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June 8, 1989


Milton I. Shadur, United States District Judge.

The opinion of the court was delivered by: SHADUR


 Pine Top Insurance Company ("Pine Top"), an Illinois insurance company currently in liquidation under Illinois Insurance Code Art. XIII (Ill. Rev. Stat. ch. 73, paras. 799-833.13 *fn1" ), has sued Century Indemnity Company ("Century") and Bank of America ("Bank") under Insurance ยง 816(2) to recover two allegedly voidable preferential transfers. Count I of the First Amended Complaint ("Complaint") seeks to recapture one of the transfers from Century.

 Century now moves alternatively (1) under Fed. R. Civ. P. ("Rule") 56(b) for summary judgment on Count I or (2) under Rule 12(b)(6) to dismiss Count I for failure to state a claim. *fn2" For the reasons stated in this memorandum opinion and order, Century's motion is denied in both respects.


 Pine Top provided reinsurance coverage for Century in accordance with reinsurance treaties between them. Those treaties required Pine Top to reimburse Century for certain losses covered by the reinsured policies Century had initially issued. From time to time Century would require Pine Top to establish standby letters of credit ("LOCs") to secure its obligations under the treaties.

 On February 10, 1986 *fn4" Bank issued a commitment letter to Pine Top in which Bank agreed to provide Pine Top with a $ 10 million line of credit conditioned upon the provision of specified collateral. That collateral comprised (1) Pine Top's current and future receivables, (2) $ 6.8 million in its short term notes and (3) a $ 3.2 million standby LOC previously issued by Bank to Pine Top on the account of Greyhound Corporation (Pine Top's parent corporation).

 On February 26 Pine Top, to secure its then-existing open account obligations to Century under the treaties, drew on Bank's commitment by causing Bank to issue an approximately $ 2.9 million standby LOC in Century's favor. Then on March 18 Pine Top signed a security agreement (the "Agreement") with Bank, granting Bank a security interest in cash and securities in consideration for the line of credit extended in Bank's commitment letter. At about the same time Pine Top also granted a security interest to Bank in its reinsurance receivables and also assigned Greyhound's $ 3.2 million LOC to Bank pursuant to the terms of the commitment letter. Then on April 22 Pine Top actually transferred to Bank approximately $ 6.7 million of the collateral described in the Agreement and in its other loan documents with Bank.

 On June 23 the Illinois Director of Insurance filed a Verified Petition for the rehabilitation of Pine Top, and Pine Top was then placed into voluntary rehabilitation pursuant to the Illinois Insurance Code. On January 16, 1987 Pine Top was placed in liquidation and deemed insolvent.

 Pine Top had in fact been insolvent since at least the preceding February 26 (when it first drew on Bank's commitment), and Century had reasonable cause to believe Pine Top was insolvent at and after that time. It was some time after June 23 that Century drew down the entire $ 2.9 million under the LOC previously issued in its favor.

 Bank and Pine Top had intended the $ 10 million line of credit to be 100% collateralized up front (Tr. 31). Nonetheless, although the nature of the collateralization was set forth in the February 10 commitment letter, the collateral itself was not finally identified until the Agreement was signed on March 18. It was on that date that Bank was assigned the proceeds of the Greyhound LOC (P. Ex. 13). Even though the parties had generally agreed the entire transaction would proceed with dispatch (see, e.g., Tr. 67), the remainder of the collateral did not reach Bank until April 18 or 22.

 It is undisputed that Bank liquidated Pine Top's pledged collateral to cover its loss when Century drew down on the LOC. Those are the proceeds now in dispute in Complaint Count I.

 Voidable Preference

 Every LOC transaction is tripartite in nature. For that reason it necessarily involves three sets of relationships -- one between each pair of the parties (Debtor, Creditor and Issuer).

 At the outset of the LOC transaction Debtor (here Pine Top) owes or will owe *fn5" Creditor (here Century) money (here under the reinsurance treaties). Issuer (here Bank) issues an LOC to Creditor to satisfy Debtor's obligations or anticipated obligations -- in this case the LOC was standby in nature, assuring Creditor Century that Debtor Pine Top would honor its promise. As between Issuer Bank and Debtor Pine Top, ...

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