CO Code § 4-5-114 (2021)
2021 Colorado Code|Title 4 - Uniform Commercial Code|Article 5 - Letters of Credit|§ 4-5-114. Assignment of Proceeds

  In this section, “proceeds of a letter of credit” means the cash, check, accepted draft, or other item of value paid or delivered upon honor or giving of value by the issuer or any nominated person under the letter of credit. The term does not include a beneficiary's drawing rights or documents presented by the beneficiary.    A beneficiary may assign its right to part or all of the proceeds of a letter of credit. The beneficiary may do so before presentation as a present assignment of its right to receive proceeds contingent upon its compliance with the terms and conditions of the letter of credit.    An issuer or nominated person need not recognize an assignment of proceeds of a letter of credit until it consents to the assignment.    An issuer or nominated person has no obligation to give or withhold its consent to an assignment of proceeds of a letter of credit, but consent may not be unreasonably withheld if the assignee possesses and exhibits the letter of credit and presentation of the letter of credit is a condition to honor.    Rights of a transferee beneficiary or nominated person are independent of the beneficiary's assignment of the proceeds of a letter of credit and are superior to the assignee's right to the proceeds.    Neither the rights recognized by this section between an assignee and an issuer, transferee beneficiary, or nominated person nor the issuer's or nominated person's payment of proceeds to an assignee or a third person affect the rights between the assignee and any person other than the issuer, transferee beneficiary, or nominated person. The mode of creating and perfecting a security interest in or granting an assignment of a beneficiary's rights to proceeds is governed by article 9 of this title or other law. Against persons other than the issuer, transferee beneficiary, or nominated person, the rights and obligations arising upon the creation of a security interest or other assignment of a beneficiary's right to proceeds and its perfection are governed by article 9 of this title or other law.     History. Source: L. 96: Entire article R&RE, p. 199, § 1, effective July 1.    Editor's note:   This section is similar to former § 4-5-116 as it existed prior to 1996.   OFFICIAL COMMENT   1. Subsection (b) expressly validates the beneficiary's present assignment of letter of credit proceeds if made after the credit is established but before the proceeds are realized. This section adopts the prevailing usage — “assignment of proceeds” — to an assignee. That terminology carries with it no implication, however, that an assignee acquires no interest until the proceeds are paid by the issuer. For example, an “assignment of the right to proceeds” of a letter of credit for purposes of security that meets the requirements of Section 9-203(1) would constitute the present creation of a security interest in that right. This security interest can be perfected by possession (Section 9-305) if the letter of credit is in written form. Although subsection (a) explains the meaning of “'proceeds' of a letter of credit,” it should be emphasized that those proceeds also may be Article 9 proceeds of other collateral. For example, if a seller of inventory receives a letter of credit to support the account that arises upon the sale, payments made under the letter of credit are Article 9 proceeds of the inventory, account, and any document of title covering the inventory. Thus, the secured party who had a perfected security interest in that inventory, account, or document has a perfected security interest in the proceeds collected under the letter of credit, so long as they are identifiable cash proceeds (Section 9-306(2), (3)). This perfection is continuous, regardless of whether the secured party perfected a security interest in the right to letter of credit proceeds.   2. An assignee's rights to enforce an assignment of proceeds against an issuer and the priority of the assignee's rights against a nominated person or transferee beneficiary are governed by Article 5. Those rights and that priority are stated in subsections (c), (d), and (e). Note also that Section 4-210 gives first priority to a collecting bank that has given value for a documentary draft.   3. By requiring that an issuer or nominated person consent to the assignment of proceeds of a letter of credit, subsections (c) and (d) follow more closely recognized national and international letter of credit practices than did prior law. In most circumstances, it has always been advisable for the assignee to obtain the consent of the issuer in order better to safeguard its right to the proceeds. When notice of an assignment has been received, issuers normally have required signatures on a consent form. This practice is reflected in the revision. By unconditionally consenting to such an assignment, the issuer or nominated person becomes bound, subject to the rights of the superior parties specified in subsection (e), to pay to the assignee the assigned letter of credit proceeds that the issuer or nominated person would otherwise pay to the beneficiary or another assignee.   