ADMANCO, Inc. ex rel. Polsky v. 700 Stanton Drive, LLC

2010 WI 76, 786 N.W.2d 759, 326 Wis. 2d 586, 72 U.C.C. Rep. Serv. 2d (West) 678, 2010 Wisc. LEXIS 70

• Court: Wisconsin Supreme Court
• Decided: July 13, 2010
• Docket: No. 2007AP2791
• Status: Published

Opinions

PATIENCE DRAKE ROGGENSACK, J.

¶ 1. This review arises in the context of a Wis. Stat. ch. 128 insolvency proceeding, which proceeding applies to property of the debtor. Wis. Stat. § 128.08 (2007-08).¹ The receiver, Michael S. Polsky (Polsky), was appointed to administer property of the debtor, Admanco, Inc. (Admanco). In that capacity, Polsky demanded return of proceeds from two standby letters of credit issued by M&I Marshall and Ilsley Bank (M&I Bank) that 700 Stanton Drive, LLC (Stanton) drew down, as well as the cash security deposit made by Admanco that Stanton retained. The circuit court awarded² the receiver judgment in the amount of $513,292.66 plus statutory costs and fees. The court of appeals affirmed the circuit court.³

¶ 2. Because we conclude that the proceeds of the standby letters of credit were not property of Admanco, they are not property of the debtor's estate subject to the receiver's administration under ch. 128. We also conclude that the "claim" of Wis. Stat. § 128.17(2) is a claim against property of the debtor's estate, not a claim against property of the issuer of the standby letters of credit. And finally, we conclude that the circuit court should have ordered summary judgment denying Polsky's breach of contract claim and granting Stanton's breach of contract claim. Accordingly, we reverse the decision of the court of appeals and remand to the circuit court to dismiss Polsky's suit against Stanton, as it relates to the proceeds of the standby letters of credit, and for further proceedings consistent with this decision.⁴

I. BACKGROUND

¶ 3. The relevant facts of the underlying transactions are straightforward and not in dispute. On March 31, 2004, Stanton and Admanco entered into a sale-leaseback arrangement, wherein Stanton paid Admanco $2.8 million for a building Admanco owned and entered into a 15-year leaseback of the building to Admanco.

¶ 4. The written lease required Admanco to provide Stanton a security deposit of $61,313.66 and to obtain for Stanton's benefit two letters of credit, each in the amount of $375,000. Admanco applied for one of the letters of credit, and Admanco's major shareholders, Edward Bumby and Cristopher Bumby (the Bumbys), applied for the other letter of credit. Both letters of credit, in the combined amount of $750,000, were issued by M&I Bank.

¶ 5. The letters of credit were "irrevocable standby letters of credit" that were payable upon presentation of documents listed on the face of the letters of credit. M&I Bank was fully secured by Admanco's property in the event there was a drawdown on the letters of credit.

¶ 6. Admanco encountered financial difficulties, and on December 30, 2004, Admanco assigned its assets to Polsky for the benefit of creditors pursuant to Wis. Stat. § 128.05. Also on December 30, 2004, Polsky was appointed as the receiver for Admanco's property pursuant to Wis. Stat. § 128.08.

¶ 7. Admanco failed to make its January 1, 2005 rent payment, and Stanton gave notice of default and the opportunity to cure according to the parties' lease.⁵ On January 10, 2005, after Admanco failed to cure, Stanton gave notice that it was accelerating the full amount due under the lease without terminating the lease, citing section 22.2 of the lease. Stanton then drew down the full $750,000 from both letters of credit.⁶ Stanton also gave notice that it was retaining Admanco's $61,313.66 security deposit.

¶ 8. As part of the ch. 128 proceedings, and with M&I Bank's approval, Polsky applied for and was given permission from the court to sell Admanco's assets. From the sale of those assets to EBSCO Industries, Inc. (EBSCO Industries),⁷ M&I Bank was paid more than $3 million, which included full reimbursement for the $750,000 payment M&I Bank made to Stanton.

¶ 9. Polsky brought suit against Stanton on behalf of the debtor's estate, claiming the estate had the right to recoup $811,313.66. This amount included the $750,000 drawdown on the letters of credit and Stanton's retention of the $61,313.66 cash security deposit.⁸

¶ 10. Polsky also sued the Bumbys, seeking $375,000 to reimburse the debtor's estate for the second letter of credit of which the Bumbys were the applicants. The Bumbys reached an agreement with Polsky by paying $267,374.17, and Polsky dismissed them from further collection actions. Polsky continued to proceed against Stanton for the balance on the Bumbys' letter of credit, as well as the full amount of the letter of credit for which Admanco applied.

¶ 11. Both parties moved for summary judgment. The circuit court granted judgment in favor of the debtor's estate and determined that $513,292.66 was due from Stanton. The circuit court's decision turned in large part on Wis. Stat. § 128.17(2), which it concluded limited the amount of rent that Stanton could assess as damages under the Admanco-Stanton lease. The circuit court did not analyze whether the proceeds of the letters of credit were property of the debtor's estate, but simply assumed they were.

