Article

Factual Summary: Beneficiary requested that Confirming Bank assign proceeds from an LC to four Assignees, but Confirming Bank refused to do so due to the unusual number of assignments. In May 2002, Beneficiary itself without the acknowledgement of Confirming Bank executed assignment letters to Advising Bank purportedly irrevocably assigning proceeds from the LC to Assignees, stating "[Beneficiary] hereby authorizes and directs [Advising Bank] to pay the proceeds of each draft drawn by [Beneficiary], payable to [Advising Bank's] order, and in compliance with the above described [LC], if and when such draft is honored by [Advising Bank]."

When Beneficiary drew on the LC in May 2003, Confirming Bank honored the draft and disbursed the LC proceeds to Advising Bank (the payee of Beneficiary's draft) which paid the proceeds to Assignees respectively. One day after the proceeds were received, an involuntary Chapter 7 Bankruptcy petition was filed against Beneficiary.

The assignment of the LC proceeds occurred before the 90-day liquidating preference period under local law, but the disbursement of the LC proceeds to Assignees occurred during the 90-day liquidating preference period but before the insolvency proceedings against Beneficiary began. When Assignees refused Trustee's demands for return of the LC proceeds, Trustee filed this adversary proceeding. Trustee moved for partial summary judgment and Assignee moved for partial summary judgment. The Bankruptcy Court denied Trustee's motion and granted Assignee's motion.

Legal Analysis:

1. Assignment of Proceeds; Voidable Preferential Transfers: Under the US Federal Bankruptcy Code, a transfer made within 90 days of the filing of a bankruptcy petition are voidable by Trustee as preferential transfers. 11 U.S.C. §547(b). The LC proceeds were received by Assignees less than 90 days before the insolvency proceedings began against Beneficiary, but the assignment letters were delivered to Advising Bank outside the 90-day window. Trustee argued that Beneficiary's transfer of the LC proceeds occurred when the proceeds were received by Assignees, not when Beneficiary purportedly assigned the proceeds via the assignment letters. The court ruled "that valid irrevocable assignments of the [LC] proceeds were completed in May 2002, almost one year before the bankruptcy petition, the [LC] Transfers occurred outside the 90- day preference period and thus cannot be avoided as preferences by Trustee under § 547(b)."

2. Assignment of Proceeds: Trustee argued that the assignments failed because they were conditional providing that the proceeds were payable to Assignee "if and when such draft is honored by [Advising Bank]." According to the terms of the LC, Confirming Bank would provide the funds upon Beneficiary's draft to be disbursed by Advising Bank. Observing that a literal interpretation of the language of the assignment letter would cause the assignment to fail even if the proceeds were disbursed, the court rejected Trustee's argument noting that "merely because the parties used the words 'if and when such draft is honored by you,' it is a strained argument to suggest that the parties intended the assignment to fail absolutely." The court ruled that "honor of the draft was not a condition precedent to the assignments. The Assignment Letters did not fail simply because of the alleged unsatisfied condition."

3. Assignment of Proceeds; Revised UCC Section 5-114: Trustee argued that the assignments failed because Revised UCC Articles 5 and 9 require the consent of Issuer for the assignment of an LC's proceed to be valid. The court disagreed, concluding that Revised UCC Article 9 is inapplicable and that Revised UCC Article 5 does not require Issuer's consent between Beneficiary and Assignee.

Under Revised UCC §5-114, the test for determining whether Revised UCC Article 9 applies is whether:

The rights of an assignee against parties other than the issuer, transferee beneficiary, or a nominated person are governed (a) by Chapter 9 of the UCC when a security interest is involved; or (b) by "other law" when the beneficiary has effected an absolute interest. If the beneficiary creates a security interest, Chapter 9 of the UCC governs the secured party's right as against third parties such as the Trustee here. On the other hand, if the beneficiary makes an outright assignment of the proceeds, then "other law," namely the common law of assignment applies.

Applying Texas common law, the court ruled that Revised UCC Article 9 is inapplicable because Beneficiary and Assignee intended an irrevocable assignment of the LC proceeds, not to create a security interest:

The Letters clearly directed and authorized [Advising Bank] to pay the proceeds to the named assignees. Nowhere in the documents did the parties express an intention to create a security interest in the proceeds. Applying the test to this case, the Court is convinced that [Beneficiary] intended to effect an absolute assignment rather than create a security interest in the proceeds.

The court ruled that the assignment of the LC's proceeds to Assignee by Beneficiary did not fail for lack of consent, noting that "§ 5.114 definitely requires an issuer's consent to an assignment in order for the issuer to be unconditionally bound by the assignment. However, § 5.114 does not require an issuer's consent in order for an assignment to be valid between [Beneficiary] and [Assignee]."

4. Assignment of Proceeds; Texas Common Law: Trustee argued that the assignment was invalid because the assignment letters did not indicate Beneficiary's intent to assign the LC proceeds and Beneficiary did not relinquish control of the proceeds. The court disagreed, noting that the assignments contained clear conveyance language. The court also noted that even though relinquishment of control is not a specific requirement for an assignment under Texas common law, Beneficiary did relinquish control over the assignment proceeds when it executed the irrevocable assignments.

5. Transfer of Proceeds: Trustee argued that the "Assignment Letters gave [Assignees] a contractual right to payment that vested during the preference period" and "for purposes of avoidance under § 547 of the Bankruptcy Code, the [LC] Transfers did not occur until [Assignees] received the proceeds within the preference period." 11 U.S.C. § 547(e)(3). The court disagreed, ruling that the transfers occurred when the assignment letters were executed in favor of Assignees, not when the funds were disbursed.

The court based its ruling on the decision of the court in In re Gibraltar Resources which stated that "when a debtor makes an absolute assignment to a creditor, of money that the debtor is entitled to receive from a third party, a transfer is perfected and complete when the assignment is executed rather than when the money is disbursed to the creditor." In re Gibraltar Res., Inc., 202 B.R. 586 (N.D. Tex. 1996).

The court noted that "Here, [Beneficiary's] contract right to the [LC] proceeds as against [Confirming Bank] arose when it became the beneficiary in March 2002. Although [Beneficiary] had to perform all the duties and present confirming documents in order to obtain payment from the bank, its right to the [LC] proceeds came into play prior to that time. Therefore, [Beneficiary] had already acquired the contract right to the property transferred, i.e., the proceeds, at the time it made the assignments."

[JEB/al]

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