Dimension 6 - 110 to 127 (CRC US) PDF

DIMENSION 6 - 110 NOTES: DOCUMENTATION REQUIREMENTS Security agreement. Evidence of receipt of the collateral from the borrower. Documents necessary to transfer the collateral in case of default. These include an endorsement of the instrument, assignments, and stock powers signed by the owner of the...

DIMENSION 6 - 110 NOTES: DOCUMENTATION REQUIREMENTS Security agreement. Evidence of receipt of the collateral from the borrower. Documents necessary to transfer the collateral in case of default. These include an endorsement of the instrument, assignments, and stock powers signed by the owner of the securities. If the instrument is a promissory note, the endorsement may be on an attached sheet of paper, which is called an allonge. PERFECTION BY FILING For practical reasons, the collateral frequently must remain with the debtor or third party grantor. In such cases, the most common method of perfecting a security interest is by filing a UCC-1 financing statement. DOCUMENTATION REQUIREMENTS Security agreement. Financing statement. Your security interest will normally be perfected by filing a financing statement (usually designated a UCC-1) with an appropriate public office. The purpose of filing a financing statement is to give public notice to other creditors that you claim an interest in the collateral. DURATION OF FILING CRC US Body of Knowledge A financing statement generally is effective for five years. CONTINUATION To continue perfection beyond five years, a continuation statement (usually designated a UCC-3) must be filed in the last six months of the prior effective period. The effectiveness of the filing will generally continue for the same number of years as the prior filing (usually five years). If you filed prior to July 1, 2001, filings in a place that is incorrect under the revised UCC, you must file a new UCC-1 in the new proper location before July 1, 2006. DIMENSION 6 - 111 For collateral other than consumer goods, a secured party must send a termination statement to the debtor within 20 days after the secured party received an authenticated demand if the debt has been fully paid and there is no obligation to make further loans. For consumer goods, the secured party must send the termination statement within 30 days after the debt is fully paid and there is no obligation to make further loans. The debtor is not obligated to make a demand. If a demand is made, the period for terminating is shortened from 30 days to 20 days following the demand. There are penalties for failure to terminate. You would be liable to the debtor for $500 plus any loss sustained by the debtor. There may be additional requirements and/or different penalties in the state where you filed a financing statement. If you do not know the requirements in that state, consult legal counsel. PLACE OF FILING Except for filings covering timber, minerals, and fixtures, a filing is effective only if it is made in the designated central location in the state where the debtor is located. If the debtor is an individual, the debtor is deemed to be located in the state where the individual resides. If the debtor is a registered organization (e.g., corporations, limited partnerships, and limited liability companies), the “debtor is located” in the state where it was formed as an entity. If the debtor is not a registered organization (e.g., a general partnership), the “debtor is located” in the state where the debtor has its place of business. If registration is not required and the debtor has more than one place of business, the “debtor is located” in the state where its chief executive office is located. NOTES: Dimension 6 // Identify Repayment Sources and Appropriately Structure and Document Credit Exposures for.. TERMINATION DIMENSION 6 - 112 NOTES: UCC SEARCH Before granting credit against collateral, you should confirm that no other lender has an existing perfected security interest in the same collateral. Until July 1, 2006, searches can be complicated. to be certain that no prior lien exists against the collateral you must make a request for information (usually designated a UCC-11) at the filing offices, local or central, in the state where a filing on the collateral would have been required prior to July 1, 2001. In addition, you must order a search from the state where the “debtor is located” under the revised UCC-9. You should order a search under any and all known addresses of the debtor. You may use an outside search firm to conduct UCC searches. PERFECTION BY ACQUIRING CONTROL TYPES OF COLLATERAL PERFECTED BY CONTROL Types of collateral in which security interests are perfected by control include investment property, deposit accounts, electronic chattel paper, and letter of credit rights. TIME OF PERFECTION BY CONTROL FOR INVESTMENT PROPERTY A security interest is perfected by control from the time you enter into a control agreement with the securities intermediary (stock broker or trust division of a bank) and the owner of the collateral. A security interest in such property perfected by control takes priority over a security interest in the same property perfected by a UCC filing. DOCUMENTATION REQUIREMENTS CRC US Body of Knowledge Security agreement. Control agreement. COMMENTS Loans secured by margin stocks, bonds convertible into margin stocks, and shares of mutual funds are subject to Federal Reserve Board’s Regulation U. See the perfection chart for the methods of acquiring control of deposit accounts, letter of credit rights, and electronic chattel paper. DIMENSION 6 - 113 The UCC does not cover all types of assets. For assets not covered by the UCC, other state and federal laws set methods for taking and perfecting collateral interests. In the paragraphs to follow, we will discuss the following non-covered assets: Real estate Ships Aircraft Life insurance REAL ESTATE A mortgage or deed of trust is an agreement that grants a lien on real estate that secures repayment of a debt and gives the lender rights to the real estate in the event of default. A mortgage is an agreement between two parties, a mortgagor and a mortgagee. The mortgagor is the party granting your institution an interest in real property to secure repayment of a loan. Your institution