Wysko Investment Company v. Great American Bank: A New Attack on the Usefulness of Letters of Credit

Gavigan, Robert Jay | January 1, 1993

The letter of credit has long been accepted as a valuable instrument of assured payment in international business. In Wysko Investment v. Great American Bank, however, an Arizona district court jeopardized the usefulness of the letter of credit transaction by enjoining payment to the beneficiary after the issuing party became insolvent.’ This note addresses the issue of whether a bankruptcy court has the power to enjoin payment of a letter of credit issued by the debtor’s principal, pursuant to 11 U.S.C. ยง 105(a), when the court finds the injunction necessary for the debtor’s reorganization. Further, this note examines whether such an injunction represents an unreasonable burden on letters of credit as commercial devices. Although a valid argument can be made that the bankruptcy court has the power to issue this injunction, the Wysko decision represents an unreasonable expansion of the equitable powers of the bankruptcy court and an exception to the respect for the “independence principle” historically afforded to letters of credit by other courts. The policies behind the Wysko decision, if followed, will have a significant chilling effect on the uses of letters of credit.