inc. by Michael S. Polsky, Receiver,, Plaintiff-Respondent, v. Defendant-Appellant-Petitioner, M&I Marshall & Ilsley Bank, EBSCO Industries, Inc. and Alliance Laundry Systems, Inc., Garnishees. |
|
|
|
|
|
REVIEW OF A DECISION OF THE COURT OF APPEALS 2009 WI App 57 Reported at: 318 (Ct. App 2009-Published) |
|
|
|
|
Opinion Filed: |
July 13, 2010 |
|
Submitted on Briefs: |
|
|
Oral Argument: |
January 5, 2010
|
|
|
|
|
Source of Appeal: |
|
|
|
Court: |
Circuit |
|
County: |
|
|
Judge: |
Peter L. Grimm
|
|
|
|
Justices: |
|
|
|
Concurred: |
|
|
Dissented: |
CROOKS, J., dissents (opinion filed). BRADLEY, J., joins dissent. |
|
Not Participating: |
ABRAHAMSON, C.J. and ZIEGLER, J., did not participate. |
|
|
|
Attorneys: |
|
For the defendant-appellant-petitioner there were briefs
by Valerie L. Bailey-Rihn, Jeffrey O.
Davis, Matthew D. Fortney, and Quarles
& Brady LLP,
For the plaintiff-respondent there was a brief by Kevin L. Keeler, Matthew S. Vignali, and
Beck, Chaet, Bamberger & Polsky,
S.C.,
An amicus curiae brief was filed by Erin O’Connor and the O’Connor Law Offices, Fox Point, on behalf of the NAIOP Wisconsin Chapter, Inc., Building Owners and Managers Association and Commercial Association of Realtors Wisconsin, Inc.
2010
WI 76
notice
This opinion is subject to further editing and modification. The final version will appear in the bound volume of the official reports.
REVIEW of a decision of the Court of Appeals. Reversed and remanded to the circuit court.
¶1 PATIENCE DRAKE ROGGENSACK, J. This review arises
in the context of a Wis. Stat. ch. 128 insolvency proceeding, which proceeding
applies to property of the debtor.
¶2 Because we conclude that the proceeds of the standby letters of
credit were not property of Admanco, they are not property of the debtor's
estate subject to the receiver's administration under ch. 128. We also conclude that the "claim"
of Wis. Stat. § 128.17(2)
is a claim against property of the debtor's estate, not a claim against
property of the issuer of the standby letters of credit. And finally, we conclude that the circuit
court should have ordered summary judgment denying Polsky's breach of contract
claim and granting
I. BACKGROUND
¶3 The relevant facts of the underlying transactions are
straightforward and not in dispute. On
March 31, 2004, Stanton and Admanco entered into a sale-leaseback
arrangement, wherein
¶4 The written lease required Admanco to provide
¶5 The letters of credit were "irrevocable standby letters of credit" that were payable upon presentation of documents listed on the face of the letters of credit. M&I Bank was fully secured by Admanco's property in the event there was a drawdown on the letters of credit.
¶6 Admanco encountered financial difficulties, and on December 30, 2004, Admanco assigned its assets to Polsky for the benefit of creditors pursuant to Wis. Stat. § 128.05. Also on December 30, 2004, Polsky was appointed as the receiver for Admanco's property pursuant to Wis. Stat. § 128.08.
¶7 Admanco failed to make its January 1, 2005 rent payment, and
¶8 As part of the ch. 128 proceedings, and with M&I Bank's
approval, Polsky applied for and was given permission from the court to sell
Admanco's assets. From the sale of those
assets to EBSCO Industries, Inc. (EBSCO Industries),[7]
M&I Bank was paid more than $3 million, which included full reimbursement
for the $750,000 payment M&I Bank made to
¶9 Polsky brought suit against
¶10 Polsky also sued the Bumbys, seeking $375,000 to reimburse the
debtor's estate for the second letter of credit of which the Bumbys were the
applicants. The Bumbys reached an
agreement with Polsky by paying $267,374.17, and Polsky dismissed them from
further collection actions. Polsky
continued to proceed against
¶11 Both parties moved for summary judgment. The circuit court granted judgment in favor
of the debtor's estate and determined that $513,292.66 was due from
¶12 Stanton appealed, arguing that the proceeds from the letters of
credit were not property of the debtor's estate; that Wis. Stat. § 128.17(2) does not
apply to the drawdown of the letters of credit; and that Stanton is a Wis.
Stat. § 128.25(1)(e)
secured creditor, in regard to the proceeds from the letters of credit. The court of appeals affirmed the circuit
court, concluding that § 128.17(2)
limited
¶13
II. DISCUSSION
A. Standard of Review
¶14 This case presents upon cross-motions for summary judgment, wherein
the circuit court granted Admanco's motion and denied that of
¶15 In the course of reviewing these summary judgment motions, we are
required to interpret and apply
B. Letter of Credit Principles
¶16 Because this review arises from the drawdown of standby letters of credit, it is important to understand the nature of standby letters of credit and their use in commercial settings; the relative rights and obligations of the participants to standby letters of credit; and how the participants may relate to each other at various times.
¶17 Letters of credit have been used in commercial transactions for a
very long time. John F. Dolan, The
Law of Letters of Credit ¶1.01,
1-2 (rev. ed. 1999). Initially, letters
of credit were used to protect a seller in the sale of goods by assuring that
the seller received the purchase price.
¶18 There are two general types of letters of credit: those "that serve the sale of
commodities and those that guarantee the performance of an obligation[. We call] the former a 'commercial' [letter
of] credit and the latter a 'standby' [letter of] credit."
