Letters of credit (L/Cs) provided by tenants to US landlords to guarantee that rental payments will be made may not hold up if the tenant goes into bankruptcy, according to a partner at the law firm, Day Pitney.

In an interview with the Metropolitan Corporate Council (MCC) publication, another lawyer from the US law firm says he believes that L/Cs still have some utility for landlords.

Court decisions

According to partner in Day Pitney's Commercial Real Estate and Development Transaction Practice Group, Jerome Berkman, the status of a L/C supplied by a tenant who is about to go into bankruptcy may not be seen by the courts as wholly outside the bankrupt estate.

Berkman concedes that the L/C is an independent obligation of a bank but says that the bankruptcy courts and federal appellate courts have recently tended to apply the same rules to L/Cs as have been applied to cash security deposits.

No excess proceeds

The lawyer reckons that if, for example, a landlord has received a L/C in an amount in excess of the statutorily allowed damages in bankruptcy it will not be permitted to keep the excess proceeds.

Instead the landlord would have to put excess proceeds back into the creditors' pool of funds.

A partner in Day Pitney's Distressed Assets and Bankruptcy and Creditors' Rights Practice Groups, James Tancredi, argues that L/Cs still provide a useful tool for landlords.

He says L/Cs remain useful because they are not subject to the automatic stay in bankruptcy - unless there is some prerequisite to give the debtor notice before drawing on the L/C, which, Tancredi says, is seldom the case.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.