Where the letter of credit must be presented as a condition to honor and the assignee holds and exhibits the letter of credit to the issuer or nominated person, the risk to the issuer or nominated person of having to pay twice is minimized. In such a situation, subsection (d) provides that the issuer or nominated person may not unreasonably withhold its consent to the assignment.   ANNOTATION   Annotator's note. The following annotations include cases decided under former provisions similar to this section.   Contractual relationships arising from letter of credit. See Dovenmuehle, Inc. v. East Bank, 38 Colo. App. 507, 563 P.2d 24 , aff'd, 196 Colo. 422 , 589 P.2d 1361 (1978); Leney v. Plum Grove Bank, 670 F.2d 878 (10th Cir. 1982).   Strict compliance with terms of letter of credit is required to maintain the commercial vitality of the letter of credit device. Colo. Nat'l Bank v. Bd. of County Comm'rs, 634 P.2d 32 (Colo. 1981).   Independence of letters of credit to be preserved. The purpose of the letter of credit requires that the unique feature of the letter of credit, i.e., their independence from the contract between the customer and the beneficiary, be preserved by courts. Dovenmuehle, Inc. v. East Bank, 38 Colo. App. 507, 563 P.2d 24 (1977), aff'd, 196 Colo. 422 , 589 P.2d 1361 (1978).   The transactions or contracts underlying the bank's issuance of a letter of credit have no bearing whatsoever on the bank's primary liability to the beneficiary of the letter. Bd. of County Comm'rs v. Colo. Nat'l Bank, 43 Colo. App. 186, 607 P.2d 1010 (1979), aff'd in part and rev'd in part on other grounds, 634 P.2d 32 (Colo. 1981).   Effect of letter of credit on issuing bank. By issuing a letter of credit, the bank substitutes its credit for that of its customer. Leney v. Plum Grove Bank, 670 F.2d 878 (10th Cir. 1982).   Letters of credit are actual liabilities of a bank. Bank acted properly in freezing accounts of beneficiary even though no demand for payment under letters of credit issued by bank had been made. Balzano v. United Bank of Denver, 761 P.2d 229 (Colo. App. 1988).   Letters of credit do not eradicate the contractual latitude afforded the parties, but are intended to enhance it. Dovenmuehle, Inc. v. East Bank, 38 Colo. App. 507, 563 P.2d 24 (1977), aff'd, 196 Colo. 422 , 589 P.2d 1361 (1978).   Within broad limits, an issuer and the beneficiary may agree that various conditions be satisfied by documentation prior to payment. Dovenmuehle, Inc. v. East Bank, 38 Colo. App. 507, 563 P.2d 24 (1977), aff'd, 196 Colo. 422 , 589 P.2d 1361 (1978).   And contract principles may be considered in deciding controversies. As a result of the flexibility with which the issuer and beneficiary may agree to conditions to payment, contract principles are not necessarily precluded from consideration in deciding controversies involving letters of credit if the parties embody them within the terms of the credit. Dovenmuehle, Inc. v. East Bank, 38 Colo. App. 507, 563 P.2d 24 (1977), aff'd, 196 Colo. 422 , 589 P.2d 1361 (1978).   Issuer may pay on letter of credit despite notice of irregularity. The issuer of a letter of credit may, in good faith, honor a draft or demand for payment notwithstanding notice from its customer that documents are forged or fraudulent or that there is fraud in the transaction; the issuer may, however, be enjoined from honoring such drafts or demands for payment. Colo. Nat'l Bank v. Bd. of County Comm'rs, 634 P.2d 32 (Colo. 1981).   “Fraud in the transaction”, as referred to in subsection (2), must stem from conduct by the beneficiary of the letter of credit as against the customer of the bank. Colo. Nat'l Bank v. Bd. of County Comm'rs, 634 P.2d 32 (Colo. 1981).   Fraud must be of such an egregious nature as to vitiate the entire underlying transaction so that the legitimate purposes of the independence of the bank's obligation would no longer be served. Colo. Nat'l Bank v. Bd. of County Comm'rs, 634 P.2d 32 (Colo. 1981).   When issuer confined to stated grounds for dishonor. An issuer is confined to its stated grounds for dishonor where the statements have misled the beneficiary who could have cured the defect but relied on the stated grounds to its injury. Colo. Nat'l Bank v. Bd. of County Comm'rs, 634 P.2d 32 (Colo. 1981).   Waiver of grounds for refusal to pay. In cases involving letters of credit, a refusal to pay by an issuer formally placed on one ground will be deemed a waiver of all others based on the letter of credit. Dovenmuehle, Inc. v. East Bank, 38 Colo. App. 507, 563 P.2d 24 (1977), aff'd, 196 Colo. 422 , 589 P.2d 1361 (1978).   “Guaranty letter of credit” issued by a bank requiring a documentary demand, and conspicuously stating that it was a letter of credit, falls squarely within the definition of letter of credit, so that a defendant bank cannot escape its obligation to honor a demand on it. East Bank v. Dovenmuehle, Inc., 196 Colo. 422 , 589 P.2d 1361 (1978).   Standby letters of credit, suretyship and guaranty contracts compared. Colo. Nat'l Bank v. Bd. of County Comm'rs, 634 P.2d 32 (Colo. 1981).   Surety contract not similar. An analogy between a surety contract and a letter of credit is not well taken. General Ins. Co. of Am. v. City of Colo. Springs, 638 P.2d 752 (Colo. 1981).   Forum for suing out-of-state issuing bank limited. It is unfair to burden an out-of-state issuing bank with having to defend litigation over a letter of credit in any state in which the bank could reasonably expect the credit to be used. Leney v. Plum Grove Bank, 670 F.2d 878 (10th Cir. 1982).