¶19 Transactions involving letters of credit are governed by Article 5
of the Uniform Commercial Code (U.C.C.), and in Wisconsin by ch. 405 of the
statutes, which is part of Wisconsin's enactment of the U.C.C. Since the adoption of U.C.C. Article 5,
governing letters of credit, there has been a significant expansion in the use
of letters of credit in various commercial transactions "where they serve
to reduce risk of nonperformance under a contract that calls for
performance. Generally, [letters of]
credit[] in the nonsale setting have come to be known as standby [letters of]
credit[]" because they "standby" and perform only in the event
that the person primarily liable to perform does not.
¶20 "The linchpin of the letter-of-credit transaction is the
unique legal relationship [among the parties]." Douglas G. Baird, Standby Letters of
Credit in Bankruptcy, 49 U. Chi. L. Rev. 130, 134 (1982). "Professors White and Summers note that
a letter of credit is not like other devices creating legal obligations, but
rather that a letter of credit is a letter of credit."
¶21 There are three parties to a standby letter of credit: (1) the applicant who requests the letter of
credit; (2) the beneficiary to whom payment is due upon the presentation of
documents required by the letter of credit; and (3) the issuer who obligates
itself to honor the letter of credit by paying up to a stated amount of money
when it is presented with documents the letter of credit requires.
¶22 The
obligation of an issuer to pay upon presentation of proper documentation is an
obligation independent of any other claim that may exist among the parties to
the letter of credit contract.
¶23 Performance under a standby letter of credit amounts to payment and
is often referred to as "honoring" the letter of credit. See Eakin, 875 F.2d at 116;
¶24 One of the primary purposes of standby letters of credit is to
shift the risk of nonpayment and insolvency from the beneficiary of the letter
of credit to the issuer of the letter of credit. Eakin, 875 F.2d at 116-17 (explaining
that "[i]ssuers of letters of credit take the risk of insolvency" and
that "[s]tandby letters of credit are especially designed to deal with
insolvency"); Musika v. Arbutus Shopping Ctr. Ltd. P'ship (In re Farm
Fresh Supermarkets of Maryland, Inc.), 257 B.R. 770, 772 (Bankr. D.
¶25 All parties to a letter of credit benefit from its use. The applicant uses the letter of credit as a financial inducement to the beneficiary of the letter of credit to enter into a business arrangement, such as a long-term lease, that the beneficiary would not enter into without this inducement.[9] The issuer receives a fee for the risk it takes, and usually, it also contracts for its security from the applicant or others, in the event the issuer is required to honor the letter of credit.[10] The beneficiary of a letter of credit obtains the gold standard of payment assurance for commercial transactions. Alan N. Resnick, Letter of Credit as a Landlord's Protection Against a Tenant's Bankruptcy: Assurance of Payment or False Sense of Security?, 82 Am. Bankr. L.J. 497 (2008).
¶26 Letters of credit create a potential obligation for the issuer that
is completely independent of the business arrangement for which it was an
inducement.
¶27 To properly protect the independence of a letter of credit, it is necessary to have a clear understanding of the rights of a trustee in bankruptcy or a receiver in insolvency vis-ŕ-vis the beneficiary of a standby letter of credit once a drawdown has occurred. Their rights must accommodate protection of the beneficiary from nonpayment and insolvency, which the independence principle provides. However, the independence principle nevertheless permits a subsequent breach of contract claim by a bankruptcy trustee or receiver, if such claim lies against a beneficiary who draws down a letter of credit in excess of its right to do so. It is with these foundational principles in mind that we proceed to the issues presented in this case.
C. Summary Judgment
¶28 A decision on summary judgment begins with a review of the
complaint to determine whether it states a claim; it proceeds to a review of
the answer to determine whether issue has been joined; and finally to a review
of the material submitted in support of and in opposition to the motion to
determine whether material issues of fact are in dispute. Jackson Cnty. v. DNR, 2006 WI 96, ¶11, 293
¶29 Polsky
filed this action to recover what he alleged were excess lease payments to
¶30
¶31 We
conclude that the complaint and answer join issue, and the documents submitted
with the affidavits do not raise issues of material fact. Accordingly, summary judgment is appropriate
for Polsky's statutory claim for return of the proceeds paid from the standby
letters of credit, his claim for breach of contract and
D. Property
and Claims under
1. Property
of the debtor's estate
¶32 Polsky was appointed as receiver of Admanco's property. As Wis. Stat. § 128.08 provides, "[t]he court within the
proper county may sequestrate the property of a debtor and appoint a receiver
therefor." It has long been the law
in
¶33 Polsky contends, and the court of appeals agreed, that the proceeds
of the standby letters of credit became subject to administration of the
debtor's estate through the application of Wis. Stat. § 128.17(2), when M&I Bank was reimbursed from
the estate's property. Admanco,
318
¶34 However, rather than analyzing whether the standby letters of
credit were improperly drawn down, which could then give rise to a claim for
breach of contract against Stanton, the court of appeals took a shortcut. The court of appeals concluded that because
M&I Bank was fully secured by property of the debtor's estate, the drawdown
on the standby letters of credit must be treated the same as would property of
the debtor.
¶35 This shortcut, if upheld, would do violence to what has been the
gold standard for security in
¶36 Under the court of appeals decision, standby letters of credit would no longer shift the risk of nonpayment and insolvency from the beneficiary to the issuer of the letter of credit because the beneficiary of the letter of credit would bear the ultimate loss. Accordingly, the court of appeals decision contravenes the major function of letters of credit. Stated otherwise, under the court of appeals decision, those who entered into commercial transactions with persons of uncertain creditworthiness, assured by a bargained-for letter of credit, would be deprived of the safety provided by the letter of credit that induced them to enter into the contract.[19]
¶37 However, standby letters of credit are able to shift the risk of
nonpayment and insolvency to the issuer of the letter of credit because the
proceeds of letters of credit are not property of the debtor's estate in a
bankruptcy or insolvency proceeding. Willis
v. Celotex Corp., 978 F.2d 146, 148 n.3 (4th Cir. 1992) (explaining that
the proceeds of an irrevocable letter of credit are not property of the
bankruptcy estate); Kellogg v. Blue Quail Energy, Inc., 831 F.2d 586,
589 (5th Cir. 1987) (concluding that "[i]t is well established that a
letter of credit and the proceeds therefrom are not property of the debtor's
estate"); Wetzel v. Lumbermans Mut. Cas.
