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Bankruptcy and The Letter of Credit Dilemma: Overcoming Challenges to Keeping LOC Proceeds

Recording of a 90-minute CLE video webinar with Q&A

This program is included with the Strafford CLE Pass. Click for more information.
This program is included with the Strafford All-Access Pass. Click for more information.

Conducted on Wednesday, August 2, 2023

Recorded event now available

or call 1-800-926-7926

This CLE webinar will discuss the effect on the beneficiary and issuer of a letter of credit (LOC) if the account party (a/k/a the applicant) files for bankruptcy. The panel will identify key provisions in LOCs, post-petition draw demands, possible preference liability and related defenses, how proceeds of the LOC are applied to an outstanding claim, and drafting strategies to minimize risks. The panel will also discuss issues that arise for the other parties if the issuer or the beneficiary files for bankruptcy.


Landlords and vendors dealing with financially volatile tenants or customers find standby LOCs attractive. If the LOC is carefully and properly drafted, and the applicant owes the beneficiary money, the beneficiary can draw on the LOC even after the account party files bankruptcy without violating the automatic stay. Whether the issuer can be reimbursed or can keep a reimbursement already paid presents separate issues.

When the applicant files bankruptcy, drawing on LOCs can quickly become complicated and unpredictable. In certain situations, debtors and trustees may seek to recover LOC proceeds as preferences or even fraudulent conveyances. If the LOC is not exercised, payments actually made by the debtor may nonetheless be attacked as preferences. If an LOC is drawn upon and the debt falls into multiple priorities, disputes may arise over where to apply the LOC proceeds.

Listen as this experienced panel of bankruptcy attorneys discusses the hidden risks of LOCs, issues that arise when an account party files bankruptcy, and what a potential beneficiary should consider before insisting on an LOC.



  1. Overview of LOCs
  2. Pre-petition draw on the LOC
  3. Post-petition draw on the LOC
  4. Preference risks and defenses
  5. Indirect transferees
  6. Strategies for beneficiaries before and after bankruptcy


The panel will review these and other key issues:

  • How are LOC proceeds applied to the cap on lease damages in Section 502?
  • When might the issuer be an indirect transferee of a preference?
  • What happens if the account party is not the debtor but a guarantor of the debtor?
  • Does it matter if the LOC is secured when the security interest arose?
  • When would drawing on an LOC violate the automatic stay?


Fitzmaurice, Patrick
Patrick E. Fitzmaurice

Pillsbury Winthrop Shaw Pittman

Mr. Fitzmaurice's practice focuses on representing lenders and other creditors in workouts, restructurings,...  |  Read More

Gardner, William
William D. Gardner

von Briesen & Roper

Mr. Gardner is a Shareholder and Chair of the firm’s Restructuring & Insolvency Section. Clients value his...  |  Read More

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