The use of standby letters of credit in commercial transactions continues to grow. In the case of a commercial letter of credit, it is intended by the parties that the credit under the letter will be drawn in the completion of a transaction. In the case of a standby letter, the credit will be drawn only after some party has failed to meet its obligations. Obtaining a letter of credit in lieu of a cash bond or collateral is viewed with increasing favor by businesses, governments, and the courts. The attractiveness is due to the essential nature of a letter of credit transaction. With a letter of credit, the lender’s credit, rather than the credit of the borrower, is on the line. This provides parties with certain advantages in bankruptcy and greatly increases the probability of ultimate payment. (more…)
Posts Tagged ‘line of credit’
Standby Letters of Credit
Friday, April 2nd, 2010Default and Prepayment Language Does Not Defeat a Demand Note
Friday, March 12th, 2010In a case recently decided by the U.S. 7th Circuit Court of Appeals, the Court upheld that a bank was not liable for breach of contract or fraud for pointing out that the note was payable on demand to the borrower. In this case, a development company obtained a line of credit. The line of credit was a demand note, meaning that the bank could demand payment in full at any time of the outstanding balance. Although the note was not in default, the Bank asked the Borrower to term out a portion of the note with a loan to a related entity and to reduce the remaining availability on the line of credit. The Borrower was not expecting this request and asked about the consequences if it did not make these changes. The Bank responded by pointing out to the Borrower that this was a demand note and that it was possible that the Bank could demand payment in full at any time. (more…)