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In re Howell Enterprises, Inc. | 934 F.2d 969 (1991)
Collateral is property that’s pledged to secure payment of a loan or other obligation. The case In re Howell Enterprises explores whether a creditor’s security interest can attach to collateral if the debtor doesn’t have any rights in the collateral.
Howell Enterprises sold rice. In 1986, Howell borrowed money from First National Bank of Stuttgart, Arkansas, and granted the bank a security interest in all of Howell’s accounts receivable.
In 1987, Bar Schwartz Limited wanted to purchase rice with a letter of credit. A letter of credit is a commercial instrument for guaranteeing payment. The buyer of goods gives the seller a letter on the credit of a reputable third party like a bank. The third party, in turn, pays the seller upon delivery of the goods.
Howell didn’t accept letters of credit. Tradax America, which also sold rice, did accept letters of credit. However, Bar Schwartz refused to buy rice from Tradax. Accordingly, Howell and Tradax agreed that Tradax would sell Tradax’s rice to Bar Schwartz under Howell’s name. Once the rice was delivered, Bar Schwartz caused a letter of credit to be issued to Howell. Howell agreed to transfer the proceeds to Tradax when the letter of credit matured. Howell listed the Bar Schwartz transaction as an account receivable on its books.
Howell filed for bankruptcy before the letter of credit matured. First National claimed its perfected security interest in Howell’s accounts receivable. Tradax then filed a complaint with the bankruptcy court, arguing that the letter of credit wasn’t a Howell account receivable and therefore wasn’t subject to First National’s security interest.
The bankruptcy court found that Tradax had an equitable interest in the letter of credit and its proceeds. The bankruptcy court also found that the letter of credit qualified as an account receivable in which First National had a perfected security interest. The bankruptcy court concluded that First National’s interest was superior to Tradax’s and therefore ruled in First National’s favor. The district court affirmed. Tradax appealed to the Eighth Circuit.
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