Professor Alan Resnick, Benjamin Weintraub Distinguished Professor of Bankruptcy Law, authored “Letter of Credit as a Landlord’s Protection Against a Tenant’s Bankruptcy: Assurance of Payment or False Sense of Security?” recently published in The American Bankruptcy Law Journal. The American Bankruptcy Law Journal publishes articles that have been peer-reviewed by leading bankruptcy scholars. The Journal is published by the National Conference of Bankruptcy Judges.
“In commercial lease transactions, landlords often accept letters of credit issued by a bank to secure the tenant’s obligations,” said Resnick. His research has found that courts are in disagreement, and some courts use faulty reasoning, on the degree of protection that a letter of credit gives the landlord in the event of the tenant’s bankruptcy.
Resnick believes that “landlords should be aware that letters of credit, which are usually the most reliable form of credit enhancement, may provide a false sense of security rather than total protection in the event of the tenant’s bankruptcy,” he said. “I propose a judicial approach, as well as legislation, to correct this problem so that letters of credit will give landlord’s greater protection consistent with general bankruptcy principles.”