is the mortgagee. If the borrower does not repay the loan, you can foreclose on the mortgage to obtain partial or full payment of the loan. A deed of trust is an agreement among three parties, a trustor, a trustee, and a beneficiary. The trustor is the party granting an interest in real property to secure repayment of a loan. The trustee is a party who holds an interest in the real property for the benefit of the beneficiary. The beneficiary is the lender. In many states it is legal for the lender to be both trustee and beneficiary. In some states, a public trustee must be used. If the borrower does not repay the loan, the trustee can hold a trustee’s sale to obtain funds to repay all or part of the loan. If you are taking a real estate mortgage interest, you must obtain answers to the following: Who owns the real property and what is the nature of that ownership? Are there interests in the real property, other than those of the prospective mortgagor or grantor, which could take priority over your lien? What interest in the real property will the mortgagor or grantor be granting to you—is it a mortgageable interest? What is the real property worth? NOTES: Dimension 6 // Identify Repayment Sources and Appropriately Structure and Document Credit Exposures for.. ASSETS NOT COVERED BY UCC DIMENSION 6 - 114 NOTES: Are there existing or future factors that could negatively affect the collateral value of the real property, such as environmental hazards, flood hazards, use restrictions, easement problems, or encroachment problems? Easements are rights or privileges that a party may acquire over the land of another party. For example, utility companies have easements that allow them to install necessary lines on property that is privately owned. Encroachments are structures, such as a fence or wall, which are illegally situated in whole or part on the real property of another person. How can those hazards be avoided or mitigated? OWNERSHIP Title insurance protects against any undisclosed defects in the title to the property. You should obtain a title insurance binder from a reputable title insurance agency representing a financially sound title insurance company. The binder will contain information as to the status of the title to the real estate and will enumerate steps you must follow to obtain a final title insurance policy in accordance with the binder. You may also have to examine other documents referred to in the binder. You should direct any unanswered questions to an experienced real estate lender or your legal counsel. You must clear all unacceptable exceptions prior to closing. Types of ownership vary from state to state, but generally include the following: Fee simple estate A fee simple estate is one in which the owner(s) is entitled to the entire property, with unconditional power of disposition during the life or existence of that owner(s). CRC US Body of Knowledge Life estate The duration of a life estate is limited to the life of the party holding it, or the life of some other person. The estate ends when the life of the person ends. DIMENSION 6 - 115 A leasehold estate is an estate held under a lease for a fixed term. The estate ends when the lease terminates. You may discover that your real estate collateral is owned by your mortgagor but is on land that is not owned by your mortgagor. The collateral is subject to a ground lease, that is, the collateral is on leased land. You must obtain a copy of the lease agreement. Ask your legal counsel to review the lease to determine how it will affect your collateral value. Determine the length of the lease, whether it is assignable and what restrictions on land use are included. Tenancy by the entireties A tenancy by the entireties is created when a husband and wife become fee simple owners and take possession of real property. After the death of one, the survivor takes the whole. Joint tenancy A joint tenancy involves ownership of real property by two or more persons. If the joint tenancy includes rights of survivorship, title passes to the surviving owner(s). If the joint tenancy is without rights of survivorship title of the deceased owner passes to the heir(s) of the deceased owner if one of the owners dies. Tenancy in common A tenancy in common involves ownership of real property by two or more persons. A tenancy in common is always inheritable. If one of the owners dies, the ownership share of that deceased owner passes to the heir(s) of the deceased owner. A real estate deed to two or more persons as joint owners without any further express description is considered to establish a tenancy in common. Homestead Under modern law, homestead is an artificial estate in land devised to protect the possession and enjoyment of the owners against the claim of creditors. It withdraws the property from execution and forced sale as long as the land is occupied as a home. The extent of the homestead exemption and the methods for claiming it differ widely from state to state. The exemption does not apply to properly executed conveyances, including the granting of mortgages or deeds of trust. NOTES: Dimension 6 // Identify Repayment Sources and Appropriately Structure and Document Credit Exposures for.. Leasehold estate DIMENSION 6 - 116 NOTES: TITLE INSURANCE POLICY A title insurance binder is not a final title insurance policy. It is an agreement to issue a final title insurance policy in accordance with the terms of the binder if the conditions contained in the binder are met. Your institution should be named as the insured party on the final title policy. You or your legal counsel should carefully examine the final title policy before closing to make certain that it complies with any provision or instructions contained in the binder. You must verify the legal description, the names of your institution and the property owner, and the amount of coverage. The legal description must be identical on the title binder, title policy, mortgage or deed of trust, and survey. The title insurance company will not insure against undisclosed interests of parties in possession of the property. It will also not insure against encroachments that would have been disclosed by an accurate survey unless a survey has been provided to the insurer. A