Letter of Credit Forum

The treatment of creditors of a bankrupt bank does not offer any surprises: The beneficiary is going to be offered the treatment as an unsecured creditor.

I do not qualify this as the good news, BUT, the United States legal system, with its sense for individual justice and (thus) unpredictability treats L/Cs issued by a bankrupt applicant sometimes in surprising ways.

In bankruptcy cases the crucial question is whether payment f the credit constitutes a transfer of the debtor's property. If no property of the debtor is concerned, bankruptcy law does not apply. In a letter of credit case, one would assume that the independence principle would protect a beneficiary in the insolvency of the applicant. This view however is not always shared by US courts.

In the Postal case (Postal ./. Smith, 552 F2d 791) the bankruptcy court assumed jurisdiction arguing that payment of the credit would have an adverse impact on the debtor's assets.

When dealing with US banks, one need not only worry about their lack of cash, but also about the US legal system. BTW, this result is not supported by German law, where the courts honor the independence principle.