See the attached.  Antonoff relies on 546 e, the margin provision.  


Cordially,
Mary Cook
Enron North America Corp.
1400 Smith, 38th Floor, Legal
Houston, Texas   77002-7361
(713) 345-7732 (phone)
(713) 646-3490 (fax)
mary.cook@enron.com
----- Forwarded by Mary Cook/HOU/ECT on 06/04/2001 11:05 AM -----

	"Rick Antonoff" <Rick.Antonoff@cwt.com>
	05/31/2001 04:19 PM
		 
		 To: mary.cook@enron.com
		 cc: "David Mitchell" <David.Mitchell@cwt.com>
		 Subject: Re:  Letter of Creidt Question


Mary,

The short answer to your questions about letters of credit is that if the
creditor drew on the letter of credit for a margin payment or settlement
payment under a forward contract or swap, it would be excluded from the
trustee's power to avoid preferences.  (Bankruptcy Code section 546(e).)
It does not matter if the payment is from the issuing bank or the
counterparty since the Bankruptcy Code protects such payments made "by or
to" a commodity broker or forward contract merchant.  The pending
legislation would clarify this by expanding the definitions of "commodity
contract," "forward contract," and "swap agreement" to specifically include
"credit enhancements" related to the contract.

The Powerline case never really bothered me and I'm curious to know why it
bothers the panelists at the seminar you attended.  The creditor's problem
in that case is that the letter of credit expired before the preference
claim was commenced.  The fix is to negotiate a letter of credit
termination date that is either (a) 91 days after the maturity date of the
contract or (b) a day or more after the two-year limitations period for
bringing preference actions, and in either case make it payable in the
event a preference claim is brought and let the bank defend it. Banks are
willing to do it because they collect fees for an indefinitely longer
period (which makes settling the claim much easier) and borrowers are
willing to do it because, generally, they have to.

The Air Conditioning case is more troublesome and seems to have been
wrongly decided except that there's a quirk in the facts that may justify
the result.  On a quick read, the decision seems to violate the
independence principle of letters of credit -- that is, that the
beneficiary's right to draw on the letter of credit is independent from the
issuing bank's exposure to the account debtor.  Applying the principle
means that even if a pledge of collateral from the account debtor to the
issuing bank is a preference, that's a matter between the bank and the
debtor and does not interfere with the beneficiary's right to draw on the
letter of credit.

For the same reason, it should not matter, as the Court there seemed to
focus on, that the creditor improved its position by securing its unsecured
claim with a secured letter of credit.  That was precisely the issue in the
infamous Twistcap decision that has been so roundly criticized, even by the
judge who rendered it.

The Eleventh Circuit in Air Conditioning seems at first to give no regard
to the independence principle when it says that the creditor received a
preference by virtue of the debtor's pledge of a certificate of deposit to
the issuing bank. In and of itself, that reasoning is, in my view, wrong.
However, later in the decision the Court seems to say that the proceeds of
the creditor's draw on the letter of credit was, in fact, the very
certificate of deposit pledged by the debtor to the bank. (The decision is
somewhat confusing in that earlier in the opinion it says that the
bankruptcy court ordered the bank to return the certificate of deposit to
the bankruptcy trustee.)
If the creditor held the certificate of deposit, two consequences flow from
that fact:  First, it means that while proceeds of letters of credit
generally are not property of the debtor's bankruptcy estate, in this case,
since the certificate of deposit was merely pledged as collateral to the
bank, it was indisputably property of the estate.  The fact that it was
conveyed to a third party doesn't change that.

Second, if the pledge to the bank was a preference (and no party argued
that it wasn't) then recovering the transferred property from the creditor
is the right result, although here too I think the Court's reasoning misses
the mark.

The Court relied on the provision of the avoidance recovery statute
(section 550) that  allows recovery of preferential transfers from the
initial transferee or the entity for whose benefit such transfer was made.
I believe the certificate of deposit was transferred for the bank's
reimbursement claim and therefore for its benefit and not the creditor's.
To the extent it is deemed to have been made for the beneficiary's benefit,
it again ignores the independence principle.  But the same result could
have been reached had the Court instead relied on the part of section 550
that allows recovery from the initial transferee or any immediate
transferee from such initial transferee.  Since the creditor received the
certificate of deposit, it was the immediate transferee from the initial
transferee bank.

Of course the fix in this case is to have a letter of credit that provides
for more fungible proceeds, such as cash, and have it come from the bank's
own funds.

I hope these comments are helpful.  Please call if you have any questions
or wish to discuss these issues.

Regards.

______________
Rick B. Antonoff
Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, NY 10038
Phone: 212 504-6759
Main Fax: 212 504-6666
Local Fax: 212 993-2539
Mobile: 917 287-6391
Email: rick.antonoff@cwt.com


==============================================================================
NOTE:  The information in this email is confidential and may be legally 
privileged.  If you are not the intended recipient, you must not read, use or 
disseminate the information.  Although this email and any attachments are 
believed to be free of any virus or other defect
that might affect any computer system into which it is received and opened, 
it is the responsibility of the recipient to ensure that it is virus free and 
no responsibility is accepted by Cadwalader, Wickersham
& Taft for any loss or damage arising in any way from its use.


==============================================================================