## Facts

- Latino Americano de Reaseguros, S.A. (LARSA), a Panamanian reinsurance company, entered reinsurance contracts with Insurance Corporation of Hannover (Hannover) in 1984–1985.
- Hannover alleged LARSA breached the contracts and owed more than $1.7 million.
- LARSA arranged for Banco Cafetero to issue a standby letter of credit in Hannover’s favor, secured by collateral, to cover certain losses if LARSA failed to reimburse Hannover.
- On April 6, 1990, LARSA entered statutory reorganization in Panama.
- Hannover filed (1) a federal action in the Central District of California against Banco Cafetero to enforce the letter of credit and (2) a federal action in the Southern District of New York against LARSA and Citibank, N.A. seeking to attach assets of a New York trust created for policyholder protection under New York insurance regulation.
- On November 18, 1991, LARSA commenced an ancillary case in the U.S. Bankruptcy Court for the Southern District of New York under 11 U.S.C. § 304, seeking to aid the Panamanian proceeding.
- The bankruptcy court entered an order staying both of Hannover’s federal actions, including the California letter-of-credit action against Banco Cafetero.
- Hannover appealed the stay order to the district court.

## Issues

1. Whether the bankruptcy court’s stay order was appealable as a final order or as an interlocutory order granting injunctive relief.
2. Whether a bankruptcy court, in a § 304 ancillary proceeding, may stay a beneficiary’s action against an issuing bank to enforce a letter of credit when the debtor is only the account party and not the defendant in that action.

## Decision

- The district court held the stay order was appealable because it functioned as a preliminary injunction barring Hannover for an open-ended period from pursuing litigation not brought against the debtor.
- The district court reversed the bankruptcy court’s stay insofar as it enjoined Hannover’s California action against Banco Cafetero to enforce the letter of credit.
- The court concluded the stay rested on an incorrect legal theory that treated enforcement of the letter of credit as equivalent to pursuing a claim against the debtor.

## Legal Principles

- A bankruptcy court order that operates as an open-ended restraint on outside litigation functions as injunctive relief and is appealable under 28 U.S.C. § 158(a).
- A letter of credit is an independent obligation of the issuing bank to the beneficiary, separate from the underlying contract between the beneficiary and the account party.
- Because the issuing bank’s payment obligation is independent, enforcement of a letter of credit against the bank is not an action against the debtor and is not barred merely because the account party is in insolvency proceedings.
- Section 304(b)(1) relief may enjoin actions against the debtor with respect to property involved in the foreign proceeding, but it does not authorize enjoining a beneficiary’s suit seeking payment from a non-debtor bank on its own independent undertaking.

## Conclusion

The district court exercised appellate jurisdiction over the bankruptcy court’s stay order and held that § 304 relief could not be used to block Hannover’s independent letter-of-credit enforcement action against the issuing bank, reversing the stay as legally unsupported.


In re Ocana, 151 B.R. 670 (S.D.N.Y. 1993)