¶ 12. Stanton appealed, arguing that the proceeds from the letters of credit were not property of the debtor's estate; that Wis. Stat. § 128.17(2) does not apply to the drawdown of the letters of credit; and that Stanton is a Wis. Stat. § 128.25(1)(e) secured creditor, in regard to the proceeds from the letters of credit. The court of appeals affirmed the circuit court, concluding that § 128.17(2) limited Stanton's claim to one month's rent and that Stanton was not a secured creditor under § 128.25(1)(e). Admanco, Inc. v. 700 Stanton Drive, LLC, 2009 WI App 57, ¶¶ 1, 22, 318 Wis. 2d 232, 768 N.W.2d 32. The court of appeals did not analyze Stanton's rights under the Stanton-Admanco lease to determine whether Stanton had a contractual right to draw down the entire $750,000 from the letters of credit.

¶ 13. Stanton petitioned for review, which we granted. We now reverse.

II. DISCUSSION

A. Standard of Review

¶ 14. This case presents upon cross-motions for summary judgment, wherein the circuit court granted Admanco's motion and denied that of Stanton, which the court of appeals affirmed albeit on a somewhat different basis. We review decisions on summary judgment independently, applying the same standards of review as did the circuit court and the court of appeals. DeHart v. Wis. Mut. Ins. Co., 2007 WI 91, ¶ 7, 302 Wis. 2d 564, 734 N.W.2d 394.

¶ 15. In the course of reviewing these summary judgment motions, we are required to interpret and apply Wisconsin statutes. The interpretation and application of statutes are questions of law that we decide independently of the decisions previously made by other courts, but benefitting from their discussions and analyses. Richards v. Badger Mut. Ins. Co., 2008 WI 52, ¶ 14, 309 Wis. 2d 541, 749 N.W.2d 581. The summary judgment motions also require us to interpret a written contract, the Admanco-Stanton lease. Interpretation of an unambiguous written contract presents a question of law for our independent review, as well. See Trent Corp. v. Martek Holdings, Inc., 2000 WI App 194, ¶ 10, 238 Wis. 2d 777, 618 N.W.2d 201.

B. Letter of Credit Principles

¶ 16. Because this review arises from the draw-down of standby letters of credit, it is important to understand the nature of standby letters of credit and their use in commercial settings; the relative rights and obligations of the participants to standby letters of credit; and how the participants may relate to each other at various times.

¶ 17. Letters of credit have been used in commercial transactions for a very long time. John F. Dolan, The Law of Letters of Credit ¶ 1.01, 1-2 (rev. ed. 1999). Initially, letters of credit were used to protect a seller in the sale of goods by assuring that the seller received the purchase price. Id. at ¶ 1.01, 1-2 n.l. That use has expanded dramatically such that merchants and bankers commonly use letters of credit in areas that were formerly "the domain of secondary guaranties." Id.

¶ 18. There are two general types of letters of credit: those "that serve the sale of commodities and those that guarantee the performance of an obligation [. We call] the former a 'commercial' [letter of] credit and the latter a 'standby' [letter of] credit." Id.

¶ 19. Transactions involving letters of credit are governed by Article 5 of the Uniform Commercial Code (U.C.C.), and in Wisconsin by ch. 405 of the statutes,

which is part of Wisconsin's enactment of the U.C.C. Since the adoption of U.C.C. Article 5, governing letters of credit, there has been a significant expansion in the use of letters of credit in various commercial transactions "where they serve to reduce risk of nonperformance under a contract that calls for performance. Generally, [letters of] creditQ in the nonsale setting have come to be known as standby [letters of] creditG" because they "standby" and perform only in the event that the person primarily liable to perform does not. Id. at ¶ 1.04, 1-20, 21. A standby letter of credit is not drawn upon when a transaction proceeds smoothly, with each party performing according to their contractual agreement.

¶ 20. "The linchpin of the letter-of-credit transaction is the unique legal relationship [among the parties]." Douglas G. Baird, Standby Letters of Credit in Bankruptcy, 49 U. Chi. L. Rev. 130, 134 (1982). "Professors White and Summers note that a letter of credit is not like other devices creating legal obligations, but rather that a letter of credit is a letter of credit." Id. at 134 n.16. One scholar posits that the standby letter of credit arose out of a rule limiting banks from assuming guarantee obligations for third parties, but that the function of a standby letter of credit is essentially that of a guarantor secondarily liable. Richard A. Lord, The No-Guaranty Rule and the Standby Letter of Credit Controversy, 96 Banking L.J. 46, 61-62 (1979).

¶ 21. There are three parties to a standby letter of credit: (1) the applicant who requests the letter of credit; (2) the beneficiary to whom payment is due upon the presentation of documents required by the letter of credit; and (3) the issuer who obligates itself to honor the letter of credit by paying up to a stated amount of money when it is presented with documents the letter of credit requires. Wis. Stat. § 405.102(l)(b), (c) & (i); Wis. Stat. § 405.108.

¶ 22. The obligation of an issuer to pay upon presentation of proper documentation is an obligation independent of any other claim that may exist among the parties to the letter of credit contract. Wis. Stat. § 405.103(4). As Eakin explained, "Letters of credit are designed to avoid complex disputes about how much the beneficiaries 'really' [are] owe[d]. The promise and premise are 'pay now, argue later.'" Eakin v. Cont'l Ill. Nat'l Bank & Trust Co. of Chi., 875 F.2d 114, 116 (7th Cir. 1989). This principle of payment upon proper presentation is known as the independence principle. See Dolan, supra ¶ 17, at ¶ 2.09, 2-46.

