What a dirt lawyer needs to know about new Article 9 of the UCC

Perfection. The only way for a secured party to perfect a security interest in letter-of-credit rights, other than as a supporting obligation, is for the secured party to obtain control of that collateral.129 A secured party takes control of letter-of-credit rights by obtaining the consent of the issuer or nominated person to an assignment of proceeds of the letter of credit under U.C.C. section 5-114(c) or otherwise applicable law or practice. In some cases, consent may be required from more than one party, if, for example, there is a nominated person in addition to the issuer. U.C.C. section 5-114(c) provides that an issuer or nominated person need not recognize an assignment of the proceeds of a letter of credit until the issuer or nominated person consents to the assignment. However, the issuer or nominated person may not unreasonably withhold its consent. Section 9-- 409 of Article 9 allows a debtor to create, attach, perfect, assign, or transfer a security interest in letter-of-credit rights notwithstanding a contractual or statutory prohibition against or limitation on assignment; this section also provides that transfer or creation of the security interest is not a default. The third party, for example, the issuer or nominated person, is protected because the secured party is not able to draw on the letter of credit; indeed, the issuer is not obligated even to acknowledge the secured party.

of-credit rights, except to the extent filing perfects a security interest in other collateral to which the letter-of-credit rights are supporting obligations, as discussed above.131

Priority. Notwithstanding section 9-203(b) of Article 9, any security interest enforceable against a debtor respecting letter-of-credit rights remains subject to the provisions of U.C.C. section 5-118 respecting the security interest of the issuer or nominated person.132 The rights of a transferee beneficiary or nominated person are independent of, and superior to, all security interests, as provided in U.C.C. section 5-114.(133) Thus, the transferee beneficiary (if any) of the letter of credit, for example, in a credit-enhanced real estate secured financing, is always in a position superior to a secured party holding a security interest in the letter-of-credit rights, regardless of the method of perfection. A security interest in letterof-credit rights perfected by control has priority over a security interest in the same letter-of-credit rights perfected automatically as a supporting obligation for collateral in which a security interest is perfected.134 Thus, if the letter-of-credit rights that serve as supporting collateral are an important part of a secured party's collateral, the prudent secured party should take control of the letter-of-credit rights, or even become a transferee beneficiary of the letter of credit, if possible.135

H. Proceeds

are satisfied or the secured party otherwise acts within the twenty-day period to perfect the security interest in the proceeds.139 For priority purposes, the time of filing or perfection as to the security interest in the underlying collateral is deemed the time of filing or perfection as to the security interest in the proceeds.140 If a security interest in deposit accounts, investment property, letter-of-credit rights, or promissory notes is perfected by control or possession, as applicable, and therefore has priority over another security interest in the same collateral perfected by filing, then the security interest in any supporting obligation or proceeds will also have priority, if certain facts apply.141