¶38 We agree that the proceeds of standby letters of credit are not property of the debtor's estate. Rather, the proceeds are property of the issuer that are paid to the beneficiary upon a proper demand. They never have been property of the debtor.
¶39 Furthermore, some courts have opined that honoring a letter of
credit has little effect on the unsecured creditors of the debtor's estate
because any security the issuer takes in the applicant's property is reserved
for the issuer when the letter of credit commences. In re Sabratek, 257 B.R. at 735. Therefore, from that point forward, until the
letter of credit has expired, the applicant has no right to dispose of that
collateral without the permission of the issuer.
¶40 The dissent contends that we misconstrue Kellogg and that it actually supports the dissent's position that "the proceeds at issue are property of the [debtor's] estate, by virtue of the estate collateral securing them."[21] This assertion highlights the central flaw at the core of the dissent: it mistakenly conflates the rights of a beneficiary of a letter of credit to the proceeds of the letter of credit with the rights of a secured creditor to an interest in the property of the debtor's estate.
¶41 The dissent correctly points out that Kellogg concludes that "'the letter of credit itself and the payments thereunder may not be property of [the] debtor, but the collateral pledged as a security interest for the letter of credit is.'"[22] We do not quarrel with this statement. However, what the dissent mistakenly does next is to conflate the rights of a secured creditor (M&I Bank) to enforce its security interest in the property of the debtor (Admanco) with the rights of the beneficiary of the letter of credit (Stanton) to be paid by M&I Bank, independent of any contract between M&I Bank and Admanco.
¶42 An example may help to show why the dissent is conflating two
separate and distinct property rights.
Suppose Admanco had given property of an unnamed third party, instead of
its own property, as security for the letters of credit, breached its lease,
and assigned its assets for the benefit of creditors;
¶43 The right to execute against collateral and the right to draw down
proceeds from letters of credit are legally separate and independent of one
another. To conclude otherwise would
defeat the rights of the beneficiary of a letter of credit, who is entitled to
the same security of payment as it would have received if Admanco had not
commenced an insolvency proceeding. See
Eakin, 875 F.2d at 117. In this
respect, the issuer of the letters of credit operates like a guarantor of
2. Ch. 128 claims
¶44 All
property administered under ch. 128 was the debtor's property, which becomes
the debtor's estate, that is then subject to administration by the
receiver.
¶45 Wisconsin
Stat. § 128.14(2) raises concerns for creditors "not filing claims
within the time limited [because they] may be precluded from participation in
any dividend which may be declared."
(Emphasis added.) The
"claim" referenced in § 128.14(2) is a claim against the
debtor's estate, and the "dividend" that is referenced in
§ 128.14(2) is a payment from the debtor's estate. See
¶46 "Claims" also are addressed in Wis. Stat. § 128.17(2), the statute
upon which the circuit court and the court of appeals relied to preclude
(1) The order of distribution out of the debtor's estate shall be as follows:
. . .
(g) Debts due to creditors generally, in proportion to the amount of their claims, as allowed.
. . .
(2) Debts to become due as well as debts due may be proved, but a lessor's claim shall be limited to past due rent, and to any actual damage caused the lessor by a rejection of the lease on the part of the debtor or by its termination by force of its provisions. The lessor shall be entitled to payment in full, at the rate specified in the lease, for the period of any actual occupancy by the receiver or assignee.
(Emphasis added.)
¶47 Wisconsin Stat. § 128.17(2) limits a lessor's claims against property of the debtor's estate. However, it says nothing about a lessor's claims against property that is not property of the debtor's estate. Stated otherwise, ch. 128 applies to claims against the debtor's estate, not to claims against the property of another.
¶48 Recognizing that ch. 128 claims are claims to share in the debtor's
estate is important because the proceeds of the letters of credit are not
property of the debtor's estate. Kellogg,
831 F.2d at 589; supra ¶¶32-37. Therefore, Wis. Stat. § 128.17(2) says nothing about proceeds from letters
of credit, which are property of the issuers.
The court of appeals did not consider from what property a
"claim" under § 128.17(2)
was requesting payment. However, the
only property in a ch. 128 proceeding is the property of the debtor's
estate.
¶49 The court of appeals concluded that Wis. Stat. § 128.17(2) capped
Stanton's claim for rent, relying in part on cases such as Oldden v. Tonto
Realty Corp., 143 F.2d 916 (2d Cir. 1944) and Redback Networks, Inc. v.
Mayan Networks Corp. (In re Mayan Networks Corp.), 306 B.R. 295 (B.A.P. 9th
Cir. 2004), construing 11 U.S.C. § 502(b)(6)(A) (2006) of the revised
federal bankruptcy code. Admanco,
318
¶50 The revised federal bankruptcy act caps "rent reserved by such lease, without acceleration, for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of such lease." 11 U.S.C. § 502(b)(6)(A). It was this provision that Oldden[23] and In re Mayan Networks interpreted in the context of a federal bankruptcy proceeding, not a state insolvency proceeding as we have here. Oldden, 143 F.2d at 917; In re Mayan Networks, 306 B.R. at 297–98. While it may be that ch. 128 was modeled on the federal bankruptcy act, it is beyond dispute that when the federal act was revised to include this cap, ch. 128 was not similarly revised. Therefore, the case law interpreting the cap on rent from § 502(b)(6)(A) does not inform our interpretation of Wis. Stat. § 128.17(2).[24]
3. Breach of contract
¶51 Even though the proceeds of a letter of credit are not the property of the debtor's estate and the drawdowns on the letters of credit are not claims against the debtor's estate, it does not follow that a receiver can make no claim that the beneficiary drew down more proceeds than it was contractually entitled.
