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  • August 04, 2010

    Proceeds of letters of credit not property of insolvent debtor's estate, supreme court holds

    ScaleBy Joe Forward, Legal Writer, State Bar of Wisconsin

    July 27, 2010 – The Wisconsin Supreme Court recently ruled that proceeds from a standby letter of credit are not the property of the debtor’s estate for purposes of bankruptcy proceedings that would limit a lessor’s claims to damages under a lease agreement.

    In Admanco, Inc. v. 700 Stanton Drive LLC, 2010 WI 76 (July 13, 2010) the supreme court ruled 3-2[1] to reverse an appeals court decision that allowed Admanco Inc. (Admanco) to recoup $513,292 of the $750,000 letter of credit proceeds paid to 700 Stanton Drive LLC (Stanton) after Admanco defaulted on a lease and entered bankruptcy proceedings.

    Justice Patience D. Roggensack wrote the majority opinion, joined by Justices Michael J. Gableman and David T. Prosser. Justices N. Patrick Crooks and Ann W. Bradley dissented.

    Facts and procedure

    In March 2004, Admanco and Stanton entered a sale-leaseback agreement, whereby Stanton purchased a building owned by Admanco for $2.8 million and Admanco leased back the building from Stanton for a 15-year term.

    The lease required Admanco to pay a $61,313 security deposit and obtain letters of credit to benefit Stanton in the amount of $750,000 to protect against default.

    Admanco obtained both letters of credit from M&I Marshall & Ilsley Bank (M&I Bank). In turn, M&I Bank secured interests in Admanco’s property in the event that Stanton drew down on the letters of credit.

    In December 2004, Admanco encountered financial difficulties and assigned its assets to a receiver for the benefit of creditors pursuant to Wis. Stat. section 128.05.

    In January 2005, Admanco defaulted on its lease agreement with Stanton. Stanton terminated Admanco’s possession without terminating the lease, and notified Admanco that it was accelerating the full amount due under the lease agreement.

    Stanton then drew down the full $750,000 from the letters of credit and retained the $61,313 security deposit as a partial payment for damages under the lease. M&I recovered its $750,000 payment to Stanton upon a sale of Admanco’s assets.

    Admanco’s receiver brought suit against Stanton, claiming Admanco’s estate had a right to recoup the $750,000 letter of credit proceeds paid to Stanton by M&I and the $61,313 cash security deposit under Wis. Stat. section 128.17(2).

    The circuit court held that section 128.17(2) “limited the amount of rent that Stanton could assess as damages under the Admanco-Stanton lease.” The circuit court awarded Admanco $513,292 plus statutory costs and fees. The appeals court affirmed. However, both courts ruled on the assumption that letter of credit proceeds are the property of the debtor’s estate.

    Wis. Stat. Section 128.17(2)

    Chapter 128 of the Wisconsin Statutes governs bankruptcy proceedings in Wisconsin. All property administered under chap. 128 becomes the debtor’s estate.

    Admanco’s receiver argued that proceeds from standby letters of credit became subject to administration of Admanco’s estate and limited Stanton’s right to such proceeds as partial payment for damages under the lease agreement.

    Under section 128.17(2), a lessor’s claim is 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.”

    The circuit and appeals courts applied section 128.17(2) to cap Stanton’s claim for damages upon Admanco’s default of the lease. That is, the circuit and appeals courts held that section 128.17(2) precluded Stanton from accelerating the full amount due under the lease.

    However, the supreme court held that proceeds from letters of credit are not the property of the debtor’s estate, and thus section 128.17(2) does not apply. Section 128.17(2) limits a lessor’s claims against “property of the debtor’s estate,” the court explained, “but says nothing about a lessor’s claims against property that is not property of the debtor’s estate.”

    To hold differently, the court held, would “do violence to what has been the gold standard for security in Wisconsin commercial transactions” – to “shift the risk of nonpayment and insolvency from the beneficiary [Stanton] to the issuer of the letter of credit [M&I Bank], who is better able to assess the risk of nonpayment and insolvency.” Thus, the court held that proceeds of standby letters of credit are property of the issuer, here M&I Bank.

    Breach of contract

    The court recognized that even though letter of credit proceeds are not the property of a debtor’s estate, the debtor’s receiver may still pursue breach of contract actions because that right of action belongs to the debtor’s estate.

    That is, while the “proceeds of a letter of credit is property of the issuer … damages for breach of contract are property of the debtor because they are payment for the debtor’s contract rights,” the court explained.

    Admanco’s receiver argued that Stanton drew down more proceeds than it was contractually entitled to receive under the lease. The court reviewed the lease to determine whether Stanton was entitled to the $750,000 letter of credit proceeds.

    Under the lease, Stanton had a right to terminate Admanco’s possession without terminating the lease, and had a right to accelerate base rent payments for the term of the lease if Stanton could not relet the premises, the court explained.

    The court held that Stanton did not breach any contract by drawing down the $750,000 letters of credit because the base rent payments due under the lease “greatly exceeds Stanton’s $750,000 draw down on the standby letters of credit.”

    The court remanded the case to the circuit court to dismiss Admanco’s suit against Stanton, as it relates to the proceeds of the standby letters of credit, and to reinstate Stanton’s breach of contract claims under the lease.


    Justice N. Patrick Crooks wrote a 21-page dissent (Bradley, J. joined), stating that the majority opinion “demolishes the utility of section 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.”

    Justices Crooks and Bradley argued that proceeds of a letter of credit are secured by the property of the estate, and “thus within the receiver’s (or bankruptcy trustee’s) control.”


    Kevin Keeler and Matthew Vignali of Beck, Chaet, Bamberger & Polsky S.C., Milwaukee, represent 700 Stanton Drive LLC. Valerie Bailey-Rihn, Jeffrey Davis and Matthew Fortney of Quarles & Brady LLP, Madison, represent Admanco, Inc.

    [1] Chief Justice Shirley S. Abrahamson and Justice Annette K. Ziegler did not participate.

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