## Facts

- Howell Enterprises, Inc., an Arkansas rice mill, borrowed $2.1 million from First National Bank in Stuttgart and granted the bank a perfected security interest in all of Howell’s accounts receivable.
- Tradax America, Inc. owned rice and arranged a sale to Bar Schwartz Limited, which insisted on paying by a one-year commercial letter of credit.
- Because Bar Schwartz would not buy from Tradax and Howell would not accept a letter of credit if it were the seller, Howell and Tradax structured the transaction so the sale documents named Howell as seller/beneficiary to facilitate issuance of the letter of credit.
- Shipping and export documentation listed Howell and Tradax in different places; Tradax handled and paid freight-related costs and retained the economic risk of the transaction.
- Howell made internal bookkeeping entries recording the transaction as Howell’s account receivable from Bar Schwartz and a corresponding payable to Tradax; Tradax did not invoice Howell for the rice.
- Before the letter of credit matured, Howell filed a voluntary Chapter 11 petition.
- First National asserted the letter of credit and its proceeds were Howell collateral within “accounts receivable.” Tradax asserted Howell had no substantive rights in the proceeds and that Tradax, as the true seller, had the superior claim (including under constructive trust principles).

## Issues

1. Whether the Bar Schwartz letter of credit (or its proceeds) constituted Howell’s “account receivable” or otherwise fell within the bank’s Article 9 collateral description so that the bank’s security interest attached.
2. Whether Howell had sufficient “rights in the collateral” for attachment, given Tradax’s ownership and economic control of the transaction.
3. Whether Tradax’s equitable/beneficial ownership in the proceeds prevailed over the bank’s asserted secured claim.

## Decision

- The Eighth Circuit reversed the judgment for First National and directed entry of judgment for Tradax.
- The court held the letter of credit was not Howell’s account receivable for purposes of the bank’s security interest.
- The court held Howell lacked rights in the letter of credit proceeds; therefore the bank’s security interest did not attach to those proceeds.
- The court rejected reliance on Howell’s internal accounting entries as a basis to create or expand Howell’s property rights or the bank’s collateral.
- The court concluded Tradax, as the true seller and economic owner, had the superior claim to the letter of credit proceeds.

## Legal Principles

- Under UCC Article 9, a security interest attaches only if the debtor has rights in the collateral; nominal involvement or bookkeeping characterizations do not supply those rights.
- Letters of credit are distinct commercial instruments and are not treated as ordinary “accounts receivable” absent a legally sufficient basis showing the debtor holds enforceable rights in the proceeds.
- Internal accounting entries cannot create property interests in collateral or enlarge a secured party’s interest where the debtor lacks substantive rights.
- Equitable ownership principles may prevail against a secured creditor’s claim when the debtor’s apparent interest is merely facilitative and the secured creditor cannot show detrimental reliance on the debtor’s characterization of the asset.

## Conclusion

The court awarded the letter of credit proceeds to Tradax because Howell acted only as a transactional conduit, lacked rights in the proceeds needed for Article 9 attachment, and Howell’s bookkeeping could not convert Tradax’s sale into collateral covered by the bank’s accounts-receivable security interest.


In re Howell Enters., Inc., 934 F.2d 969 (8th Cir. 1991)