Century does not dispute either the logic or the holding of those cases. Instead it urges they are inapplicable to the facts of this case. In Compton the LOC was fully collateralized when it was issued, due to a prior security agreement and a contemporaneous promissory note. In re Air Conditioning, 55 Bankr. 157, 159 (Bankr. S.D. Fla. 1985) the bankruptcy court noted the LOC was secured by a certificate of deposit, and the issuer perfected its security interest in the certificate within seven days after the LOC issued. Century R. Mem. 10 concludes the Compton-Air Conditioning rule requires that the two events (issuance and collateralization of the LOC) be "substantially contemporaneous," or that there be a causal relationship between the improvement of Creditor's position (issuance of the LOC) and the depletion of Debtor's assets (collateralization).
Like the "indirect transfer" concept, the "substantially contemporaneous" doctrine is well-rooted in precedent. First identified in Dean v. Davis, 242 U.S. 438, 61 L. Ed. 419, 37 S. Ct. 130 (1917), it is normally invoked in the bankruptcy context under Bankruptcy § 547(c)(1). Dean held a debtor's transfer of property one week after the making of the loan secured by that transfer was not a preference because (1) the parties had intended from the beginning that the loan be secured and (2) the two transactions were "substantially contemporary."
Development of the substantially-contemporaneous-exchange doctrine in the bankruptcy context has been colored by Bankruptcy § 547(e)(2)(A), which relates back a security interest perfected within ten days after the original transfer. Essentially that provides a ten-day grace period to provide security. Century relies on a series of bankruptcy court decisions such as In re Damon, 34 Bankr. 626, 630 (Bankr. D. Kan. 1983) to conclude that a transfer of security more than ten days after the underlying loan is prima facie not contemporaneous.
Even taken on its own terms, that argument would not necessarily carry the day. There is a separate line of cases (typified by In re Arnett, 13 Bankr. 267 (Bankr. E.D. Tenn. 1981), aff'd, 17 Bankr. 912 (E.D. Tenn. 1982)) that rejects Bankruptcy § 547(e) as defining the exclusive limitation on Bankruptcy § 547(c). Those cases look at the initial intent of the parties even if the security transfer takes place more than ten days later. And because the Illinois Insurance Code has no provision corresponding to Bankruptcy § 547(e), there would seem to be even less reason to be bound exclusively by a ten-day cutoff here.
But the premise that Century's argument should be taken on its own terms is itself false. This LOC situation was of course much more complex than the standard contemporaneous exchange scenario -- say that in which an automobile lien is perfected after the loan has been made. There the contrast between a voidable preference and a non-voidable for-value exchange (as always, a function of whether the debtor's estate was or was not diminished in favor of the creditor) is determined by the timing -- or what is treated as the timing -- of the two transactions. If the debtor receives or is considered as having received fresh money (in the hypothesized example, loan proceeds) at the same time the debtor has parted with its property (in the example, a lien on its automobile), the net estate is undiminished and preexisting creditors cannot complain: They share in the same pot as before. But if the debtor has already received a loan without any contemplated giving of security, its enlarged estate (its prior assets plus the loan proceeds) is treated as the pot in which the preexisting creditors (and the new lender) are entitled to share. If thereafter the new lender is preferred by being given security sufficiently close to the date the law designates as the measuring point for voidability, the other creditors (or their surrogate, the receiver or trustee or debtor itself) can attack the transfer.
Although that line of analysis -- including the way in which it looks at the timing as between (1) the creditor's parting with its property to benefit the debtor and (2) the debtor's delivery of security -- might profitably apply to some LOC situations (say the establishment of a standby LOC arrangement before the creditor ever begins to extend credit), it is totally inapropos here. It must be remembered that Pine Top owed Century money under the treaty (an unsecured obligation) before it caused Bank to issue the LOC in Century's favor. That sequence, and not the relative timing of the issuance and collateralization of the LOC, is the principal key to the existence of a voidable preference. Had Pine Top turned over assets to Bank to secure the concurrent issuance of an LOC to Century because of a preexisting debt Pine Top owed Century, the "indirect transfer" concept would have rendered that turnover voidable as a preference. And if (as here) the turnover of assets came even later, the preexisting debt was if anything more antecedent, so the preference concept should apply a fortiori.
Hence the only question that needs to be answered is whether, as the issue was posed in Compton, 831 F.2d at 594:
The purpose of the letter of credit transaction in this case was to secure payment of an unsecured antecedent debt for the benefit of an unsecured creditor. This is the only proper way to look at such letters of credit in the bankruptcy context.