Letters of credit, voidable preferences, and the "independence" principle

When a creditor receives a letter of credit on antecedent debt just before a debtor's bankruptcy, courts have ruled that the letter of credit Itself i s not a transfer of "debtor" property. This is supposedly dictated by the w ell-known "independence" principle that governs letters of credit as a matt er of state law. Instead, the creditor is held liable as the beneficiary of the issuing bank's security interest. The authors show that such reasoning is self-defeating On Deprizio grounds, if the creditor is liable for the s ecurity interest. so is the bank (as "initial transferee"). The authors arg ue that only the repeal of the independence principle by the federal law of voidable preferences makes sense of standby letters of credit. The authors present a reconceptualization of the entire tripartite relation between is suing bank, account parry, and beneficiary, in order to assess the voidable preference risk creditors and banks face in light of the account party's b ankruptcy.