¶52 Payment from a standby letter of credit does not negate any suit for breach of contract against the beneficiary of a letter of credit, if such a claim exists. See First Ave. W. Bldg. v. James (In re Onecast Media, Inc.), 439 F.3d 558, 564 (9th Cir. 2006) (explaining that a trustee may maintain a claim for breach of contract if the beneficiary breached the contract underlying the letter of credit by a drawdown that exceeded the beneficiary's damages).
¶53 A breach of contract claim is a chose in action under
¶54 Recognizing that the proceeds of a standby letter of credit is not part of the debtor's estate, while permitting a suit on the debtor's behalf against the beneficiary of a standby letter of credit for breach of contract is an important distinction to maintain. That distinction preserves the ability of a standby letter of credit to shift the risk of nonpayment and insolvency to the issuer of the letter of credit, thereby facilitating commercial transactions. However, it also permits a debtor's receiver to collect all of the property of the debtor, including damages arising from breach of contract actions.
¶55 Therefore, while the amount of money sought by a receiver subsequent to a drawdown on a standby letter of credit may be the same amount that is proved as damages for breach of contract against a beneficiary, they are not the same property interest and they do not arise in the same way. The proceeds of a letter of credit is property of the issuer of the standby letter of credit. Kellogg, 831 F.2d at 589. The damages for breach of contract are property of the debtor because they are payment for the debtor's contract rights. In re Onecast Media, 439 F.3d at 564.
¶56 Furthermore, distribution from a standby letter of credit arises upon the presentation of documents that the standby letter of credit requires for payment. Nothing more is required. By contrast, damages for breach of contract require the receiver to prove the contract, the breach and the amount of damages that resulted from the breach. Arthur L. Corbin, Corbin on Contracts §§ 943-944, at 923-24 (1952). Stated otherwise, a lawsuit for breach of contract in a ch. 128 proceeding requires the same proofs as does a lawsuit for breach of contract outside of such proceeding; payment of damages is not automatic upon a claim of breach of contract. See Hayes v. Buda, 323 F.2d 748, 750 (7th Cir. 1963).
¶57 Here, Polsky did allege
¶58 Resolution of both Polsky's and Stanton's breach of contract claims depend on the terms of the written Admanco-Stanton lease. The lease was submitted to the circuit court during the motions for summary judgment, as well as being attached to the Complaint.
¶59 There is no dispute that Admanco breached the lease by failing to
pay the rent due January 1, 2005, and that Admanco did not timely cure
that default of its obligations under the lease.[28]
21. EVENTS OF DEFAULT
21.1 Bankruptcy of Tenant or Guarantor. It shall be a default by Tenant under this Lease if either or both of any Guarantor and Tenant makes an assignment for the benefit of creditors, or files a voluntary petition under any state or federal bankruptcy or insolvency law . . . that is not dismissed within 90 days, . . . or whenever a receiver of Tenant or any Guarantor, as the case may be, or of, or for, the property of Tenant or any Guarantor, as the case may be, shall be appointed, or Tenant or Guarantor, as the case may be, admits it is insolvent or is not able to pay its debts as they mature.
(Emphasis added.)
¶60 Admanco assigned its assets to Polsky for the benefit of Admanco's
creditors, and Polsky was appointed receiver for Admanco's property. These facts are undisputed. The terms of default under section 21.1 are
clearly set out, and the undisputed facts establish that Admanco "ma[de]
an assignment for the benefit of creditors" and "file[d] a voluntary
petition under [] state . . . insolvency law." As such, Admanco's conduct comes within its
provisions. Therefore, as a matter of
law, Admanco committed a second event of default under the lease's terms by
these actions. See Prent Corp.,
238
¶61 The Admanco-Stanton lease also provides remedy options for the
landlord when the tenant defaults. The
remedies available to the landlord are set out in section 22. Here,
22.2 Landlord's Remedies. In the event of any default by Tenant under this Lease, Landlord, at its option, . . . may, in addition to all other rights and remedies provided in this Lease, or otherwise at law or in equity: . . . (b) terminate Tenant's right of possession of the Premises without terminating this Lease, provided, however, that Landlord may, whether Landlord elects to proceed under Subsections (a) or (b) above, relet the Premises, or any part thereof for the account of Tenant . . . If Landlord elects to pursue its rights and remedies under Subsection (b) above, . . . and Landlord fails to relet the Premises, then Tenant shall pay to Landlord the sum of (x) the projected costs of Landlord's expenses of reletting . . . and (y) the accelerated amount of Base Rest and Additional Rent due under the Lease for the balance of the Term, discounted to present value at a rate of 6% per annum.
(Emphasis added.)
