Collecting on A Letter of Credit to Circumvent Bankruptcy

bankruptcyBusinesses should be wary of language in contracts. Attempting to promise that amounts of money borrowed in particular could read in a phrase such as… “shall be payable without regard to the existence or notice of existence of any dispute, litigation, bankruptcy, or arbitration. Unless, the issuer is prevented from doing so by a court of competent jurisdiction.”  These types of clauses run directly afoul of the automatic bankruptcy stay.

Referred to simply as an LC, this is something that is typically furnished by a bank. Often companies will obtain a letter of credit that by their nature states it is collectable.  Even cited as collectable without limitations of disputes and even court proceedings like bankruptcy.

The savvy business understands to look beyond these words and evaluate this. And even though companies have the freedom to contract for terms that ordinarily may not be considered wise, enforcing those terms may be problematic when it comes to obstacles like bankruptcy.

A filing of bankruptcy triggers a blanket prohibition.  An automatic bankruptcy stay is triggered by Bankruptcy Code Section 362(a), and thus bars collection efforts by a bank and other creditor actions against the debtor and/or his property once the bankruptcy has been filed. As soon as the debtor filed for bankruptcy protection, the provisions of Bankruptcy Code Section 362(a) immediately spring into place to form a protective barrier of sorts around the debtor and his assets.

Here are six things to keep in mind:

(1) The commencement or continuation; which includes the issuance or employment of process. And this implies of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title. This can also entail to recover a claim against the debtor that arose before the commencement of the case under this title.

(2) The enforcement against the debtor or against property of the debtor’s estate, of a judgment obtained before the commencement of the case under this title.

(3) Any act to obtain possession of property from the debtor. This includes action to take hold of an estate or gain property within estate or to exercise control over property of an estate.

(4) Any act to create, perfect, or enforce any lien against property of an estate held by the debtor.

(5) Any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title.

(6) Any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title.

To learn more about ‘A Letter of Credit to Circumvent Bankruptcy’ and to understand ways to overcome obstacles concerning bankruptcy, contact HVP attorneys.

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