¶ 23. Performance under a standby letter of credit amounts to payment and is often referred to as "honoring" the letter of credit. See Eakin, 875 F.2d at 116; Wis. Stat. § 405.102(l)(h). Payment is due upon presentation of documents required by the letter of credit because presentation of those documents is a representation that the applicant has not performed on a contractual obligation that is independent of the contract that sets the terms of the letter of credit. Dolan, supra ¶ 17, at ¶ 1.04, 1-21; Wis. Stat. § 405.108.

¶ 24. One of the primary purposes of standby letters of credit is to shift the risk of nonpayment and insolvency from the beneficiary of the letter of credit to the issuer of the letter of credit. Eakin, 875 F.2d at 116-17 (explaining that "[i]ssuers of letters of credit take the risk of insolvency" and that "[s]tandby letters of credit are especially designed to deal with insolvency"); Musika v. Arbutus Shopping Ctr. Ltd. P'ship (In re Farm Fresh Supermarkets of M., Inc.), 257 B.R. 770, 772 (Bankr. D. Md. 2001) (noting that "a standby letter of credit [] is a distinct type of financing document that is more akin to a guarantee than to the usual letter of credit"); Duplitronics, Inc. v. Concept Design Elecs. & Mfg., Inc. (In re Duplitronics, Inc.), 183 B.R. 1010, 1015 (Bankr. N.D. Ill. 1995) (noting that by issuing a standby letter of credit the "risk of the customer's . .. insolvency or inability to promptly pay has been shifted from the beneficiary to the bank, a party who can better assess that risk and protect itself'); Baird, supra ¶ 20, at 144-45.

¶ 25. All parties to a letter of credit benefit from its use. The applicant uses the letter of credit as a financial inducement to the beneficiary of the letter of credit to enter into a business arrangement, such as a long-term lease, that the beneficiary would not enter into without this inducement.⁹ The issuer receives a fee for the risk it takes, and usually, it also contracts for its security from the applicant or others, in the event the issuer is required to honor the letter of credit.¹⁰ The beneficiary of a letter of credit obtains the gold standard of payment assurance for commercial transactions. Alan N. Resnick, Letter of Credit as a Landlord's Protection Against a Tenant's Bankruptcy: Assurance of Payment or False Sense of Security ?, 82 Am. Bankr. L.J. 497 (2008).

¶ 26. Letters of credit create a potential obligation for the issuer that is completely independent of the business arrangement for which it was an inducement. Wis. Stat. § 405.103(4); All Serv. Exportacao, Importacao Comercio, S.A., v. Banco Bamerindus, Do Brazil, S.A., N.Y. Branch, 921 F.2d 32, 34 (2d Cir. 1990); Eakin, 875 F.2d at 116. By shifting the risk of nonpayment in an underlying transaction to a commercial institution such as a bank that is better able to assess the risk of nonpayment, letters of credit serve to encourage and to facilitate commercial transactions. N. Shore & Cent. Ill. Freight Co. v. Am. Nat'l Bank & Trust Co. of Chi. (In re N. Shore & Cent. Ill. Freight Co.), 30 B.R. 377, 378 (Bankr. N.D. Ill. 1983); Baird, supra ¶ 20, at 131.

¶ 27. To properly protect the independence of a letter of credit, it is necessary to have a clear understanding of the rights of a trustee in bankruptcy or a receiver in insolvency vis-á-vis the beneficiary of a standby letter of credit once a drawdown has occurred. Their rights must accommodate protection of the beneficiary from nonpayment and insolvency, which the independence principle provides. However, the independence principle nevertheless permits a subsequent breach of contract claim by a bankruptcy trustee or receiver, if such claim lies against a beneficiary who draws down a letter of credit in excess of its right to do so. It is with these foundational principles in mind that we proceed to the issues presented in this case.

C. Summary Judgment

¶ 28. A decision on summary judgment begins with a review of the complaint to determine whether it states a claim; it proceeds to a review of the answer to determine whether issue has been joined; and finally to a review of the material submitted in support of and in opposition to the motion to determine whether material issues of fact are in dispute. Jackson Cnty. v. DNR, 2006 WI 96, ¶ 11, 293 Wis. 2d 497, 717 N.W.2d 713; Schuster v. Altenberg, 144 Wis. 2d 223, 228, 424 N.W.2d 159 (1988). Summary judgment may be granted only if no genuine issue of material fact is in dispute. Jackson Cnty., 293 Wis. 2d 497, ¶ 11.

¶ 29. Polsky filed this action to recover what he alleged were excess lease payments to Stanton as evidenced by the proceeds from the letters of credit and the cash security deposit that Stanton held. Specifically, Polsky alleged that "Stanton's drawing down on the letters of credit indicates that Stanton elected to terminate the Lease."¹¹ According to Polsky, termination of the lease was a necessary precondition to Stanton's right to draw down the letters of credit.¹² Polsky alleged Stanton's drawdown was a "Termination Default."¹³ Polsky alleged that as a result of Stanton's termination of the lease, it had no right to offset the proceeds of the letters of credit against damages occurring after the termination of the lease and, in so doing, Stanton breached the terms of the lease.¹⁴ Additionally, Polsky alleged that as a result of Stanton's termination of the lease, Wis. Stat. § 128.17(2) limited Stanton's claim for "unpaid rent, if any, for the period up to April 1, 2005, when the new lease with EBSCO Industries commenced."¹⁵