¶62 When Stanton terminated Admanco's possession without terminating
the lease,[32]
the payments for the full term of the lease came due at a discounted rate of 6%
per annum.[33] The Base Rent under the lease for the first
12 months was $367,882.00; the Base Rent for the next 12 months was
$377,079.05; the Base Rent for the third 12 months was $386,506.03.[34] The Base Rent continued to escalate annually,
ending with $519,807.63 due during the final 12 months of the lease.[35] The cumulative amount of the Base Rent
payments due under the lease, discounted by 6% per annum, greatly exceeds
¶63 Polsky's breach of contract claim alleges that Stanton had no
contractual right to $750,000 when it drew down the standby letters of credit
because Stanton had terminated the lease.[36] However, as we mentioned above, the documents
that
III. CONCLUSION
¶64 Because we conclude that the proceeds of the standby letters of
credit were not property of Admanco, they are not property of the debtor's
estate subject to the receiver's administration under ch. 128. We also conclude that the "claim"
of Wis. Stat. § 128.17(2)
is a claim against property of the debtor's estate, not a claim against
property of the issuer of the standby letters of credit. And finally, we conclude that the circuit
court should have ordered summary judgment denying Polsky's breach of contract
claim and granting
¶65 Accordingly, we reverse the decision of the court of appeals and
remand to the circuit court to dismiss Polsky's suit against
By the Court.—The decision of the court of appeals is reversed, and the cause is remanded to the circuit court for further proceedings consistent with this opinion.
¶66 SHIRLEY S. ABRAHAMSON, C.J., and ANNETTE KINGSLAND ZIEGLER, J., did not participate.
¶67 N. PATRICK CROOKS, J. (dissenting). Who needs the legislature when we have this majority? Essentially, the majority does not appear to like the cap in Wis. Stat. § 128.17(2) limiting landlord claims for rent in receivership proceedings, so it writes its way around it. In so doing, the majority fails to honor the principles underlying receivership proceedings in Wisconsin and demolishes the utility of § 128.17(2), which is designed to compensate a landlord for loss of rent while preventing a claim for prospective rent so large that it would deplete an estate in receivership to the detriment of unsecured creditors.
¶68 The majority does that all in the name of protecting the integrity of all letters of credit. However, the majority's fear that to rule otherwise will destroy the utility of letters of credit is unfounded. The court of appeals' opinion in this matter was narrow and impacted only letters of credit between landlords and tenants, and only proceeds exceeding a landlord's allowable claims under chapter 128. As a result of the majority opinion, receivership estates are more likely to be depleted by a landlord that had contracted for all of its future rent, and unsecured creditors in receivership proceedings are more likely to be left twisting in the wind.
¶69 Accordingly, I dissent. I agree with the parties, the circuit court, the court of appeals, and numerous federal courts[38] that, in the context of receivership and bankruptcy, the proceeds of the letter of credit here, are secured by property of the estate, and thus are within the receiver's (or bankruptcy trustee's) control. Additionally, in response to the questions asked of this court by the parties, I would conclude, as did the court of appeals, that Stanton is not a secured creditor as defined by Wis. Stat. § 128.25(1)(e), that that conclusion does not offend the independence principle, and that Stanton's claim is limited by the landlord cap in Wis. Stat. § 128.17(2). Hence, I would affirm the court of appeals.
¶70 To understand why the majority's approach is misguided, it is
important to understand how receivership proceedings operate and the rationale
behind the statutory scheme. Wisconsin
Stat. ch. 128 governs assignments for the benefit of creditors. "An assignment provides a means of
liquidating the assets of a debtor in an orderly and controlled
manner." 4
¶71 To
initiate receivership proceedings under chapter 128, a debtor voluntarily
assigns its assets to an assignee who files the assignment and delivers the
bond to the circuit court. Wis. Stat. § 128.02;
see Linton v. Schmidt, 88
¶72 Once
appointed, a receiver generally has a duty to "act[] for the benefit of
the insolvent debtor and all of his creditors." Candee v. Egan, 84
¶73 As
for specific duties, the receiver inventories all assets of the estate and
lists all of the debtor's creditors.
¶74 In
receivership proceedings, landlords' or lessors' claims receive treatment
unique from claims of secured and general unsecured creditors. Wis. Stat. § 128.17(2) provides:
Debts to become due as well as debts due may be proved, but a lessor's claim shall be limited to past due rent, and to any actual damage caused the lessor by a rejection of the lease on the part of the debtor or by its termination by force of its provisions. The lessor shall be entitled to payment in full, at the rate specified in the lease, for the period of any actual occupancy by the receiver or assignee.
In other words, a landlord or
lessor is limited to claims for "past due rent," including rent due
for the period during which the receiver or assignee occupied the property, and
any actual damage caused by the debtor's rejection of the lease or its
termination. Although the statute does not expressly state that a landlord or
lessor has no claim for future rent, it can be reasonably inferred from the
language "past due rent" and "actual damage" that the
statute does not permit a claim for future rent. The parties do not appear to dispute that the
statute, if applicable, would limit
¶75 As
an initial matter, courts have understood the original enactment of the federal
Bankruptcy Act of 1898, after which the legislature modeled Wis. Stat. § 128.17(2),
to preclude a landlord from recovering future rent because such a claim could
not be proved. See Oldden v.
Tonto Realty Corp., 143 F.2d 916, 918 (2d Cir. 1944) (listing cases so
holding). Although the court in Oldden
noted that the rule limiting a landlord to past due rent "was often harsh
as to the landlord, . . . it did prevent the exhaustion of
bankrupt estates for disproportionately large lease claims."
