In Re Howell Enterprises, Inc.

34 F.2d 969 (1991)

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Nature of the Case

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Facts

Howell Enterprises, (D) and Tradax (P) both sell rice. First National Bank (D) had a security interest in Howell's (D) receivables. P transacted business with Howell (D) on a regular basis in 1987. On February 25, 1987, a contract was signed in the name of Howell (D), under which rice would be sold by P to Bar Schwartz. Payment was to be accomplished by a one-year commercial letter of credit. Howell (D) listed the Bar Schwartz transaction as an account receivable on its books, with a corresponding and equivalent account payable to P. Tradax documented the transaction on its books as a sale to Howell (D), but did not invoice Howell (D) for a sale. The rice was delivered, and Howell (D) sent an invoice to Bar Schwartz for the purchase price of the rice. On April 29, 1987, Bar Schwartz arranged for the letter of credit to be issued, naming Howell (D) as beneficiary. On June 18, 1987, Howell (D) presented the letter of credit and the necessary supporting documents to First National (D). It was understood that Howell (D) would transfer the proceeds to P when the letter of credit matured, in May 1988. On April 4, 1988, Howell (D) filed for Chapter 11 bankruptcy. First National (D) came forward to claim its perfected security interest in Howell's (D) accounts receivable. The Bar Schwartz letter of credit was swept into the bankruptcy. P brought this complaint asserting that Bar Schwartz's letter of credit was not one of Howell's (D) accounts receivable. P also argued that the letter of credit was subject to a constructive trust in favor of P. The court ruled that P had a constructive trust. But it also held that the UCC 9-106 defines 'account' as 'any right to payment for goods sold.' The bankruptcy court ruled that because the letter of credit could be characterized as a 'right to payment,' First National (D) had a perfected security interest in the letter of credit. It found that First National (D) qualified as a bona fide purchaser for value and held an interest superior to P's equitable interest. P appealed, and the district court affirmed. P appealed.