• Real Estate: A New Right of Subrogation
  • April 27, 2004 | Author: Gary A. Goodman
  • Law Firms: SNR Denton - New York Office; SNR Denton - Chicago Office
  • Can banks and other issuers of a letter of credit for real estate financing subrogate to the rights of the beneficiary to pursue a defendant for a defaulted loan? In the absence of a controlling statute, most courts have said "no," because guarantees and letters of credit have different applicable rules. According to these courts, allowing for subrogation related to letters of credit would blur the distinction too much.

    However, a recent decision by a New York federal court held that a bank issuing a letter of credit did have standing to subrogate as the agent for a company's credit facility. The bank in this case sought subrogation after the defendant company's stock, pledged as collateral for the original loan, became worthless when the company declared bankruptcy. Interpreting New York's UCC Law Section 5-117, the court held that an issuer will always be a secondary obligor; the relevant question being whether a secondary obligor is entitled to subrogation under specific case facts.

    The court declared that any recovery would be a primary recovery by the credit facility and not a double recovery by the bank. JP Morgan Chase Bank v. Cook (2004 U.S. Dist. LEXIS 2557) (SDNY 2004). Earlier, an Oregon appellate court also concluded that the issuer was a de facto surety for the underlying obligation, holding the substance of the transaction more important than the form. Ochoco Lumber Company v. Fibrex & Shipping Company, Inc. (164 Ore. App. 769, 994 P.2d 793) (2000). For now, banks issuing loans for the purchase of, or to refinance, real estate should be aware that at least some courts support their subrogation rights.