¶76 In
1934, Congress amended federal bankruptcy law to permit a landlord to claim past
due rent as well as a portion of future rent capped at "the greater of one
year, or 15 percent, not to exceed three years, of the remaining term of such
lease."[40] 11 U.S.C. § 502(b)(6). In other words, Congress permitted larger
claims for future rent "to compensate the landlord for his loss," yet
it still retained a cap under § 502(b)(6) to prevent "a claim so
large (based on a long-term lease) as to prevent other general unsecured
creditors from recovering a dividend of the estate." Redback Networks, Inc. v. Mayan
Networks Corp. (In re Mayan Networks Corp.), 306 B.R. 295, 298 (B.A.P. 9th
Cir. 2004) (quoting the legislative history of § 502(b)(6) in S. Rep. No. 95-989, reprinted in
1978 U.S.C.C.A.N. 5787, 5849; H.R. Rep. No. 95-595, reprinted in 1978
U.S.C.C.A.N. 5963, 6309). Notably, the
¶77 Hence, Wis. Stat. § 128.17(2)
would limit
¶78 The lease between Stanton and Admanco contained a provision with
the heading "Security Deposit," which stated that Admanco would
provide Stanton with a $61,313.66
cash security deposit[42]
and two irrevocable standby letters of credit for $375,000 each
"representing security for the performance by Tenant of its rental
obligations and certain of Tenant's other obligations hereunder." Both letters of credit were issued by M&I
Bank (M&I), designated
¶79 The court of appeals' decision turns on the fact that the proceeds
were secured by estate assets and that
¶80 Mayan Networks involved the sublease of a commercial
building. The tenant delivered to the
landlord both a cash security deposit and a letter of credit secured by the
tenant's cash, both of which the sublease referred to as "security"
for the "faithful performance by [the tenant] of all of [the tenant's]
obligations under this [s]ublease."
In re Mayan Networks, 306 B.R. at 297. After the tenant filed for Chapter 11
bankruptcy, the landlord drew down the full amount of the letter of credit
proceeds and applied the cash security deposit to reduce its allowed claim
under the 11 U.S.C. § 502(b)(6)
statutory cap.
¶81 The Mayan Networks court first looked to the language and history of § 502(b)(6), noting that the intent behind the statute was that a security deposit must be applied toward a landlord's total claim, which left the question of whether it was to treat the letter of credit like a security deposit for purposes of determining the landlord's claim. The court first invoked the general consensus among bankruptcy courts that letters of credit are not property of the estate. However, it stated,
[T]he fact that letters of credit themselves are not property of the estate is a red herring. There is nothing in [§ 502(b)(6)] or in case law that suggests that the limitation in § 502(b)(6) applies only to amounts that are paid directly from property of the estate. Rather, the appropriate analysis looks to the impact that the draw upon the letter of credit has on property of the estate.
¶82 Looking to the impact that the landlord's draw on the proceeds had
on the property of the estate, the court reasoned that the proceeds secured by
property of the estate were essentially a security deposit.
¶83 Following that reasoning, just as trustees in bankruptcy[43] may seek the return of a security deposit to the extent that the amount exceeds the debtor's satisfied obligation, bankruptcy courts have held that a trustee in bankruptcy is entitled to seek proceeds from a letter of credit exceeding the debtor's obligation to the creditor, to the extent that those proceeds are secured by estate assets. See, e.g., First Avenue West Building, LLC v. James (In re Onecast Media, Inc.), 439 F.3d 558, 564 (9th Cir. 2006); AMB Property L.P. v. Official Creditors (In re AB Liquidating Corp.), 416 F.3d 961, 963 (9th Cir. 2005); S-Tran Holdings, Inc. v. Protective Ins. Co. (In re S-Tran Holdings, Inc.), 414 B.R. 28, 35 (Bankr. D. Del. 2009) (debtors may seek proceeds from letters of credit exceeding their obligation); see also Two Trees v. Builders Transport, Inc. (In re Builders Transport, Inc.), 471 F.3d 1178, 1187 (11th Cir. 2006) (a letter of credit beneficiary had a duty to return to the debtor excess proceeds not used to secure the debtor's obligation).
¶84 I am persuaded that the approach taken by the court in Mayan
Networks, and numerous other federal courts,[44]
supports the conclusion that letter of credit proceeds secured by estate
collateral are property of the estate and thus are subject to the receiver's
control in a chapter 128 proceeding. The
approach that a beneficiary may not retain standby letter of credit proceeds
that are secured by estate assets, to the extent that those secured proceeds
exceed the limit on a landlord's or lessor's claimed damages in chapter 128,
comports with the clear legislative intent that a landlord is entitled to
unpaid rent through the date of the receivership petition. See
¶85 Yet the majority eats up the "red herring" discussed in Mayan Networks——hook, line, and sinker. Rather than focus on the effect that the draw on the letter of credit has on the estate in receivership and its impact on the other creditors, the majority declares that the proceeds are not property of the estate, period, on the basis of a handful of largely distinguishable cases.
¶86 For example, the majority seizes upon language in Kellogg v. Blue Quail Energy, Inc. (In re Compton Corp.), 831 F.2d 586, 589 (5th Cir. 1987), stating that a letter of credit and its proceeds are not property of the estate. See majority op., ¶¶37, 48. However, the court in that case goes on to state, "When a debtor pledges its assets to secure a letter of credit, a transfer of debtor's property has occurred under the provisions of 11 U.S.C. § 547. . . . Overall, the letter of credit itself and the payments thereunder may not be property of debtor, but the collateral pledged as a security interest for the letter of credit is." In re Compton Corp., 831 F.2d at 590-91 (emphasis added). Other cases invoked by the majority, upon close examination, likewise do not clearly appear to support its proposition concerning the property of the estate.[45]
¶87 Despite
the majority's claim that I am conflating the rights of a beneficiary of a
letter of credit with the rights of a secured creditor to an interest in
property of the debtor's estate, I do no such thing. Rather, the majority uses such a claim to
avoid the question of whether
¶88 Secured
creditors, as compared to unsecured creditors (and, for that matter, secured
creditors under federal Chapter 11 proceedings), have the ability to show some
strength in receivership proceedings because secured creditors cannot be
compelled to participate in receivership proceedings or have their security
taken away without their consent. Wis.
