the proceeds from any draws made
thereunder) issued for the account
of a bankrupt company are outside
of the bankruptcy estate and not
subject to the automatic stay. Meaning, if the Chief Credit Officer negotiates for back-to-back letters of credit
in lieu of cash to secure the existing
letters of credit, and then Heading
South subsequently files for bankruptcy, the Bank would not need to
obtain relief from the automatic stay
to draw down under the back-to-back
letters of credit and any amounts so
drawn by the Bank could be freely
applied to reimburse the Bank for
any draws honored by the Bank
under the existing letters of credit.
These benefits derive from the
“independence principle” associated
with letters of credit, which provides
that the issuer of a letter of credit
has an absolute obligation to honor
any valid draw under letter of credit,
independent of any underlying ob-
ligation or transaction between the
letter of credit beneficiary and the
Clearly, there is a benefit for the
Bank to receive back-to-back letters
of credit, rather than cash, as collat-
eral security for Heading South’s ob-
ligations to the Bank with respect to
existing letters of credit. However,
as mentioned above, the Chief Credit
Officer is not going to risk a payoff
in a distressed deal by insisting on
back-to-back letters of credit rather
than cash. He will certainly push for
back-to-back letters of credit, but he
realizes that, even in the worst case
scenario where he accepts cash and
then Heading South files for bank-
ruptcy, he is still better off than if he
walked away from the payoff over
We hope you enjoyed the column
and, of course, are always interested
in your feedback. As such, if you have
any scenarios you would like to see
discussed in a future column, please
let us know at Dfiorillo@otterbourg.
com or Jcretella@otterbourg.com. TSL
Dan Fiorillo and Jim Cretella are
Members of the law firm Otterbourg P.C.
*Source: National Information Center. All credit facilities are subject to the normal credit approval process. Webster Business Credit Corporation is a wholly owned subsidiary of Webster Bank, N.A. Member FDIC.
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