¶ 30. Stanton answered, alleging the lease terms permitted Stanton to draw down on the letters of credit without terminating the lease, which Stanton affirmatively alleged it did not terminate.¹⁶ Because it did not terminate the lease, Stanton alleged that it was entitled to offset the proceeds of the cash security deposit and the letters of credit against its future actual damages under the lease.¹⁷ Stanton also alleged that limits imposed under Wis. Stat. § 128.17(2) do not apply to its rights under the lease.¹⁸

¶ 31. We conclude that the complaint and answer join issue, and the documents submitted with the affidavits do not raise issues of material fact. Accordingly, summary judgment is appropriate for Polsky's statutory claim for return of the proceeds paid from the standby letters of credit, his claim for breach of contract and Stanton's defense to his claims, as well as Stanton's claim for damages arising from Admanco's breach of the lease. See Jackson Cnty., 293 Wis. 2d 497, ¶ 11.

D. Property and Claims under Ch. 128

1. Property of the debtor's estate

¶ 32. Polsky was appointed as receiver of Admanco's property. As Wis. Stat. § 128.08 provides, "[t]he court within the proper county may sequestrate the property of a debtor and appoint a receiver therefor." It has long been the law in Wisconsin that § 128.08 "provides for the sequestration of the property of the debtor." Indus. Comm'n v. Sanitary Baking Co., 242 Wis. , 7 N.W.2d 603 (1943) (emphasis added). Stated otherwise, it is only the property of the debtor (Admanco) that is administered by the receiver (Polsky) in this ch. 128 proceeding. The property of others lies outside the debtor's estate.

¶ 33. Polsky contends, and the court of appeals agreed, that the proceeds of the standby letters of credit became subject to administration of the debtor's estate through the application of Wis. Stat. § 128.17(2), when M&I Bank was reimbursed from the estate's property. Admanco, 318 Wis. 2d 232, ¶ 29. M&I Bank's reimbursement occurred because M&I Bank had a security interest in the estate's property sufficient to cover Stanton's $750,000 drawdown. Stanton did point out that the actual proceeds from the letters of credit were not Admanco's property, and the court of appeals recognized this principle as well. Id., ¶ 34 n.17.

¶ 34. However, rather than analyzing whether the standby letters of credit were improperly drawn down, which could then give rise to a claim for breach of contract against Stanton, the court of appeals took a shortcut. The court of appeals concluded that because M&I Bank was fully secured by property of the debtor's estate, the drawdown on the standby letters of credit must be treated the same as would property of the debtor. Id., ¶ 35.

¶ 35. This shortcut, if upheld, would do violence to what has been the gold standard for security in Wisconsin commercial transactions, which standby letters of credit have provided for many, many years. As the cases that discuss the use of standby letters of credit in commercial transactions explain, standby letters of credit are employed because they shift the risk of nonpayment and insolvency from the beneficiary to the issuer of the letter of credit, who is better able to assess the risk of nonpayment and insolvency. See Eakin, 875 F.2d at 116; In re Farm Fresh Supermarkets, 257 B.R. at 772; In re Duplitronics, 183 B.R. at 1015.

¶ 36. Under the court of appeals decision, standby letters of credit would no longer shift the risk of nonpayment and insolvency from the beneficiary to the issuer of the letter of credit because the beneficiary of the letter of credit would bear the ultimate loss. Accordingly, the court of appeals decision contravenes the major function of letters of credit. Stated otherwise, under the court of appeals decision, those who entered into commercial transactions with persons of uncertain creditworthiness, assured by a bargained-for letter of credit, would be deprived of the safety provided by the letter of credit that induced them to enter into the contract.¹⁹

¶ 37. However, standby letters of credit are able to shift the risk of nonpayment and insolvency to the issuer of the letter of credit because the proceeds of letters of credit are not property of the debtor's estate in a bankruptcy or insolvency proceeding. Willis v. Celotex Corp., 978 F.2d 146, 148 n.3 (4th Cir. 1992) (explaining that the proceeds of an irrevocable letter of credit are not property of the bankruptcy estate); Kellogg v. Blue Quail Energy, Inc., 831 F.2d 586, 589 (5th Cir. 1987) (concluding that "[i]t is well established that a letter of credit and the proceeds therefrom are not property of the debtor's estate"); Wetzel v. Lumbermans Mut. Cas. Co., 324 B.R. 333, 340 n.18 (S.D. Ind. 2005) (same); OHC Liquidation Trust v. Discover Re (In re Oakwood Homes Corp.), 342 B.R. 59, 66-67 (Bankr. D. Del. 2006) (same); Sabratek Corp. v. LaSalle Bank, N.A. (In re Sabratek Corp.), 257 B.R. 732, 735 (Bankr. D. Del. 2000) (same); Leisure Dynamics, Inc. v. Cont'l Ill. Nat'l Bank & Trust Co. of Chi. (In re Leisure Dynamics, Inc.), 33 B.R. 171, 172-73 (Bankr. D. Minn. 1983) (same).²⁰

¶ 38. We agree that the proceeds of standby letters of credit are not property of the debtor's estate. Rather, the proceeds are property of the issuer that are paid to the beneficiary upon a proper demand. They never have been property of the debtor.

