Of Competing Claims to Excess Letter of Credit Proceeds

Abstract

The author examines transactions in which a letter of credit beneficiary draws on the credit for an amount that ultimately exceeds the amount to which the beneficiary has a valid claim, and analyzes who is entitled to these overdrafts. The author concludes that, generally, the letter of credit applicant (or its trustee in bankruptcy) has the superior claim to the excess payment held by the beneficiary, superior to claims of the beneficiary and to claims of the bank issuer - and arguably to third parties, whose claims to the excess are derivative of the applicant's rights.