Brick & Block Corp. v. Vogel, 54
a creditor who has either legal or equitable security for his or her debt upon any property of the insolvent debtor of a nature to be liquidated and distributed in a liquidation proceeding, or a creditor to whom is owed a debt for which such security is possessed by some endorser, surety, or other person secondarily liable.
Accordingly, creditors who do not fit within that definition and who have timely filed claims that are not otherwise entitled to priority under § 128.17(1) are placed within the pool of general unsecured creditors.
¶89 I am satisfied that
¶90 Because it is not a secured creditor, I would hold that
¶91 In summary, I would affirm the court of appeals' well-reasoned, narrow, and firmly supported opinion. As that court correctly stated:
This approach recognizes the reality that a letter of credit with a related reimbursement agreement secured by the debtor's assets could overwhelm the estate to the detriment of other creditors and faithfully implements the limit on a landlord's claim set forth in ch. 128.
Admanco, 318
¶92 The majority's claim that this approach does "violence" to letters of credit is nothing more than a cry of wolf. First, the court of appeals' approach has no impact on the many letters of credit that are not between a landlord or lessor and tenant. The court of appeals' holding was limited to enabling a receiver to disgorge proceeds only to the extent that those proceeds operate like a security deposit and deplete the estate assets in excess of the beneficiary's allowed claim. Landlords or lessors comprise the only category of creditors whose claim has a statutory cap in chapter 128. If a beneficiary of a letter of credit who is not a landlord or lessor draws on a letter of credit for its full, authorized amount, there is no cap to apply to that amount under chapter 128.
¶93 Second, letters of credit under the court of appeals' approach will
continue to effectuate their purpose of shifting the risk of nonpayment of the
amount to which the beneficiary is
entitled to the issuer. The
majority's arguments to the contrary are premised on the proposition that the
beneficiary here, Stanton, is entitled to the full amount of the letter of
credit proceeds. For a beneficiary in
¶94 Third, this approach honors the many other benefits that letters of
credit convey. Here, for example, the letters of credit
provided
¶95 Aside
from retaining those benefits,
¶96 As noted previously, indeed, it is the majority's approach that is likely to result in considerable mischief, since that approach ignores the framework that the legislature established in Wis. Stat. § 128.17(2) to protect and treat fairly unsecured creditors in receivership proceedings. Rather, following the majority's reasoning, landlords or lessors could tiptoe around the protections in § 128.17(2) to deplete estate assets to the detriment of unsecured creditors.
¶97 Is the landlord cap in Wis. Stat. § 128.17(2) fair?
Several courts have observed that limiting a landlord to past due rent
and actual damages in receivership proceedings might not provide them adequate
compensation. See Oldden,
143 F.2d at 919; Admanco, 318
¶98 For the foregoing reasons, I respectfully dissent.
¶99 I am authorized to state that Justice ANN WALSH BRADLEY joins this dissent.
[1] All further references to the Wisconsin Statutes are to the 2007-08 version unless otherwise indicated. Even though Admanco, Inc. filed for receivership in 2004 and the receiver filed this action in 2006, we employ the 2007-08 version of the statutes because there has been no intervening statutory change that affects this decision.
[2] The Honorable Peter L.
Grimm of
[3] Admanco, Inc. v.
[4] The record reflects
that Polsky has instituted various garnishment actions against
[5] Admanco-Stanton lease, § 21.2.
[6] Because the letters of credit were secured on March 31, 2004, contemporaneous with Stanton's payment of $2.8 million to Admanco, and the petition that commenced the ch. 128 proceeding was not filed until December 30, 2004, no argument can be made that the letters of credit constituted a preference under Wis. Stat. § 128.07.
[7] Admanco is a division of EBSCO Industries, Inc.
[8] We agree with the receiver's determination that the $61,313.66 cash security deposit is part of the debtor's estate because it was Admanco's property prior to the commencement of the debtor's ch. 128 proceeding. Accordingly, our discussion relative to the ownership of the proceeds of the letters of credit does not apply to the cash security deposit.
[9] Letters of credit are
generally more cost-effective and flexible than performance bonds or other
types of financial guarantees.
[10] The letter of credit may be secured by cash deposits, personal guarantees, guarantees of one who is not a party to the letter of credit contract, real estate, personal property, etc.
[11] Complaint, ¶13.
[12]
[13]
[14]
[15]
[16] Answer 2, ¶13.
[17]
[18]
[19] The dissent would have
had the same result were it the law in
[20] Many of the cases cited by the dissent, when properly understood, support our reasoning. Dissent, ¶84 n.7. See First Ave. W. Bldg. v. James (In re Onecast Media, Inc.), 439 F.3d 558, 564 & n.5 (9th Cir. 2006) (explaining that cases such as Kellogg are "not apposite" because it was confronted with a claim for breach of contract underlying the letter of credit); Int'l Fin. Corp. v. Kaiser Grp. Int'l Inc. (In re Kaiser Grp. Int'l Inc.), 399 F.3d 558, 566–67 (3d Cir. 2005) (finding "compelling" the logic of Kellogg and concluding that the collateral securing the letters of credit, not the proceeds of the letter of credit, constituted property of the debtor's estate); Am. Bank of Martin Cnty. v. Leasing Serv. Corp. (In re Air Conditioning, Inc. of Stuart), 845 F.2d 293, 296 (11th Cir. 1988) (explaining that "neither a letter of credit nor its proceeds are property of the debtor's estate"; however, "[c]ollateral which has been pledged by the debtor as security for a letter of credit [] is property of the debtor's estate").
[21] Dissent, ¶¶86–87.
[22]
[23] Oldden v. Tonto
Realty Corp., 143 F.2d 916 (2d Cir. 1944), interpreted 11 U.S.C.
