Letters of Credit, Voidable Preferences and the 'Independence' Principle
Posted: 30 Jun 2000
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: Suggested Citation