Okla. Stat. tit. 12A § 5-114
Okla. Stat. tit. 12A, § 5-114
Oklahoma Code Comment
Under former Article 5, the transfer of a letter of credit and the assignment of the proceeds of a letter of credit were codified together in former Section 5-116 . Revised Article 5 separates the transfer and assignment rules, with draw transfers covered by revised Section 5-112 and assignments of proceeds covered by revised Section 5-114 . Nonetheless, revised Section 5-114 makes it clear that an assignment of proceeds which occurs before the draw is a present assignment.
Revised sub section 5-114(a) defines "proceeds of a letter of credit." In essence, "proceeds" means the value received upon honor of the credit. The definition makes it clear that "proceeds" does not include drawing rights under the credit. In addition, Official Comment 1 notes that proceeds of a letter of credit also could be proceeds of other collateral under UCC Article 9. More on this issue below.
Revised Section 5-114 preserves the right of a beneficiary to assign the proceeds of the letter of credit and adds a clause allowing the assignment to cover "part or all" of the proceeds. Revised Section 5-114 also continues the right of the beneficiary to assign proceeds before presentation, but makes it clear the right to proceeds is contingent on compliance with the terms of the credit. Under revised Section 5-114, however, the assignment right is restricted by a new rule that the issuer or a nominated person is not required to recognize the assignment until the issuer or nominated person consents to the assignment. Moreover, the issuer or nominated person is not obligated to consent to the assignment, except for a letter of credit where presentation of the letter is a condition to honor; in that case, the issuer or nominated person may not withhold consent unreasonably where the assignee possesses and exhibits the letter of credit. These provisions on consent were deemed to be necessary to bring U.S. law more in line with domestic and international letter of credit practice.
Under revised Section 5-114, the rules regarding the effectiveness of assignments of proceeds of letters of credit have been completely rewritten. Under former Article 5, an assignment of proceeds, whether or not for security, was the assignment of an account and thus was governed by Article 9, with certain exceptions. Revised Section 5-114 recognizes assignments other than for security. The section governs the Article 5 right of an assignee to enforce the assignment of proceeds against the issuer and controls the priority of an assignee against a transferee beneficiary or nominated person. The rights of an assignee against any other person are governed by other rules of law which, in the case of an assignment for security, may be Article 9, if a written letter of credit is involved. Thus, in most cases, the creation and perfection of a security interest, and the rights and obligations of the parties arising on the creation and perfection of a security interest, are governed by Article 9, unless the letter of credit is not written.
Under former Article 5, an assignment of proceeds was ineffective until the letter of credit or advice of credit was delivered to the assignee, with the delivery perfecting the security interest. Moreover, even though delivery made the assignment effective and perfected the security interest, the issuer could continue to honor drafts drawn under the credit until the issuer received notice of the assignment, signed by the beneficiary and containing a request to pay the assignee, and the issuer could require exhibition of the credit before paying the assignee.
Under revised Section 5-114, an assignment of proceeds also is ineffective until an issuer or a nominated person consents to the assignment. Moreover, even after consent, the rights of a transferee beneficiary or a nominated person are independent of the assignment and have priority over the rights of the assignee. Under related amendments to Article 9, in sections 9-103 , 9- 104, 9-105 , 9-106 , 9-304 and 9-305 , a security interest in the right to the proceeds of a written letter of credit is created as in the case of any other security interest, and perfection must occur by the secured party taking possession of the LC. Of course, possession of the LC, if the credit is drawn to require presentation as a condition of honor, also will allow the secured party assignee to enforce the assignment because, in that case, consent may not be withheld unreasonably. Priority against other parties, such as a lien creditor, another assignee secured party, or perhaps an inventory secured party who claims the LC proceeds as proceeds of the inventory collateral, is determined by Article 9 for a written letter of credit. Until Article 9 is completely revised in 1998, the provisions of Article 9 will not apply to a transfer of an interest in a letter of credit other than the right to proceeds of a written letter of credit.