Letters of Credit, Voidable Preferences and the 'Independence' Principle

Posted: 30 Jun 2000

See all articles by David Gray Carlson

David Gray Carlson

Yeshiva University - Benjamin N. Cardozo School of Law

William H. Widen

University of Miami - School of Law

Abstract

When a creditor receives a letter of credit on antecedent debt just before a debtor's bankruptcy, courts have ruled that the letter of credit itself is not a transfer of "debtor" property. This is supposedly dictated by the well-known "independence" principle that governs letters of credit as a matter of state law. Instead, the creditor is held liable as the beneficiary of the issuing bank's security interest. The authors show that such reasoning is self-defeating. On Deprizio grounds, if the creditor is liable for the security interest, so is the bank (as "initial transferee"). The authors argue that only the repeal of the independence principle by the federal law of voidable preferences makes sense of standby letters of credit. The authors present a reconceptualization of the entire tripartite relation between issuing bank, account party and beneficiary, in order to assess the voidable preference risk creditors and banks face in light of the account party's bankruptcy.

Suggested Citation

Carlson, David Gray and Widen, William H., Letters of Credit, Voidable Preferences and the 'Independence' Principle. Available at SSRN: https://ssrn.com/abstract=229306

David Gray Carlson (Contact Author)

Yeshiva University - Benjamin N. Cardozo School of Law ( email )

55 Fifth Ave.
New York, NY 10003
United States
212-790-0210 (Phone)
212-790-0205 (Fax)

William H. Widen

University of Miami - School of Law ( email )

P.O. Box 248087
Coral Gables, FL 33146
United States

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