SDNY Limits Automatic Renewals of Letters of Credit

JD Supra Finance & Banking

Filed March 31st, 2026

Detected April 1st, 2026

Summary

The U.S. District Court for the Southern District of New York held that a commonly used auto-extension clause in a letter of credit (LC) did not create an evergreen or perpetual instrument, causing the LC to expire after a single one-year extension despite no notice of nonrenewal being sent. The court interpreted the phrase 'any future expiration date' as merely preserving the possibility of later amendments, not providing for indefinite renewal. Credit facilities more than two years old that rely on LCs as collateral may face LC validity issues.

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What changed

The SDNY ruled on a letter of credit containing an auto-extension clause stating the LC would 'automatically be extended without amendment for one (1) year from the expiration date hereof or any future expiration date, unless sixty (60) days prior to such expiration date' notice of nonrenewal was sent. The court held this language provided for only a single automatic renewal, not indefinite renewal, because 'any future expiration date' merely preserved the possibility of future amendments. The LC expired after one year, and the beneficiary's draw eight years later was properly dishonored. This decision aligns with a 2025 Illinois appellate ruling applying similar strict construction of auto-extension language.\n\nLenders, borrowers, administrative agents, and collateral agents with credit facilities governed by New York law that are more than two years old and rely on LCs as collateral should immediately review outstanding LCs to confirm they remain valid and enforceable. Affected parties should consider renegotiating LC terms to add explicit final or outside expiration dates or confirm the instruments have been properly renewed through other means. The decision creates significant legal risk for existing credit facilities if LCs are found to be legally ineffective.

What to do next

Review all outstanding letters of credit in credit facilities governed by New York law that are more than two years old
Assess whether auto-extension clauses in existing LCs provide for single or indefinite renewals under the SDNY interpretation
Consult legal counsel regarding LC replacement, renegotiation, or amendment to add explicit final expiration dates

Source document (simplified)

March 31, 2026

The Growing Trend to Limit Automatic Renewals of Letters of Credit

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[co-author: Connor A. Cruz]

Highlights

The U.S. District Court for the Southern District of New York held that a commonly used auto-extension clause in a letter of credit did not create an evergreen instrument, causing the letter of credit (LC) to expire after a single one-year extension.
The ruling, together with a recent Illinois appellate decision, signals a trend toward strict judicial interpretation of auto-extension language, creating risk for existing credit facilities that rely on LCs as collateral.
Credit facilities more than two years old may be especially vulnerable, and lenders and borrowers should review outstanding LCs to confirm they remain valid and enforceable. A recent decision from the U.S. District Court for the Southern District of New York (SDNY) should prompt immediate attention from borrowers, lenders, administrative agents and collateral agents with existing credit facilities. In its decision, the court held that a commonly used automatic extension clause in a letter of credit (LC) did not create an "evergreen" or perpetual instrument – meaning the LC expired after a single one-year extension, even though no notice of nonrenewal was ever sent. A major takeaway of this decision is that if an organization is a party to a credit facility that is governed by New York law, is more than two years old and relies on LCs as some or all of its collateral, the ruling could mean that some of those LCs are already legally ineffective.

The SDNY Decision

The LC at issue contained the following auto-extension language:

This Letter of Credit is deemed to be automatically extended without amendment for one (1) year from the expiration date hereof or any future expiration date, unless sixty (60) days prior to such expiration date, we notify you by regular mail and registered mail at the above address, … that this Letter of Credit will not be renewed for any such additional period.

The beneficiary argued that this clause created successive one-year renewals, or a true evergreen LC, and that since the issuer did not send a notice of nonextension, the LC should still be in effect when the beneficiary attempted to draw on it eight years after its issuance. The LC did not contain a final or outside expiration date.

The court disagreed. It ruled that the phrase "any future expiration date" did not create an indefinite renewal mechanism. Instead, the court interpreted those words as merely holding open the possibility that the parties might later amend the LC to establish a new expiration date. In that context, the court interpreted the auto-extension clause as allowing a single automatic renewal and contemplating possible later amendments, but it did not provide for indefinite renewal. The result: The LC expired after a single one-year extension, and the beneficiary's draw was properly dishonored.

Why This Decision Matters

This ruling is significant for three reasons:

The decision was rendered in a critical jurisdiction. Because SDNY is the forum for a substantial volume of commercial lending disputes and many LCs are governed by New York law, this ruling carries outsized practical weight even as a district court decision. If it is not successfully appealed or distinguished, it creates an uneasy precedent for the entire LC market.
The decision follows a similar trend. The SDNY case echoes a 2025 Illinois appellate court decision, which also concluded that a single auto-extension clause – using the singular "an additional term of one year" – provided for only one extension, not indefinite renewal. Taken together, these decisions suggest a judicial trend toward strictly construing auto-extension language, even where the parties clearly intended the LC to renew indefinitely.
The language at issue is extremely common. The auto-extension clause interpreted by the court is similar to boilerplate style language found in many outstanding LCs that were assumed to have created evergreen LCs. This is where the SDNY decision becomes a risk: If an LC contains auto-extension clauses similar to the language at issue in the SDNY case and is without an outside or final expiration date, the court's reasoning leads to the troubling conclusion that those LCs may have already expired after just one year without any party realizing it. In practical terms, this means any credit facility that is more than two years old is particularly vulnerable because the single one-year extension permitted under this SDNY interpretation would have already elapsed.

Automatic Extension Clauses Moving Forward

Not all auto-extension clauses suffer from the vulnerability exposed by the SDNY decision. The Institute of International Banking Law & Practice's ISP98 Model Form 2 uses language that expressly provides for "successive" renewals, which appears far more robust under the court's reasoning:

The expiration date of this Standby shall be automatically extended for successive one-year periods, unless Issuer notifies Beneficiary by registered mail or other receipted means of delivery sent to Beneficiary's above-stated address 5 or more days before the then current expiration date that Issuer elects not to extend the expiration date. The expiration date is not subject to automatic extension beyond [date], and any pending automatic one-year extension shall be ineffective beyond that date.

Two features of the ISP98 model language are particularly important. First, the word "successive" makes it explicit that the extension is not a one-time event but an ongoing, repeating mechanism. Second, the clause includes a final or outside expiration date, which provides certainty as to the LC's maximum duration and avoids any argument that the LC is "perpetual" under New York UCC Section 5-106(d). 1 Under this SDNY decision, the inclusion of both these two features would better protect automatic extension clauses in LCs against unfavorable court interpretations.

Conclusion

The SDNY decision is a wake-up call for anyone involved in credit facilities that rely on LCs as collateral. What many market participants have long treated as standard, self-renewing instruments may, under this ruling, have long expired. This latest decision shows a growing trend of strict court interpretation, and the risk of this decision not theoretical – it is a real limitation to a long-accepted practice that could affect loan covenants, security packages and the enforceability of credit arrangements across a wide range of industries.

Notes

1 See Carter Klein, "Automatic Extension LC Issues," Documentary Credit World, Aug. 14, 2025 (discussing UCC Section 5, and the importance of including final or outside expiration dates in a LC.).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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