Opinion ID: 569328
Heading Depth: 2
Heading Rank: 2

Heading: Standby Letters of Credit.

Text: 43 At this point, some discussion appears to be in order regarding the nature of the standby letter of credit. The standby letter of credit is a hybrid financing mechanism, borrowing features from both the guaranty and commercial letter of credit. Like a guaranty agreement, the standby letter of credit may be drawn upon only in the event of the default of a debtor whose loan is collateralized by the letter of credit. However, the standby letter of credit, like the commercial letter of credit evidences, a principal, as opposed to ancillary, obligation--that is, the issuer's liability attaches pursuant to the issuer's own terms, without regard to performance of the underlying contract. In other words, the issuer of a standby letter of credit has a duty to pay which arises upon presentation of the complying documents. The principal difference between the traditional letter of credit and these newer standby letters of credit is that, whereas in the classical setting the letter of credit contemplates payment upon performance, the standby credit ... contemplates payment upon failure to perform. 13 44 The term standby letter of credit is defined at 12 C.F.R. § 32.2(e) (emphasis added) as follows: 45 A 'standby letter of credit' is any letter of credit, or similar arrangement, however named or described, which represents an obligation to the beneficiary on the part of the issuer (1) to repay money borrowed by or advanced to or for the account party, or (2) to make payment on account of any indebtedness undertaken by the account party, or (3) to make payment on account of any default by the account party in the performance of an obligation. 46 The plain definition of this financing mechanism belies appellant's contention that the parties do not expect that the standby letter of credit will ever be utilized. The Code of Federal Regulations further provides at section 32.2(a) and (d) that, for the purposes of calculation of the amount of loans and extensions of credit to any one borrower, both standby letters of credit and guaranties are considered loans or extensions of credit, i.e., as any direct or indirect advance of funds. 12 C.F.R. § 32.2(d). Thus, the lending limit regulations treat a standby letter of credit not as contingent liability, but as a loan--that is, as though the credit had been extended as of the date of commitment. 47