The recent ruling by the U.S. Court of Appeals for the 7th Circuit in Hoosier Energy Rural Elec. Coop. Inc. v. Hancock Life Ins. Co., 582 F.3d 721 (7th Cir. 2009), affirmed a decision by the Southern District of Indiana, applying New York law, to enjoin payment under a credit-default swap. The district court’s injunction protected a plaintiff that was not party to the swap agreement but allegedly would have been harmed by the payment. If extended, the Hoosier Energy precedent may become a tool for nonparties to stay payment under credit-default swaps or letters of credit until related contract disputes are resolved.
A traditional standby letter of credit (L.C.) involves three parties: the bank, the bank’s customer and the beneficiary. The bank contracts with the beneficiary on one side, providing that the bank will pay the beneficiary if the beneficiary makes a conforming request for payment. On the other side, the bank contracts with the customer to pay the bank in the event that the beneficiary draws on the letter of credit. The bank’s agreements with the beneficiary and the customer are independent. Kellogg v. Blue Quail Energy Inc. (In re Compton Corp.), 831 F.2d 586, 590 (5th Cir. 1987), reh’g granted, 835 F.2d 584 (5th Cir. 1988).
