Law School Case Brief
In re Howell Enters., Inc. - 934 F.2d 969 (8th Cir. 1991)
Mere possession of a letter of credit is insufficient to establish a right to collateral upon which to base a security interest.
Howell Enterprises, Inc., (Howell) and Tradax America, Inc., (Tradax) both sell rice. A customer, Bar Schwartz Limited (Bar Schwartz), wanted to buy some rice and pay for it with a commercial letter of credit. But Bar Schwartz could not buy rice from Howell because Howell would not accept the commercial letter of credit (LOC) as payment. This means of payment was acceptable to Tradax, but Bar Schwartz refused to buy rice from Tradax for reasons of its own. So, Howell and Tradax came up with a plan -- Tradax would sell its rice to Bar Schwartz under Howell's name. Howell listed the transaction as an account receivable on its books and thereafter filed for bankruptcy. First National Bank of Stuttgart, Arkansas, (First National), a bank, claimed its perfected interest in Howell’s accounts receivable. Tradax brought this complaint before the bankruptcy court asserting that Bar Schwartz's LOC was not one of Howell's accounts receivable, and therefore, was not subject to First National's security interest. Tradax alternatively argued that the LOC was subject to a constructive trust in favor of Tradax. The bankruptcy court ruled in favor of Howell and First National, and the district court affirmed.
Could Howell claim interest in Bar Schwartz’s account or the proceeds of a LOC as it listed the transaction as an account receivable on its books notwithstanding that the rice was actually owned by Tradax?
The Court of Appeals for the Eighth Circuit held that the LOC was never intended to be an account and that it was listed as such purely by happenstance. The court held that Howell could not claim any interest in Bar Schwartz’s account or the proceeds of the LOC under Ark. Code Ann. § 4-9-203 because the rice was always owned by Tradax. The court held that mere possession of a LOC was insufficient to establish a right to collateral upon which to base a security interest.
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