As you know, bank failures have become endemic and given the turmoil in the economy, show no signs of abating. We believe that beneficiaries of standby letters of credit should review their documents and take immediate action to ensure that they have the protection that they bargained for and expected.

Many people holding standby letters of credit assume they are the equivalent of cash. In some instances, they have even been considered to be superior to cash because of case law inhibiting the rights of landlords to access cash security deposits in bankruptcy situations.

However, standby letters of credit issued by FDIC insured banks that go into receivership may be worthless. Parties to a letter of credit transaction should carefully examine their documents to ensure that they have the right to require a replacement of the letter of credit in the event that the issuing bank becomes a troubled institution.

While a letter of credit is generally a boiler-plate document, most banks will agree to a draw down provision if the bank's credit rating drops below a specified level. If your documents do not presently provide such a provision, you should consider requesting an immediate amendment of the document.

The FDIC has made it abundantly clear that it does not have to honor undrawn standby letters of credit by a bank that has been placed under government receivership or conservatorship. In addition, the Supreme Court has held that letters of credit are not typically considered deposits and are not protected by FDIC insurance.

If you have any questions regarding letters of credit or require appropriate contractual language for new or existing letters of credit please contact Ted Tashlik of our office at (516) 466-08006 or ttashlik@TKGClaw.com.