Matter of P.A. Bergner & Co.
United States Court of Appeals for the Seventh Circuit
140 F.3d 1111 (1998)
Facts
Bergner & Co. (Bergner) (debtor) owned a department-store chain. Bergner had a line of credit from a group of European banks headed by Swiss Bank Corporation (Swiss Bank group) while Bank One handled Bergner’s operating account and issued letters of credit (LOCs) to suppliers and insurers. In 1989, Bergner and Bank One entered a standby-letter-of-credit agreement (SLCA) that required Bank One to pay all drafts the LOC beneficiaries presented. If a default event occurred, Bergner had to prepay Bank One the amount of all drafts that could be presented so Bank One could honor them. The SCLA also allowed Bank One to use Bergner’s deposit accounts to offset Bergner’s unpaid obligations. When Bank One announced in July 1991 that it would not renew Bergner’s LOCs, supplier Associated Merchandising Corporation (AMC) had an outstanding LOC that had reached $31,207,000. AMC drew down the full amount, and Bergner transferred $31 million from its Swiss Bank group line of credit to Bank One, which paid AMC the $31,207,000. Meanwhile, when Liberty Mutual Insurance Company (Liberty Mutual) said it would also draw down its LOCs without a replacement, Bank One issued a new LOC for $6,358,000. Swiss Bank refused additional draw requests and declared a material adverse event under Bergner’s credit agreement, which Bank One considered a default event. Bank One said it would begin offsetting draws against Bergner’s operating account, which would cause Bergner’s ordinary checks to bounce unless it maintained a balance sufficient to collateralize the $6,358,000. Bergner maintained an adequate balance but filed for bankruptcy reorganization—another default event. The same day, Bank One transferred $6,358,000 from Bergner’s operating account to a collateral account that Liberty Mutual drew down over the next year. Bergner as debtor-in-possession brought an adversary proceeding to recover the $31,207,000 and $6,358,000 as preferential transfers or attempted setoffs of debts. The bankruptcy and district courts ruled for Bergner under the independence principle applicable to LOCs. Bank One appealed, arguing it was merely Bergner’s collection agent.
Rule of Law
Issue
Holding and Reasoning (Wood, J.)
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