§ 502(b)(6)(A)'s predecessor, § 63 sub. a(9), which established a cap
of "'rent reserved by the lease, without acceleration, for the year next
succeeding the date of the surrender of the premises to the landlord or the
date of reentry of the landlord, whichever first occurs, . . . plus an amount equal to the
unpaid rent accrued.'"
[24] Several other cases
cited by the dissent interpret 11 U.S.C. § 502(b)(6)(A), and for the
reasons just explained, do not inform our interpretation of Wis. Stat.
§ 128.17(2). See dissent, ¶84 n.7 (citing AMB Prop.,
L.P. v. Official Creditors for the Estate of AB Liquidating Corp. (In re AB
Liquidating Corp.), 416 F.3d 961, 965 & n.3 (9th Cir. 2005); In re
Connectix Corp., 372 B.R. 488 (Bankr. N.D.
[25] Complaint, ¶¶13, 19; see supra ¶29.
[26] Complaint, ¶¶13, 19.
[27] Answer 2, ¶13; Answer 3, ¶8 (setting forth "Offset Rights").
[28] Admanco-Stanton lease, § 21.2.
[29] Affidavit of Scott Revolinski, Exhibit 8.
[30]
[31]
[32] See generally Admanco-Stanton lease, § 22.2.
[33]
[34]
[35]
[36] Complaint, ¶13.
[37] We do not address
whether
[38] See infra ¶84 n.7 (listing cases).
[39] Although the legislature
adopted chapter 128 in 1937, there is little
[40] However, it is worth noting that in Chapter 11 proceedings, "[t]o the extent that a landlord will have a security deposit in excess of the amount of the claim allowed under § 502(b)(6), the excess will be turned over to the [bankruptcy] trustee." 4 Collier on Bankruptcy, § 502.03[7][h] (15th ed. rev. 2002) (emphasis added); see also Oldden v. Tonto Realty Corp., 143 F.2d 916, 921 (2d Cir. 1944) (stating that any surplus of security deposit held by a landlord beyond its permitted claim "should go to the trustee for the general creditors").
[41] The majority fails to offer a persuasive explanation of why federal cases such as Oldden and Mayan Networks, which interpret the cap imposed on landlord claims for future rent in 11 U.S.C. § 502(b)(6)(A), "do not inform" its interpretation of the cap imposed on landlord claims in receivership by Wis. Stat. § 128.17(2). Its reasoning seems to be based on the observation that the federal cap permits a larger landlord claim than does the state cap. Therefore, in the majority's view, analogizing to federal case law interpreting 11 U.S.C. § 502(b)(6) is inappropriate here. See majority op., ¶¶49-50 & n.24.
The majority, however, stubbornly refuses to
acknowledge that the principle present in the Bankruptcy Act of
1898——i.e., limiting a landlord's claim for future rent prevents depletion of
an estate in insolvency proceedings——necessarily underlies both 11 U.S.C.
§ 502(b)(6) and Wis. Stat. § 128.17(2). See Redback Networks, Inc. v. Mayan
Networks Corp. (In re Mayan Networks Corp.), 306 B.R. 295, 298 (B.A.P. 9th
Cir. 2004) (noting legislative history of stating that "the purpose of
[§ 502(b)(6)] is to compensate the landlord for his loss while not
permitting a claim so large (based on a long-term lease) as to prevent other
general unsecured creditors from recovering a dividend of the estate")
(internal quotation marks omitted). In
my view, and in the view of the many federal cases discussed herein, those
cases cannot be dismissed as inapplicable.
The
[42] Along with its arguments that
it was entitled to retain the proceeds from the letters of credit,
[43] A receiver in a chapter 128 proceeding has responsibilities and obligations similar to those of a trustee in bankruptcy. Compare Wis. Stat. §§ 128.13, 128.14, and 128.17 (describing receiver's duties in state receivership proceedings), with 11 U.S.C. §§ 704, 1106 (listing duties of a trustee in federal Chapter 7 and Chapter 11 bankruptcy proceedings).
[44] Before the Ninth Circuit
Bankruptcy Appellate Panel issued Mayan Networks, several other courts
had observed that collateral securing letter of credit proceeds are property of
the estate. See Kellogg v. Blue Quail Energy, Inc. (In re Compton
Corp.), 831 F.2d 586, 590-91 (5th Cir. 1987); see also American
Bank v. Leasing Service Corp. (In re Air Conditioning, Inc.), 845 F.2d 293,
296 (11th Cir. 1988). Others held that
letter of credit proceeds acting as a security deposit are subject to the
bankruptcy proceedings. Solow v. PPI
Enters., Inc. (In re PPI Enterprises (
[45] For example, the court in Willis
v. Celotex Corp., 978 F.2d 146 (4th Cir. 1992) addressed an issue
concerning a bankruptcy court's authority to enjoin execution on supersedeas
bonds. Its discussion of proceeds of a
letter of credit, which was not at issue in the case, appears to be dicta.
[46] In contrast, in the context of federal bankruptcy proceedings, the Second Circuit Court of Appeals has held that a beneficiary of a letter of credit is not a secured creditor. See New England Dairies, Inc. v. Dairy Mart Convenience Stores, Inc. (In re Dairy Mart Convenience Stores, Inc.), 351 F.3d 86, 91 (2d Cir. 2003).
[47] The receiver remained in
possession of the leased premises for only the month of January 2005, at which
point he sold Admanco's assets to another entity, EBSCO. At that point, EBSCO occupied the premises
and took over the lease obligations for February and March of that year. On April 1, 2005, a new lease between EBSCO
and Stanton went into effect. Thus,
under Wis. Stat. § 128.17(2),
[48] For example, in an
exhibit accompanying its motion for summary judgment,