Executive Summary
- What’s new: Two recent decisions, one from the Southern District of New York and one from the Fourth District Appellate Court of Illinois, have reached a common conclusion: A standard auto-extension clause in a letter of credit that provides for an automatic extension for one year from the stated expiration date or any future expiration date does not create an evergreen instrument that renews indefinitely.
- Why it matters: Issuing banks may refuse to honor the draw on such letters of credit on the premise that such letters of credit have already expired, which means that the court decisions may create significant risk for beneficiaries and applicants that rely on such “evergreen” letters of credit.
- What to do next: Market participants should (i) review outstanding letters of credit with such clauses, (ii) consider replacement letters of credit or amendments that include express “successive” renewal provisions and (iii) use final expiration dates when drafting to guard against strict judicial construction.
__________
Two Courts, One Message: Auto-Extension Does Not Mean Evergreen
A January 2026 decision from the U.S. District Court for the Southern District of New York held that an auto-extension clause in a letter of credit did not create an evergreen instrument (resulting in the letter of credit’s expiration after a single, one-year extension even though the issuing bank never sent a notice of nonrenewal to the beneficiary).
This follows a March 2025 Illinois appellate decision that reached a similar conclusion. The Illinois court took a strict construction of customary auto-extension language in a letter of credit and determined that the letter of credit in question only renewed for a single term.
For market participants who have long treated such clauses as creating self-renewing, evergreen instruments, these rulings represent a serious disruption to settled expectations and prompt an immediate review of outstanding letters of credit with such clauses.
Starr Indemnity & Liability Company v. Midwest Mortgage Associates Corporation
In Starr Indemnity & Liability Company v. Midwest Mortgage Associates Corporation, No. 25-cv-4874 (S.D.N.Y. Jan. 21, 2026), the court addressed a letter of credit issued in 2017 by Midwest Mortgage Associates Corporation (Midwest) with Starr Indemnity & Liability Company (Starr) as the beneficiary. GKD Management LP and A&G Commercial Trucking had obtained the letter of credit as collateral to secure their obligations to Starr under an insurance and risk-management payment agreement.
The letter of credit contained the following auto-extension language and did not otherwise include a final expiration date:
“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.” (emphasis added)
Seeking to draw on the letter of credit in April 2025, Starr argued that this clause created successive one-year renewals — a true evergreen letter of credit —and that because Midwest never sent Starr a notice of nonrenewal, the letter of credit should have been in effect when Starr attempted to draw on it approximately eight years after its original issuance.
The court disagreed and granted summary judgment in favor of Midwest, holding that the phrase “any future expiration date” did not indefinitely extend the maturity of the letter of credit. Rather, the court interpreted those words as holding open the possibility that the parties might subsequently agree to amend the letter of credit to establish a new expiration date.
The court concluded that the extension clause only provided for a single automatic extension of one year and, while the clause contemplated the possibility of further amendments to the expiration date, the clause did not allow for indefinite renewal and lacked in language that would make the letter of credit evergreen. As a result, the letter of credit expired in 2019 and Starr’s draw on the expired instrument was properly dishonored.
In reaching this conclusion, the court distinguished two out-of-circuit decisions where the underlying letters of credit at issue referred to extensions for “additional one year periods” or automatic renewals on “a month to month basis” (emphasis added). The court found such language unmistakably intended to create evergreen instruments, in contrast to the language used in the Starr letter of credit.
People ex rel. Department of Natural Resources v. Regions Bank
Nearly a year prior to the SDNY ruling, the Fourth District Appellate Court of Illinois reached a strikingly similar conclusion in People ex rel. Department of Natural Resources v. Regions Bank, 2025 IL App (4th) 230085-U (March 27, 2025).
That case involved a letter of credit issued in December 1985 by First National Bank of Wood River (a predecessor to Regions Bank) at the request of Surefire Coal, Inc. (Surefire) with the Illinois Department of Natural Resources as beneficiary. The letter of credit at issue was required as collateral to secure Surefire’s performance obligations under a mining permit. In 2016 — more than 30 years after the letter of credit’s issuance — the Department of Natural Resources attempted to draw on the letter of credit after Surefire defaulted on its mining obligations following Surefire’s involuntary dissolution in 2005. Regions refused to honor the draw, asserting that the letter of credit had expired in 1987 after a single, one-year renewal.
The renewal clause at issue provided the following and did not include any outside expiration date:
“This Letter of Credit will automatically extend for an additional term of One (1) year unless [First National Bank] provides at least ninety (90) days notice prior to the expiration date that it does not wish to extend the Letter of Credit for an additional period.” (emphasis added)
While the trial court had found that this language constituted a valid evergreen provision, the appellate court reversed the trial court’s finding.
