Business law firm Buchalter has published advice to landlords holding letters of credit (L/Cs) issued by Silicon Valley Bank (SVB), and landlords where the collapsed bank is a tenant.

SVB was placed in receivership last week by the US Federal Deposit Insurance Corporation (FDIC), raising many questions amongst banks, businesses and other parties to L/Cs involving the failed tech-specialist bank (DC World News, 13 March 2023).

Unsecured creditors

Holders of L/Cs issued by SVB are unsecured creditors of the bank. Leases should however allow landlords to require tenants to obtain a new L/C from a bank acceptable to the landlord according to Buchalter.

The law firm says landlords should contact their tenants and ask what the tenant is going to do now that the US government has said it will make all SVB customers whole on the money the customers have on deposit with the bank, or move their accounts to a new bank.

Default position unclear

Less clear according to Buchalter is what landlords can do if there is a current lease default or event that entitles the landlord to immediately draw on the L/C.

While there may ultimately be a buyer of the bank that acquires both its assets and liabilities, that provides little comfort over the next two or three weeks that a landlord submitting a draw demand under a properly issued L/C will be able to get its funds in a timely manner.

Repudiation possible

Additionally, it is possible that the bank's liabilities will not be acquired by a third party, in which case the FDIC could choose to repudiate any L/C.

There is established authority classifying a L/C as a contract subject to repudiation by the FDIC, as receiver. But there is simply no easy resolution of this situation Buchalter's concludes.

Buchalter's Advice to Landlords Holding Letters of Credit Issued by Silicon Valley Bank, and Landlords Where Silicon Valley Bank is a Tenant can be found here.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.