OF COMPETING CLAIMS TO EXCESS LETTER OF CREDIT PROCEEDS

In this article, the author examines transactions in which a letter of credit beneficiary draws on the credit for an amount that ultimately exceeds the amount to which the beneficiary has a valid claim, and analyzes who is entitled to these overdrafts. The author concludes that, generally, the letter of credit applicant (or its trustee in bankruptcy) has the superior claim to the excess payment held by the beneficiary superior to claims of the beneficiary and to claims of the bank issuer. Allowing the applicant or its trustee in bankruptcy to recover from the beneficiary excess payments made under the credit does not offend letter of credit law. That applicant's claim to recover that excess, furthermore, is superior to that of the letter of credit issuer, unless the issuer has taken from the applicant an assignment of that claim or has a security interest in it.