¶ 39. Furthermore, some courts have opined that honoring a letter of credit has little effect on the unsecured creditors of the debtor's estate because any security the issuer takes in the applicant's property is reserved for the issuer when the letter of credit commences. In re Sabratek, 257 B.R. at 735. Therefore, from that point forward, until the letter of credit has expired, the applicant has no right to dispose of that collateral without the permission of the issuer. Id.; see also In re Leisure Dynamics, 33 B.R. at 172-73; Page v. First Nat'l Bank of M. (In re Page), 18 B.R. 713, 715-16 (D.D.C. 1982).

¶ 40. The dissent contends that we misconstrue Kellogg and that it actually supports the dissent's position that "the proceeds at issue are property of the [debtor's] estate, by virtue of the estate collateral securing them."²¹ This assertion highlights the central flaw at the core of the dissent: it mistakenly conflates the rights of a beneficiary of a letter of credit to the proceeds of the letter of credit with the rights of a secured creditor to an interest in the property of the debtor's estate.

¶ 41. The dissent correctly points out that Kellogg concludes that " 'the letter of credit itself and the payments thereunder may not be property of [the] debtor, but the collateral pledged as a security interest for the letter of credit is.' "²² We do not quarrel with this statement. However, what the dissent mistakenly does next is to conflate the rights of a secured creditor (M&I Bank) to enforce its security interest in the property of the debtor (Admanco) with the rights of the beneficiary of the letter of credit (Stanton) to be paid by M&I Bank, independent of any contract between M&I Bank and Admanco.

¶ 42. An example may help to show why the dissent is conflating two separate and distinct property rights. Suppose Admanco had given property of an unnamed third party, instead of its own property, as security for the letters of credit, breached its lease, and assigned its assets for the benefit of creditors; Stanton then drew down the $750,000. Under that scenario, when M&I Bank realizes on its security underlying the letters of credit, there will be no effect on the debtor's estate because only the property of the unnamed third party will be affected. However, in that hypothetical, M&I Bank would be enforcing the same right against collateral and fulfilling the same obligation to honor Stanton's rights to proceeds from the letters of credit as it has in the case now before us.

¶ 43. The right to execute against collateral and the right to draw down proceeds from letters of credit are legally separate and independent of one another. To conclude otherwise would defeat the rights of the beneficiary of a letter of credit, who is entitled to the same security of payment as it would have received if Admanco had not commenced an insolvency proceeding. See Eakin, 875 F.2d at 117. In this respect, the issuer of the letters of credit operates like a guarantor of Stanton's rights under the lease. See In re Farm Fresh Supermarkets, 257 B.R. at 772.

2. Ch. 128 claims

¶ 44. All property administered under ch. 128 was the debtor's property, which becomes the debtor's estate, that is then subject to administration by the receiver. Wis. Stat. § 128.08. The "claims" that are filed in a ch. 128 proceeding are claims to receive a distribution from the debtor's estate. Indus. Comm'n, 242 Wis. at 118. For example, Wis. Stat. § 128.14(1) requires creditors "to file their verified claims within 3 months from the date of the filing of an assignment or the appointment of a receiver." (Emphasis added.) Such claims seek payment from the property that comprises the debtor's estate. See Nickel v. Stoltz (In re Davis Bros. Stone Co.), 245 Wis. 130, 13 N.W.2d 512 (1944); Pobreslo v. Guar. Mortg. Corp., 210 Wis. 20, 242 N.W. 725 (1932).

¶ 45. Wisconsin Stat. § 128.14(2) raises concerns for creditors "not filing claims within the time limited [because they] may be precluded from participation in any dividend which may be declared." (Emphasis added.) The "claim" referenced in § 128.14(2) is a claim against the debtor's estate, and the "dividend" that is referenced in § 128.14(2) is a payment from the debtor's estate. See Calumet Cnty. v. Baumann (In re Calumet Brewing Co.), 243 Wis. 317, 321, 10 N.W.2d 190 (1943). Wisconsin Stat. § 128.15 addresses "[objections to claims." (Emphasis added.) Again, the "claims" referenced are claims to a distribution from the debtor's estate. Gelatt v. DeDakis, 77 Wis. 2d 578, 600-01, 254 N.W.2d 171 (1977).

¶ 46. "Claims" also are addressed in Wis. Stat. § 128.17(2), the statute upon which the circuit court and the court of appeals relied to preclude Stanton's retention of the proceeds of the letters of credit. Admanco, 318 Wis. 2d 232, ¶ 36. Section 128.17 is entitled "[o]rder of distribution," and it provides in relevant part:

(1) The order of distribution out of the debtor's estate shall be as follows:

(g) Debts due to creditors generally, in proportion to the amount of their claims, as allowed.

(2) Debts to become due as well as debts due may be proved, but a lessor's claim shall be limited to past due rent, and to any actual damage caused the lessor by a rejection of the lease on the part of the debtor or by its termination by force of its provisions. The lessor shall be entitled to payment in full, at the rate specified in the lease, for the period of any actual occupancy by the receiver or assignee.

(Emphasis added.)

¶ 47. Wisconsin Stat. § 128.17(2) limits a lessor's claims against property of the debtor's estate. However, it says nothing about a lessor's claims against property that is not property of the debtor's estate. Stated otherwise, ch. 128 applies to claims against the debtor's estate, not to claims against the property of another.

