In March 2023, Silicon Valley Bank failed on a Friday morning, and every commercial landlord holding a letter of credit issued by SVB spent the weekend holding paper worth nothing. The instrument itself had not changed. The lease still said the landlord could draw on default. But a standby letter of credit is only as good as the bank standing behind it, and for about 48 hours, until the FDIC confirmed the newly created bridge bank would honor outstanding letters of credit, there was no bank standing behind it at all.[1]
That gap is not the only place a letter of credit behaves differently from the cash security deposit it has largely replaced. Landlords like letters of credit because they are supposed to be easier to draw on and harder for a tenant in trouble to claw back. Two recent rulings test both halves of that assumption, and they land in opposite directions.
A letter of credit answers to the terms of the instrument and the bank that issued it, not to the lease it secures or the bankruptcy court supervising everything else around it.
1. The draw right survives the lease, because the bank’s promise is separate from it. In 2020, Ontario’s Court of Appeal ruled on a $2.5 million letter of credit backing an industrial lease after the tenant’s trustee disclaimed the lease in bankruptcy.[2] The lower court had limited the landlord to a fraction of that amount. The Court of Appeal reversed, holding that a letter of credit runs on the “autonomy principle”: the bank’s obligation to pay is independent of whatever is happening to the underlying lease, and a trustee walking away from the lease does not touch a promise the tenant’s bank made directly to the landlord. The landlord kept the full $2.5 million.
2. U.S. bankruptcy courts have reached similar results for two decades, on similar reasoning. Because letter-of-credit proceeds are the bank’s money and not the tenant’s, they generally sit outside the bankruptcy estate and outside the automatic stay that freezes almost everything else the moment a Chapter 11 petition is filed. A Delaware court reached that conclusion in 1998, a Maryland court reached it again in 2001, and an unpublished Delaware ruling in an earlier case reached it a third time on a landlord’s motion for summary judgment.[3] None of it depends on what the lease says about mitigation, or damages, or good faith. It depends on the letter of credit being a contract between the tenant’s bank and the landlord that the tenant is not a party to.
3. None of that is unconditional. A 2026 Delaware ruling in the Tupperware bankruptcy put a ceiling back on it. Tupperware’s headquarters lease with Spirit Realty required a $10 million letter of credit. After Tupperware defaulted, Spirit drew $9.5 million. Tupperware’s asset buyer, which had picked up the reimbursement obligation to the issuing bank, sued to claw back the excess, arguing the draw exceeded the statutory cap on landlord damages under Section 502(b)(6): the greater of one year’s rent or 15 percent of the remaining term, capped at three years.[4] The court refused to dismiss the suit, holding that even though the proceeds themselves sit outside the estate, a landlord who takes more than the cap allows can still be ordered to hand the difference back. The independence principle gets the landlord paid first. It does not necessarily let the landlord keep the full amount.
Put the three rulings together and the shape of the risk becomes clear. A tenant heading into bankruptcy should assume the landlord draws the full letter of credit early and fast, stay or no stay, disclaimer or no disclaimer. A landlord should not assume that draw is the end of the conversation if the lease priced the letter of credit as a security deposit rather than a straight damages payment; a court can still order money returned once the 502(b)(6) math is done.
The piece that gets skipped in most lease negotiations is the SVB scenario: who is the issuing bank, and what happens to the letter of credit if that bank fails before the lease does. A lease that requires “a letter of credit from a bank reasonably acceptable to Landlord” sounds like adequate protection until the tenant’s only relationship is with a regional bank that later gets placed into receivership. The FDIC’s bridge-bank fix in 2023 covered outstanding letters of credit as a matter of policy, not because any lease required it, and a landlord who wants that protection written down rather than assumed needs specific replacement-bank language: a defined list of acceptable issuers, a deadline to replace an LC from a downgraded or failed bank, and a default remedy if the tenant does not.
This sits next to a broader pattern in how landlords secure leases against a tenant’s inability to pay. A personal guaranty reaches past the entity to an individual’s assets; a letter of credit reaches past the tenant to a bank’s balance sheet. Both are ways of moving the credit risk somewhere other than the tenant’s own ability to pay rent, and both get negotiated far less carefully than the base rent they are meant to backstop.
Tracking which lease has which version#
A portfolio built up over a decade rarely has one answer to “what happens if this tenant defaults and then files.” Some leases specify a straight cash deposit, some a letter of credit with an evergreen renewal clause, some a hybrid that steps down as the tenant hits rent milestones, and the issuing-bank language ranges from a named list of approved banks to nothing at all. Acrebase extracts the exact security and default language from every lease in a portfolio, flagging which ones carry a letter of credit, what bank-acceptability standard each one uses, and which are silent on what happens if the issuer fails or merges, tracing every answer back to the source clause instead of a spreadsheet someone built once and never revisited.
It also applies a firm’s approved clause library automatically, so a landlord’s standard issuing-bank standard, or a tenant’s standard evergreen-renewal language, gets proposed the same way on every deal rather than depending on who drafted that particular lease. Its AI, trained on a firm’s own negotiation history, can flag when a counterparty’s letter-of-credit language departs from what the firm has accepted, or fought over, before.
If you are a tenant, check who is actually on the hook if your issuing bank fails, and do not assume a bankruptcy filing pauses a landlord’s right to draw the way it pauses a lawsuit. If you are a landlord, get the issuing-bank standard and replacement timeline into the lease in writing, and if a tenant heads into bankruptcy, know that drawing fast protects you, but drawing more than the statutory cap allows can still come back as a claim against you later.
Footnotes
[1] Buchalter, “Advice to Landlords Holding Letters of Credit Issued by Silicon Valley Bank, and Landlords Where Silicon Valley Bank Is a Tenant” (March 2023) — describes the FDIC’s confirmation that the SVB bridge bank would honor outstanding letters of credit after the March 2023 receivership. https://www.buchalter.com/insights/advice-to-landlord-holding-letters-of-credit-issued-by-silicon-valley-bank-and-landlords-where-silicon-valley-bank-is-a-tenant/
[2] 7636156 Canada Inc. (Re), 2020 ONCA 681 (Ont. C.A., Oct. 28, 2020) — Court of Appeal held a landlord was entitled to draw the full $2.5 million letter of credit under the autonomy principle, even after the tenant’s trustee disclaimed the lease in bankruptcy. https://insolvencylawacademy.com/wp-content/uploads/2022/09/Re-7636156-Canada-Inc-2020-ONCA-681.pdf
[3] In re PPI Enterprises (U.S.) Inc., 228 B.R. 339 (Bankr. D. Del. 1998); Musika v. Arbutus Shopping Center L.P. (In re Farm Fresh Supermarkets of Md., Inc.), 257 B.R. 770 (Bankr. D. Md. 2001); Darwin Networks Inc. v. NPE Assets Mgmt. L.P. (In re Darwin Networks Inc.), Adv. Proc. No. A01-4601 (Bankr. D. Del., unpublished) — landlords permitted to retain letter-of-credit proceeds without disgorgement under the independence principle. https://www.abi.org/abi-journal/landlords-use-letters-of-credit-to-bypass-the-claim-cap-of-502b6
[4] Party Products LLC v. Spirit Realty, L.P. (In re Tupperware Brands Corp.), Adv. Proc. (Bankr. D. Del. 2026) — court declined to dismiss a suit seeking to claw back letter-of-credit proceeds exceeding the Section 502(b)(6) cap on landlord damages. https://natlawreview.com/article/letters-credit-tenant-bankruptcy-landlord-rights-ss-502b6-cap-and-recent-tupperware
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