## Facts

- Thomas William Slamans operated gas stations and bought petroleum products for resale.
- Slamans entered a distribution agreement with Sun Company (Sun) under which Sun sold products to Slamans on credit, and Slamans resold them to customers for cash or by credit card.
- The agreement routed certain credit-card sale proceeds to Sun first, with Sun remitting amounts to Slamans when his account was current; the agreement also required Slamans to provide a letter of credit.
- Slamans obtained an irrevocable standby letter of credit from First National Bank & Trust Company of Okmulgee (FNB) in Sun’s favor, up to $200,000, payable if Slamans defaulted under the distribution agreement.
- FNB’s letter-of-credit reimbursement obligation was supported by loan documents and a security interest covering Slamans’s receivables.
- Separately, Slamans had financing from First Capital Corporation under a revolving credit note; CCF, Inc. later became First Capital’s successor-in-interest and asserted secured-creditor rights in Slamans’s receivables.
- Slamans filed bankruptcy.
- After the bankruptcy filing, Sun drew on the standby letter of credit for $192,433.15 based on Slamans’s default, and FNB honored the draw.
- At about the same time, Sun was holding $111,053.41 in credit-card sale proceeds attributable to Slamans’s operations.
- After paying Sun on the letter of credit, FNB demanded that Sun turn over the $111,053.41. Sun did not do so and instead filed an interpleader complaint in the bankruptcy case to determine who was entitled to the proceeds.
- The bankruptcy court ruled for FNB, holding FNB was entitled to statutory subrogation under 11 U.S.C. § 509 and directing Sun to pay FNB the $111,053.41.
- CCF appealed the bankruptcy court’s ruling to the U.S. District Court for the Northern District of Oklahoma.

## Issues

1. Whether an issuer of a standby letter of credit that pays the beneficiary after the debtor’s default is an “entity that is liable with the debtor on, or that has secured, a claim of a creditor against the debtor” and therefore may obtain statutory subrogation under 11 U.S.C. § 509(a).
2. If § 509(a) applies, whether the issuer, as subrogee to the beneficiary’s rights, may claim the credit-card sale proceeds held by the beneficiary despite competing claims by another secured creditor in the bankruptcy case.

## Decision

- The district court affirmed the bankruptcy court’s order awarding FNB the $111,053.41 in credit-card sale proceeds.
- The court held that FNB, having paid Sun under the standby letter of credit, qualified for subrogation under § 509(a) and could succeed to Sun’s rights in the proceeds to the extent of FNB’s payment.
- As a result, Sun was directed to pay the $111,053.41 to FNB rather than to the estate for distribution subject to CCF’s claimed lien.

## Legal Principles

- Under 11 U.S.C. § 509(a), an entity that is liable with the debtor on, or has secured, a creditor’s claim against the debtor, and that pays the claim, is subrogated to the creditor’s rights to the extent of the payment.
- A standby letter of credit that functions to assure payment to a creditor upon the debtor’s default can place the issuer within § 509(a)’s “liable with the debtor” category for purposes of statutory subrogation.
- Subrogation transfers only the rights the creditor held, and only up to the amount the paying party satisfied; the subrogee takes the creditor’s position, not a greater one.
- When § 509(a) subrogation applies, the issuer’s ability to claim a particular fund turns on the beneficiary-creditor’s rights in that fund (here, Sun’s rights under the distribution and credit-card proceeds arrangement), rather than on the issuer’s separate collateral position standing alone.

## Conclusion

The district court affirmed the bankruptcy court’s determination that, after FNB paid Sun under a standby letter of credit triggered by Slamans’s default, FNB was entitled to statutory subrogation under § 509(a) and could enforce Sun’s rights to the $111,053.41 in credit-card sale proceeds Sun held, notwithstanding CCF’s competing secured-creditor claim in the bankruptcy proceeding.


CCF, Inc. v. First National Bank (In re Slamans), 175 B.R. 762 (1994)