Article

Factual Summary: To finance the purchase of heavy machinery, buyer caused the issuance of a letter of credit in favor of seller. The machine was disassembled in the United States and shipped to South Korea where it was reassembled. According to its terms, the credit was payable in installments upon presentation of documents after specified components of the project were completed. After the majority of its funds were drawn down, the beneficiary assigned the right to the remaining proceeds to the L.A. office of a creditor/bank as collateral for performance bonds. The opinion notes that the assignee took possession of the original LC, perfecting its interest under prior 5-116.

Subsequently, a subcontractor sued the beneficiary for non-payment and obtained a writ of attachment against the beneficiary's property. The subcontractor then served the writ on the assignee which refused to deliver the credit. The subcontractor then served a writ of execution against the assignee. After serving that writ, the subcontractor discovered that, without its knowledge, the beneficiary had made additional draws due it under the credit and that the assignee had returned some funds and forwarded others to the beneficiary. The subcontractor then brought this action against the assignee, on the theory that it had violated the attachment writ. The trial court entered judgment in favor of the assignee, and the subcontractor appealed.

Legal Analysis:

1. Attachment: The subcontractor claimed that the LC was subject to the writ of attachment. The subcontractor argued that letters of credit are included in the definition of "instruments," and under the applicable California statute, are therefore subject to attachment Under the California attachment statute, an "instrument" is defined to include a writing that evidences a right to the payment of money which, in the ordinary course of business, may be transferred by delivery with any necessary endorsement or assignment. The subcontractor argued that letters of credit are writings which evidence a right of payment that, in the ordinary course of business, are transferred by delivery with any necessary endorsement or assignment.

The court did not agree. The court noted that UCC Article 5 makes no reference to "instruments," but, instead, defines a letter of credit as an "engagement." UCC - 5-103. In addition, Revised UCC Article 5, which has been passed but is not yet effective in the State of California, defines a letter of credit as an "undertaking." Revised UCC - 5- 102(a)(10). It also found that the credit, by its own terms, was not transferable. Pursuant to UCP 400 Article 54(b), a credit may only be transferable if it is expressly designated as such. Because the credit was not designated transferable, the court found that it was not transferable and, therefore, it did not satisfy the definition of "instrument" under California law.

In addition, the credit evidenced a contingent right to payment because it required presentation of specified documents and, therefore, was not subject to attachment. At the time the subcontractor served the writ of attachment, the required documents had not been presented. Thus whether the assignee would receive the proceeds of the credit was uncertain. Pursuant to California case law, "an attaching creditor, seeking to subject the property of a debtor to the payment of is debt, obtains a lien only upon the title or interest which the debtor has in the particular propertyat the time of levy." Kinnison v. Guaranty Liquidating Corp.,1155 P.2d 450 (Cal. Ct. App. 1941)[emphasis added]. Because the assignee only possessed a contingent interest in the proceeds at the time the writ of attachment was served, the inchoate interest in the proceeds were not subject to attachment.

The subcontractor also argued that contingent obligations are not exempt from judgment or attachment because they may be garnished under California law. The court did not agree. The court reasoned that the garnishment statute did not apply to letters of credit because it contemplated garnishment of property in the possession of a third party once it becomes due and did not make reference to contingent obligations. After considering and rejecting each of the subcontractor's arguments, the court ruled that the proceeds were not subject to attachment.

2. Assignment: The subcontractor argued that the trial court erred in granting judgment for the assignee. In support of this argument it noted case law holding that substantial performance of a contract is sufficient to render the debt owed pursuant to it subject to garnishment. On the ground that letters of credit are independent of the underlying transaction, the court rejected this argument. Thus, the court held that whether or not the subcontractor completed or substantially completed its obligations pursuant to its contract with the beneficiary is irrelevant to the present dispute.

3. Contingent Obligation: The subcontractor also argued that the attachment order obligated the assignee to pay the subcontractor the remaining proceeds of the credit that had not been drawn upon. The court rejected this argument as well. An attachment lien only applies to the debtor's interest in the property sought to be attached at the time the writ is served. The assignee did not have a proprietary interest in the credit's proceeds at the time of service. It only possessed a contingent interest. Therefore, because the assignee had no interest in the proceeds at the time the attachment was served, the court held that the proceeds were not subject to it. The court held that the assignee was not obliged to pay the proceeds of the credit to the subcontractor.

Comment:

This decision properly states current law regarding the assignment of proceeds. The same result should obtain under the revision of UCC Article 9.

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