¶ 48. Recognizing that ch. 128 claims are claims to share in the debtor's estate is important because the proceeds of the letters of credit are not property of the debtor's estate. Kellogg, 831 F.2d at 589; supra ¶¶ 32-37. Therefore, Wis. Stat. § 128.17(2) says nothing about proceeds from letters of credit, which are property of the issuers. The court of appeals did not consider from what property a "claim" under § 128.17(2) was requesting payment. However, the only property in a ch. 128 proceeding is the property of the debtor's estate. Wis. Stat. § 128.08; Indus. Comm'n, 242 Wis. at 118. Because the restriction of § 128.17(2) applies only to distributions from the debtor's estate, it is not applicable here.

¶ 49. The court of appeals concluded that Wis. Stat. § 128.17(2) capped Stanton's claim for rent, relying in part on cases such as Oldden v. Tonto Realty Corp., 143 F.2d 916 (2d Cir. 1944) and Redback Networks, Inc. v. Mayan Networks Corp. (In re Mayan Networks Corp.), 306 B.R. 295 (B.A.E 9th Cir. 2004), construing 11 U.S.C. § 502(b)(6)(A) (2006) of the revised federal bankruptcy code. Admanco, 318 Wis. 2d 232, ¶¶ 11-13, 24r-25, 31-34. However, this provision of the federal bankruptcy code is unlike Wis. Stat. § 128.17(2) and therefore, interpretations of it cannot be used to support applying § 128.17(2) to cap contract damages that are not claims against the debtor's estate.

¶ 50. The revised federal bankruptcy act caps "rent reserved by such lease, without acceleration, for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of such lease." 11 U.S.C. § 502(b)(6)(A). It was this provision that Oldden²³ and In re Mayan Networks interpreted in the context of a federal bankruptcy proceeding, not a state insolvency proceeding as we have here. Oldden, 143 F.2d at 917; In re Mayan Networks, 306 B.R. at 297-98. While it may be that ch. 128 was modeled on the federal bankruptcy act, it is beyond dispute that when the federal act was revised to include this cap, ch. 128 was not similarly revised. Therefore, the case law interpreting the cap on rent from § 502(b)(6)(A) does not inform our interpretation of Wis. Stat. § 128.17(2).²⁴

3. Breach of contract

¶ 51. Even though the proceeds of a letter of credit are not the property of the debtor's estate and the drawdowns on the letters of credit are not claims against the debtor's estate, it does not follow that a receiver can make no claim that the beneficiary drew down more proceeds than it was contractually entitled.

¶ 52. Payment from a standby letter of credit does not negate any suit for breach of contract against the beneficiary of a letter of credit, if such a claim exists. See First Ave. W. Bldg. v. James (In re Onecast Media, Inc.), 439 F.3d 558, 564 (9th Cir. 2006) (explaining that a trustee may maintain a claim for breach of contract if the beneficiary breached the contract underlying the letter of credit by a drawdown that exceeded the beneficiary's damages).

¶ 53. A breach of contract claim is a chose in action under Wisconsin law and a property right of the person who holds it. Burmeister v. Schultz, 37 Wis. 2d 254, 259, 154 N.W.2d 770 (1967). Accordingly, here, if there were a breach of contract action that would lie against Stanton, that property right would belong to the debtor's estate. In re Onecast Media, 439 F.3d at 564. Polsky sought to proceed on such a claim because he sued Stanton for breach of contract.²⁵ However, neither the circuit court nor the court of appeals ruled on that claim.

¶ 54. Recognizing that the proceeds of a standby letter of credit is not part of the debtor's estate, while permitting a suit on the debtor's behalf against the beneficiary of a standby letter of credit for breach of contract is an important distinction to maintain. That distinction preserves the ability of a standby letter of credit to shift the risk of nonpayment and insolvency to the issuer of the letter of credit, thereby facilitating commercial transactions. However, it also permits a debtor's receiver to collect all of the property of the debtor, including damages arising from breach of contract actions.

¶ 55. Therefore, while the amount of money sought by a receiver subsequent to a drawdown on a standby letter of credit may be the same amount that is proved as damages for breach of contract against a beneficiary, they are not the same property interest and they do not arise in the same way. The proceeds of a letter of credit is property of the issuer of the standby letter of credit. Kellogg, 831 F.2d at 589. The damages for breach of contract are property of the debtor because they are payment for the debtor's contract rights. In re Onecast Media, 439 F.3d at 564.

¶ 56. Furthermore, distribution from a standby letter of credit arises upon the presentation of documents that the standby letter of credit requires for payment. Nothing more is required. By contrast, damages for breach of contract require the receiver to prove the contract, the breach and the amount of damages that resulted from the breach. Arthur L. Corbin, Corbin on Contracts §§ 943-944, at 923-24 (1952). Stated otherwise, a lawsuit for breach of contract in a ch. 128 proceeding requires the same proofs as does a lawsuit for breach of contract outside of such proceeding; payment of damages is not automatic upon a claim of breach of contract. See Hayes v. Buda, 323 F.2d 748, 750 (7th Cir. 1963).

¶ 57. Here, Polsky did allege Stanton breached the letter of credit contract, claiming that Stanton collected more money in the drawdown than it had a right to under the Admanco-Stanton lease.²⁶ Stanton also alleged a claim for breach of contract, claiming that Admanco breached the lease, thereby giving rise to Stanton's contractual remedies under the lease.²⁷

¶ 58. Resolution of both Polsky's and Stanton's breach of contract claims depend on the terms of the written Admanco-Stanton lease. The lease was submitted to the circuit court during the motions for summary judgment, as well as being attached to the Complaint.

