Draw on Letter of Credit Has Same Effect As Cash Forfeiture

It is well-settled that "property of the estate" is broadly defined under section 541 of the Bankruptcy Code as including all legal and equitable interests of a debtor. Therefore, the breadth of property of the estate includes a debtor's indirect, residual or reversionary interest in the return of funds. It is also equally acknowledged that, in general, a letter of credit (LC) is an independent obligation of the issuing bank and, under the "independence principle," is not necessarily property of the estate. From time to time, these two concepts -- broad estate interest in property versus the treatment of a LC -- clash in bankruptcy. In these instances, some courts will look at "substance" and not "form" to determine whether the debtor's residual interest in an LC is property of its estate.

17 minute read May 27, 2004 at 10:17 AM
By
Adam C. Rogoff, Steven M. Herman and Deborah Piazza
Draw on Letter of Credit Has Same Effect As Cash Forfeiture

It is well-settled that “property of the estate” is broadly defined under section 541 of the Bankruptcy Code as including all legal and equitable interests of a debtor. Therefore, the breadth of property of the estate includes a debtor's indirect, residual or reversionary interest in the return of funds.

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