Article

Factual Summary:

The beneficiary, a manufacturer of engine generation sets, fell behind on amounts owed to suppliers. To induce the suppliers to continue to ship, the beneficiary executed an "irrevocable assignment" of the proceeds of a letter of credit issued to the manufacturer on behalf of an ultimate purchaser of the engine sets. The LC had been advised through a bank which the opinion refers to as the "collecting banker". Because the LC was freely negotiable, it is unclear if the bank had acted as a negotiating bank in forwarding documents but the opinion neither addresses the role of the bank nor states facts which would illuminate the question. This abstract will describe the bank as an "intermediary".

The beneficiary delivered a notice of the assignment, subject to UCP 500, to its intermediary bank which had advised the letter of credit. The applicant also owed this intermediary bank substantial sums under existing finance agreements. The intermediary bank notified the assignees that it would act in accordance with the assignment in the "absence of any hindrance legal or otherwise."

When the intermediary bank received funds due under the letter of credit from a partial shipment, it distributed the funds to the assignees pursuant to the terms of the assignment. After obtaining the funds from a second drawing under the credit, the intermediary bank notified the beneficiary that it would not follow the assignment instructions "owing to the delinquent nature of the Company's account in our books and the position of your overdraft liabilities." The intermediary bank retained the funds as a set off against the beneficiary's liabilities. The assignees then brought suit against the intermediary bank and the beneficiary. The intermediary bank moved for a summary disposition of the claims against it.


Legal Analysis:

1. Assignment of Proceeds: Who is Bound: The court first noted that, while the letter of credit and the assignment were expressly subject to UCP 500, the assignment was not a "UCP assignment". UCP assignments, according to the court, contemplated the assignment of the right to be paid from the issuer. In this case, the assignees had not argued that they had a right to be paid by the issuer. The issuer apparently had never received notice of the assignment, which only went to the intermediary bank and purported to assign only the right to be paid out of sums received by that bank. The court noted that this was a lesson for all counsel who represented assignees of proceeds under letters of credit.

2. Assignment of Future Rights: The intermediary bank argued that the beneficiary could not, even in equity, enforce an assignment for a future indebtedness. Since the intermediary bank had not received any funds under the letter of credit at the time of the assignment, the intermediary bank argued that the notice of assignment was not effective under English law. The court ruled, however, that English law treated future receivables as current receivables if a present contractual right existed as to the collection of those receivables. Since the beneficiary had a contractual right, which could be sued upon, for the amounts due under the letter of credit at the time of the assignment, the notice of assignment was considered, under English law, to concern existing receivables and was, therefore, effective.

3. Assignment of Proceeds As Security Interests: The intermediary bank next argued that summary disposition could not be granted in favor of the assignees because a question existed as to whether the assignment was an outright one or security. If the assignment acted as security, it had to be registered as such under English law. Having not been registered, it would be considered ineffective if found to be security. The court noted that, on its face, the assignment had all the appearances of being outright, but ruled that the intermediary bank had raised triable issues of fact as to whether the assignment was outright or security. Accordingly, summary disposition could not be granted in favor of the assignees should the court find that the assignment took precedence over the intermediary bank's rights.

4. Assignment of Proceeds: Set Off by Bank Acknowledging Assignment: The intermediary bank next argued that its pre-existing set-off agreement with the beneficiary took precedence over the assignment. The court noted that the beneficiary's liabilities to the intermediary bank existed at the time of the assignment. The assignees argued, however, that the assignment occurred prior to the receipt by the intermediary bank of any of the beneficiary's funds. As such, according to the assignees, the letter of credit funds never constituted "monies standing to the credit of any current account or deposit account" held with the intermediary bank against which the intermediary bank had a set off right. The court rejected this argument by once again noting that assignments of future receivables to which the beneficiary has a current contractual right are considered to be assignments of existing receivables under English law. Thus, as the proceeds were considered already "received" by the intermediary bank prior to the notice of assignment, the intermediary bank's set off rights took precedence over that assignment. Accordingly, the court awarded summary disposition to the intermediary bank and dismissed the assignees' action against it.

Comment:

1.The problem which gave rise to this opinion contains tantalizing questions but the opinion itself sheds little light on them. Indeed, its formulation of the facts, issues, and law call into doubt whether these questions were ever brought to the court's attention.

2. The first difficulty involves the status of the bank to which the beneficiary's assignment of proceeds had been directed. The opinion describes it as a "collecting bank" and it was nominated to advice the LC. Because the LC was freely negotiable, it could also have negotiated but it is not apparent that it did so.

All that is clear is that it held the proceeds of the LC. Presumably if it had negotiated documents, it would have already given value and the proceeds would belong to it. It is more than likely that it merely forwarded the documents for the beneficiary.

3. In any event, it was to this bank that the assignment of proceeds was directed and it responded to the assignee by acknowledging the assignment..

4. The significance of the opinion itself is difficult to assess because the opinion turns upon a bank's right of set off, a matter on which UK law has a peculiar twist. The court, for reasons not altogether clear, ruled that the bank's actions are not an "UCP assignment of proceeds" and suggests that such an assignment could only involve the issuer or the confirmer. It is unclear whether the court overlooked a nominated paying bank or intended to exclude such banks..

5. Assuming for the sake of analysis that the case involved an assignment of proceeds, there is an additional hurdle to surmount. The operative undertaking with respect to an LC assignment of proceeds from the perspective of LC practice is not the beneficiary's assignment. That exercise is a mere security interest in LC proceeds which must take its place in the various ordering of rights and responsibilities outside the rarified world of LCs. The important point is that such an assignment is irrelevant to the world of LC practice. LC banks assume (and act on the assumption) that they can ignore a notice of assignment of LC proceeds and direct their payment to the named beneficiary. They should be able to do so since they are not the obligor of a contract but rather the issuer of a special mercantile undertaking which runs only to the named beneficiary or, if duly transferred to the second beneficiary..

6. What matters in LC practice is not the assignment but its acknowledgment by the LC bank. It is this undertaking which is of value to the assigned, not the assignment from the beneficiary. By acknowledging an irrevocable assignment of proceeds, the issuer is thought to undertake to pay any proceeds assigned and acknowledged to the assignee and not to the beneficiary..

7. Here, again, this case poses a dilemma. The acknowledgment does not forthrightly undertake to deliver the proceeds to the assignee. It is qualified in general terms and yet it would be recognized in practice as an acknowledgment of an assignment of proceeds. The question is how the acknowledgment is to be read. Is it to be assumed that something which is an acknowledgment embodies an undertaking to pay any proceeds except for conditions specifically stated or must one read each acknowledgment individually to determine what, if anything, it undertakes to do?.

8. Assuming that an acknowledgment means something, what it is worth is another question. It is an inchoate interest, able to be realized only if there are proceeds..

9 The question on which LC practice has not fixed its attention, however, is (assuming that there are proceeds) what is the world of the bank's acknowledgment as against other creditors of the beneficiary (secured and unsecured) and as against the bank itself. It is the latter aspect of that question which the facts of this case raise. The opinion itself, however, hardly provides a general answer..

10. There are several factors to be taken into account. To analyze them would be beyond the scope of this comment but they can be listed. They are: 1) How does an acknowledgment interface with the law governing security interests in personal property; 2) what is the effect of the obligation as to debts owed the acknowledging bank; and 3) whether these answers should be derived from the law of property or security interests in personal property.

©1998 INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.