¶ 59. There is no dispute that Admanco breached the lease by failing to pay the rent due January 1, 2005, and that Admanco did not timely cure that default of its obligations under the lease.²⁸ Stanton also maintains that Admanco defaulted under the lease by assigning its assets for the benefit of creditors and having a receiver appointed pursuant to Wis. Stat. ch. 128. In that regard, the lease provides in section 21:

21. EVENTS OF DEFAULT

21.1 Bankruptcy of Tenant or Guarantor. It shall be a default by Tenant under this Lease if either or both of any Guarantor and Tenant makes an assignment for the benefit of creditors, or files a voluntary petition under any state or federal bankruptcy or insolvency law . . . that is not dismissed within 90 days,... or whenever a receiver of Tenant or any Guarantor, as the case may be, or of, or for, the property of Tenant or any Guarantor, as the case may be, shall be appointed, or Tenant or Guarantor, as the case may be, admits it is insolvent or is not able to pay its debts as they mature.

¶ 60. Admanco assigned its assets to Polsky for the benefit of Admanco's creditors, and Polsky was appointed receiver for Admanco's property. These facts are undisputed. The terms of default under section 21.1 are clearly set out, and the undisputed facts establish that Admanco "ma[de] an assignment for the benefit of creditors" and "file[d] a voluntary petition under [] state . . . insolvency law." As such, Admanco's conduct comes within its provisions. Therefore, as a matter of law, Admanco committed a second event of default under the lease's terms by these actions. See Prent Corp., 238 Wis. 2d 777, ¶ 10.

¶ 61. The Admanco-Stanton lease also provides remedy options for the landlord when the tenant defaults. The remedies available to the landlord are set out in section 22. Here, Stanton stated that it was proceeding under section 22.2(b) of the lease when it terminated Admanco's possession without terminating its lease.²⁹ Section 22.2 provides in relevant part:

22.2 Landlord's Remedies. In the event of any default by Tenant under this Lease, Landlord, at its option,... may, in addition to all other rights and remedies provided in this Lease, or otherwise at law or in equity: . . . (b) terminate Tenant's right of possession of the Premises without terminating this Lease, provided, however, that Landlord may, whether Landlord elects to proceed under Subsections (a) or (b) above, relet the Premises, or any part thereof for the account of Tenant... If Landlord elects to pursue its rights and remedies under Subsection (b) above,... and Landlord fails to relet the Premises, then Tenant shall pay to Landlord the sum of (x) the projected costs of Landlord's expenses of reletting... and (y) the accelerated amount of Base Rest and Additional Rent due under the Lease for the balance of the Term, discounted to present value at a rate of 6% per annum.

(Emphasis added.) Stanton gave affirmative written notice that it was not terminating the lease; it was merely terminating Admanco's right of possession.³⁰ Stanton also gave notice that in an effort to mitigate its damages, it would be reletting part of the premises to EBSCO Industries.³¹

¶ 62. When Stanton terminated Admanco's possession without terminating the lease,³² the payments for the full term of the lease came due at a discounted rate of 6% per annum.³³ The Base Rent under the lease for the first 12 months was $367,882.00; the Base Rent for the next 12 months was $377,079.05; the Base Rent for the third 12 months was $386,506.03.³⁴ The Base Rent continued to escalate annually, ending with $519,807.63 due during the final 12 months of the lease.³⁵ The cumulative amount of the Base Rent payments due under the lease, discounted by 6% per annum, greatly exceeds Stanton's $750,000 draw down on the standby letters of credit. Therefore, Stanton did not breach the Admanco-Stanton lease when it drew down $750,000 from the standby letters of credit.

¶ 63. Polsky's breach of contract claim alleges that Stanton had no contractual right to $750,000 when it drew down the standby letters of credit because Stanton had terminated the lease.³⁶ However, as we mentioned above, the documents that Stanton submitted in support of its motion for summary judgment show Stanton provided affirmative, written notice that it was not terminating the lease. Stanton had the contractual right to select this remedy for Admanco's defaults. Therefore, Polsky has not set out facts sufficient to show that Stanton exceeded its rights under the lease when it accelerated the rent due for the term of the lease pursuant to the Admanco-Stanton lease, section 22.2(b). Accordingly, Polsky's breach of contract claim fails, and Stanton's breach of contract claim prevails.

III. CONCLUSION

¶ 64. Because we conclude that the proceeds of the standby letters of credit were not property of Admanco, they are not property of the debtor's estate subject to the receiver's administration under ch. 128. We also conclude that the "claim" of Wis. Stat. § 128.17(2) is a claim against property of the debtor's estate, not a claim against property of the issuer of the standby letters of credit. And finally, we conclude that the circuit court should have ordered summary judgment denying Polsky's breach of contract claim and granting Stanton's breach of contract claim.

¶ 65. Accordingly, we reverse the decision of the court of appeals and remand to the circuit court to dismiss Polsky's suit against Stanton, as it relates to the proceeds of the standby letters of credit, and for further proceedings consistent with this decision.³⁷

By the Court. — The decision of the court of appeals is reversed, and the cause is remanded to the circuit court for further proceedings consistent with this opinion.