The appellate court focused on the precise words of the renewal clause, reasoning that the phrase “an additional term of One (1) year” meant the letter of credit renewed for a singular, one-year term only. In addition, the court noted that “the lack of a specified termination date does not preclude the letter’s termination if the text of the renewal clause plainly limits the letter to one renewal for a one-year term.” The court observed that the drafters “could have written ‘additional terms,’ in the plural, but they did not.”
In reaching this conclusion, the court distinguished two cases where courts in Illinois had found evergreen provisions in letters of credit that (i) “automatically extended without amendment for one year from the present or any future expiration date hereof” (although the New York court found that similar language to this did not create an evergreen letter of credit in the Starr case) or (ii) “automatically extended for additional one year terms” (emphasis added).
Finally, the court also rejected the Department of Natural Resource’s argument that the irrevocable nature of the letters of credit made them perpetual and declined to consider extrinsic evidence, citing the unambiguous nature of the renewal clause at issue.
Unique Circumstances or a Judicial Trend
Both the Starr case and the Regions Bank case contain unique facts that may have encouraged each court to narrowly interpret the letters of credit at issue.
In Regions Bank, the letter of credit at issue was outstanding for over 30 years before the beneficiary presented it for payment. That presentation came more than 10 years after the original applicant had been involuntarily dissolved. Practically speaking, permitting letters of credit that have been outstanding for decades to continually renew could inadvertently create unintended perpetual obligations. These facts may have led the appellate court to narrowly interpret the letter of credit at issue in that case.
While the elapsed time period in Starr was less egregious than the 30 years involved in the Regions Bank case, the beneficiary in Starr originally indicated — at the time the letter of credit was first issued — that Midwest was not an NAIC-approved bank and therefore the applicant needed to replace the letter of credit with one from an approved bank. The applicant never provided a replacement letter of credit and the beneficiary did not insist on one. The fact that the beneficiary was initially unwilling to accept the letter of credit but then sought to draw on it eight years after its original issuance may have been a factor in leading to the court’s more narrow interpretation of the auto-renewal provisions.
The outcome remains that auto-renewal provisions have come under scrutiny from courts and are susceptible to challenge if not drafted with greater clarity and precision.
Why These Decisions Matter
These two rulings, taken together, represent consequential decisions for the letter of credit market generally and the broader credit market in which they operate for the following reasons:
- First, as evidenced by the cases at issue, the language in these “evergreen” letters of credit is very common, and parties clearly intend that such letters of credit renew on an automatic basis for successive additional periods. Outstanding letters of credit may contain this language and, unbeknownst to the beneficiaries or applicants, may have already expired. Letters of credit that are beyond the expiration date of their first automatic renewal period are most susceptible to the judicial interpretations laid out in these cases.
- Second, the two courts that reached these conclusions are located in jurisdictions (New York and Illinois) that handle an outsized portion of commercial financing transactions that are implicated by these rulings. Though neither case has been decided by the highest appellate court in either jurisdiction, the cases establish precedent that will be persuasive (and in some cases binding) on other courts in their respective jurisdictions.
- Third, the New York court in the Starr case did not reference at all the Illinois Regions Bank case and independently reached the conclusion that the Starr letter of credit did not constitute an evergreen instrument. This suggests that courts are more narrowly and strictly construing the renewal clauses in letters of credit, despite assumptions in the market that such clauses create evergreen letters of credit that automatically renew for multiple periods.
Protective Drafting Going Forward
Not all auto-extension clauses are equally vulnerable. Letter of credit issuers, beneficiaries and applicants can refer to the Institute of International Banking Law & Practice’s ISP98 Model Form 2, which uses language that appears far more insulated to the reasoning adopted by these courts:
“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 [e.g., 30] 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.” (emphasis added)
Two features of this model language are particularly important.
- First, the reference to “successive” automatic extensions makes clear that the automatic renewal feature of this letter of credit is recurring — precisely the type of plural and repeating language that the courts in both Starr and Regions Bank identified as necessary to create an evergreen instrument. This is in stark contrast to singular references to “one year” renewals or “an additional period of one year.”
- Second, the inclusion of a final expiration date provides certainty that the letter of credit continually renews to at least some fixed date in the future beyond the first automatic renewal period and therefore does not create a perpetual obligation.
Parties involved in credit facilities or other commercial arrangements that rely on evergreen letters of credit should consider the following steps.
- Companies should review existing letters of credit promptly to determine whether their auto-extension clauses contain singular renewal language similar to the Starr case or the Regions Bank case.
- Where letters of credit contain vulnerable language, parties should seek to have replacement letters of credit or amendments issued with express “successive” renewal provisions or, at a minimum, on or prior to each renewal date of such letters of credit, should ask issuing banks to confirm in writing the expiration date of such letters of credit.
- Going forward, new letters of credit that are intended to be evergreen should include both express language providing for successive renewals and a final or outside expiration date to guard against strict judicial construction.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.
For further information, please contact:
Danielle Li, Partner, Skadden
danielle.li@skadden.com
