The Flip Side of Twist Cap: Letters of Credit as Executory Contracts in Bankruptcy
40 Pages Posted: 12 Jul 2007
This article analyzes the treatment of letters of credit as executory contracts in bankruptcy. Some courts had stated that the bankruptcy of the beneficiary terminates a letter of credit. This article concludes that decisions were incorrect in treating a letter of credit as an executory contract to provide financial accommodations to the beneficiary. A letter of credit is not a means to provide credit to the beneficiary: it is a means to provide credit to the applicant (and thereby allowing the applicant and beneficiary to avoid extending credit to each other). The issuer is not dependent on the credit risk of the beneficiary, rather that of the applicant. So terminating the letter of credit due to the beneficiary's bankruptcy does not fit the executory contract framework in bankruptcy.
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