A Chinese Perspective on Assignment of Proceeds and Nomination Matters in BNP V. Natixis

The recent BNP v. Natixis¹ case decided by the Supreme Court of the State of New York involved several considerations worthy of discussion, including assignment of letter of credit proceeds and nomination under an LC whereby the assignee also assumed the role of a nominated negotiating bank. Rights of the assignee and the nominated bank are the focus of this writing. Due to the complexity of the case, these matters deserve careful attention.

Case Background

In this case, the issuing bank (Natixis, New York Branch) issued a standby LC in favour of the beneficiary (Hontop). By its terms, the LC was subject to ISP98 and governed by the laws of the State of New York. The beneficiary informed the issuing bank that it had assigned all its “RIGHTS, INTEREST, TITLE AND BENEFITS” under the LC to the assignee (BNP) and instructed the issuing bank to pay proceeds to the beneficiary’s account with the assignee “OR AS THE ASSIGNEE MAY DIRECT (IN EACH CASE WITHOUT ANY SET-OFF, COUNTERCLAIM OR WITHOLDING [sic] WHATSOEVER) … .” The beneficiary also informed the issuing bank: “PLEASE NOTE THAT THE RELEVANT ASSIGNMENT IS WITHOUT PREJUDICE TO THE ASSIGNEE’S RIGHTS TO ACT AS AN ADVISING BANK AND/OR NOMINATED BANK UNDER THE SBLC.”

The issuing bank acknowledged and agreed to the assignment. The LC was issued with an undertaking to honor by paying upon negotiation and the draft was drawn on the issuing bank. The LC expired at the assignee’s counters and was also available to the assignee, therefore the assignee was also a nominated negotiating bank under the LC. The assignee subsequently made a complying draw request to the issuing bank. The court concluded that the issuing bank was obligated to honor the full amount of the draw, but the issuing bank argued that it was entitled to apply a setoff (between the issuing bank and the beneficiary) to the draw and that the assignee was not entitled to payment of the full amount drawn.

Assignment of LC Proceeds

An assignment of proceeds may be subject to any right of setoff of an issuing bank. Assignments of proceeds by LC beneficiaries are regular occurrences under LCs and the UCP rules recognize the right of beneficiaries to assign LC proceeds.² In addition, ISP98 contains a systematic treatment of issues related to the assignment of proceeds and its acknowledgement³ and ISP98 Rule 6.07(b)(ii) states, in part, that if an assignment is acknowledged “the rights of the assignee are subject to … the existence of any net proceeds payable to the beneficiary by the person making the acknowledgment”. Under the principle of assignment, the assignee does not stand in any better position than the assignor (beneficiary) and it may take the LC proceeds subject to defenses that the issuing bank could have asserted against the assignor where another claim has priority, as the proceeds to be paid to the beneficiary depends in part on priorities.⁴ As such, the assignee in this case took assignment of the LC proceeds and it may take subject to any setoff that the issuing bank could have asserted against the beneficiary, but the court concluded that the assignee became entitled to full payment under the LC.