¶ 66. SHIRLEY S. ABRAHAMSON, C.J., and ANNETTE KINGSLAND ZIEGLER, J., did not participate.

1 All farther references to the Wisconsin Statutes are to the 2007-08 version unless otherwise indicated. Even though Admanco, Inc. filed for receivership in 2004 and the receiver filed this action in 2006, we employ the 2007-08 version of the statutes because there has been no intervening statutory change that affects this decision.

2 The Honorable Peter L. Grimm of Fond du Lac County presided.

3 Admanco, Inc. v. 700 Stanton Drive, LLC, 2009 WI App 57, 318 Wis. 2d 232, 768 N.W.2d 32.

4 The record reflects that Polsky has instituted various garnishment actions against Stanton to satisfy the judgment of the circuit court. Therefore, to the extent that those garnishment proceedings have been successful, we require the garnishment proceeds, statutory costs and statutory interest be paid to Stanton.

5 Admanco-Stanton lease, § 21.2.

6 Because the letters of credit were secured on March 31, 2004, contemporaneous with Stanton's payment of $2.8 million to Admanco, and the petition that commenced the ch. 128 proceeding was not filed until December 30, 2004, no argument can be made that the letters of credit constituted a preference under Wis. Stat. § 128.07.

7 Admanco is a division of EBSCO Industries, Inc.

8 We agree with the receiver's determination that the $61,313.66 cash security deposit is part of the debtor's estate because it was Admanco's property prior to the commencement of the debtor's ch. 128 proceeding. Accordingly, our discussion relative to the ownership of the proceeds of the letters of credit does not apply to the cash security deposit.

9 Letters of credit are generally more cost-effective and flexible than performance bonds or other types of financial guarantees. Beat U. Steiner, A Letter of Credit Primer for Real Estate Lawyers, 28 Real Prop. Prob. & Tr. J. 125, 129 (1993).

10 The letter of credit may be secured by cash deposits, personal guarantees, guarantees of one who is not a party to the letter of credit contract, real estate, personal property, etc.

11 Compl., ¶ 13.

12 Id.

¹³

14 Id., ¶¶ 13, 19.

15 Id., ¶ 15.

16 Answer, ¶ 13.

17 id., ¶ 8 (setting forth "Offset Rights").

18 id, ¶ 16.

19 The dissent would have had the same result were it the law in Wisconsin.

20 Many of the cases cited by the dissent, when properly understood, support our reasoning. Dissent, ¶ 84 n.7. See First Ave. W. Bldg. v. James (In re Onecast Media, Inc.), 439 F.3d 558, 564 & n.5 (9th Cir. 2006) (explaining that cases such as Kellogg are "not apposite" because it was confronted with a claim for breach of contract underlying the letter of credit); Int'l Fin. Corp. v. Kaiser Grp. Int'l Inc. (In re Kaiser Grp. Int'l Inc.), 399 F.3d 558, 566-67 (3d Cir. 2005) (finding "compelling" the logic of Kellogg and concluding that the collateral securing the letters of credit, not the proceeds of the letter of credit, constituted property of the debtor's estate); Am. Bank of Martin Cnty. v. Leasing Serv. Corp. (In re Air Conditioning, Inc. of Stuart), 845 F.2d 293, 296 (11th Cir. 1988) (explaining that "neither a letter of credit nor its proceeds are property of the debtor's estate"; however, "[cjollateral which has been pledged by the debtor as security for a letter of credit [] is property of the debtor's estate").

21 Dissent, ¶¶ 86-87.

22 Id., ¶ 86 (quoting Kellogg v. Blue Quail Energy, Inc., 831 F.2d 586, 590-91 (5th Cir. 1987)).

23 Oldden v. Tonto Realty Corp., 143 F.2d 916 (2d Cir. 1944), interpreted 11 U.S.C. § 502(b)(6)(A)'s predecessor, § 63 sub. a(9), which established a cap of " 'rent reserved by the lease, without acceleration, for the year next succeeding the date of the surrender of the premises to the landlord or the date of reentry of the landlord, whichever first occurs,... plus an amount equal to the unpaid rent accrued.'" Id. at 917 (quoting § 63 sub. a(9)).

24 Several other cases cited by the dissent interpret 11 U.S.C. § 502(b)(6)(A), and for the reasons just explained, do not inform our interpretation of Wis. Stat. § 128.17(2). See dissent, ¶ 84 n.7 (citing AMB Prop., L.P. v. Official Creditors for the Estate of AB Liquidating Corp. (In re AB Liquidating Corp.), 416 F.3d 961, 965 & n.3 (9th Cir. 2005); In re Connectix Corp., 372 B.R. 488 (Bankr. N.D. Cal. 2007)).

25 Compl., ¶¶ 13, 19; see supra ¶ 29.

26 Compl., ¶¶ 13, 19.

27 Answer, ¶ 13; Answer 3, ¶ 8 (setting forth "Offset Rights").

²⁸

29 Aff. of Scott Revolinski, Exhibit 8.

³⁰

³¹

32 See generally Admanco-Stanton lease, § 22.2.

33 Id., § 22.2(b).

34 7<7., §2.2.

³⁵

³⁶

37 We do not address whether Stanton is a secured creditor within the meaning of Wis. Stat. § 128.25(l)(e) because that issue has no bearing on our conclusion that the proceeds of the letters of credit are not property of the debtor's estate.