This alert is meant to supply some valuable information for landlords that currently hold tenant letters of credit from Silicon Valley Bank (“SVB”).
SVB was closed this morning by the California Department of Financial Protection and Innovation, which appointed the FDIC as receiver. The takeover of SVB by the FDIC creates immediate issues for landlords with tenant letters of credit from SVB. Under FIRREA, the FDIC, as receiver for a failed bank, is expressly empowered to “repudiate contracts.” 12 U.S.C. § 1821(e)(1). Among other things, the FDIC, as receiver, may repudiate or disaffirm contracts that it determines will hinder the orderly administration of the receivership. In the letter of credit context, the FDIC commonly takes the position that undrawn standby letters of credit constitute contingent obligations of the issuing bank under FDIC receivership, which may be repudiated by the FDIC acting in its capacity as receiver. The FDIC’s ability to repudiate such letters of credit has specifically been affirmed by the courts as recently as 2021. See, e.g., Lexon Ins. Co. v. FDIC, 7 F.4th 315, 322-24 (5th Cir. 2021).
As a result, SVB’s executory letters of credit may be of no value unless a buyer of the assets of the old SVB agrees to assume such liabilities (an outcome which is presently unknown, but about which more may be learned in the coming days).
Based on the foregoing, our multidisciplinary legal team (spanning our real estate, creditors rights, and litigation practice groups) has developed a number of legal and business strategies regarding letters of credit and related leasing and transactional matters in the context of the SVB receivership. These strategies are oriented towards actions that may be taken vis-à-vis the FDIC and the buyer or buyers of the old SVB; those actions that may be taken vis-à-vis the applicable tenant, which actions are somewhat related to the language of the specific lease in issue regarding letters of credit, but could include a request for a replacement letter of credit; and those actions or discussions that may relate to a landlord’s lender.