survey is the process by which a parcel of land is measured and its contents ascertained. ASSIGNABLE INTERESTS Every interest in real property is assignable, unless it is subject to a prior agreement not to assign. When the real property in question is subject to a lease, contract for sale, or is owned by a trust, you must examine the lease, the contract, or the trust agreement to determine whether the borrower’s interest in the real property is assignable without consent of the other party(ies) to the prior arrangement. CRC US Body of Knowledge VALUE The most reliable methods for determining the value of real property collateral are evaluations and appraisals. Federal law requires an appraisal by a state-licensed appraiser whenever the lender makes a loan in the amount of $250,000 or more secured by real property. For loans under $250,000, the lender may accept an evaluation of the property or an appraisal that does not come up to the standard required for larger loans. The methods used by the lender to determine the value of real property collateral are subject to review by the lender’s examiners. DIMENSION 6 - 117 Factors that could have a negative impact on the value of real property collateral include: Environmental hazards: you should perform or order an environmental assessment. Easement problems: easements that exist in favor of parties other than the borrower could make the property less salable after a foreclosure. Encroachment problems: Improvements on the potential real property collateral that encroach on adjoining real property or improvements on adjoining real property that encroach on the real property may reduce the value of prospective collateral. You can determine potential problems by obtaining a survey. You must deal with encroachment problems before the loan closing. INSURANCE Many factors that could negatively affect the value of your collateral and the ability of the borrower to repay its loan are unavoidable and cannot be insured against. For those factors that can be insured against, require proof that such insurance has been obtained and that your institution is an included insured party. Generally, you prefer that your bank be named as loss payee under a New York Standard Mortgagee clause. It provides that your right to coverage under the policy would not be affected or defeated by any act, neglect, or default of the borrower. Types of insurance required vary depending upon the type of loan transaction. MORTGAGES/DEEDS OF TRUST A mortgage is an agreement between two parties, a mortgagor and a mortgagee. The mortgagor is the party granting your institution an interest in real property to secure repayment of a loan. Your institution is the mortgagee. If the borrower does not repay the loan, you can foreclose on the mortgage to obtain partial or full payment of the loan. A deed of trust is an agreement among three parties, a trustor, a trustee, and a beneficiary. The trustor is the party granting an interest in real property to secure repayment of a loan. The trustee is a party who holds an interest in the real property for the benefit of the beneficiary. The lender is the beneficiary. In many states it is legal for the lender to be both trustee and beneficiary. If the borrower does not repay the loan, the trustee can hold a trustee’s sale to obtain funds to repay all or part of the loan. NOTES: Dimension 6 // Identify Repayment Sources and Appropriately Structure and Document Credit Exposures for.. NEGATIVE VALUATION FACTORS DIMENSION 6 - 118 NOTES: In states where deeds of trust are permitted by law, lenders choose them because foreclosure procedures are usually easier to follow. There are also state differences in redemption periods between mortgages and deeds of trust. The state differences often favor deeds of trust. SHIPS The proper method to take and perfect a security interest in a boat depends on the kind of boat involved in the transaction. If the boat is for commercial purposes, it must be documented by a United States Coast Guard filing. A recreational boat that is more than five tons in size may be, but is not required to be, documented. If the boat is documented, you must obtain a preferred ship mortgage and record it with the Coast Guard to perfect your security interest. Some states have adopted registration statutes for noncommercial, nondocumented watercraft (boats). If the boat in which a security interest is intended is subject to such a statute, you must determine what that state’s requirements are for perfecting a lien. In all cases, whether the boat involved is documented, titled, or untitled, you should file a financing statement in the appropriate locations in the state where the boat is located. SPECIAL CONSIDERATIONS You must search the vessel’s home-port Coast Guard records to determine whether a preferred ship mortgage has already been filed against the vessel. CRC US Body of Knowledge If you want to take a security interest in a recreational vessel that is over five tons and that is not presently documented, you should consider the effect that a subsequent documenting of the vessel would have on your security interest. Your interest would probably be ineffective against third parties that obtain interests in the vessel after it has become documented. AIRCRAFT All aircraft are subject to Federal Aviation Administration (FAA) regulations. New aircraft secured by a loan must be registered with the FAA Aircraft Registry, PO Box 25504, Oklahoma City, OK 73125. UCC filing requirements also apply. DIMENSION 6 - 119 FAA title search (can be ordered from a private title company in Oklahoma City, Oklahoma). UCC 11 Request for Information. UCC search should be carried out in each state where the aircraft is located. Security agreements. Two are needed. One is sent to and retained by the FAA. The FAA will record a lien on the airframe in all cases. The FAA will record a lien on “any specifically identified aircraft engine of 750 or more rated takeoff horsepower, or any propeller capable of absorbing 750 or more rated takeoff power.” The FAA will record a lien on spare parts maintained by an air carrier certified under section 604 (b) of the Federal Aviation Act of 1958. Liens on engines under 750 rated takeoff horsepower, or propellers rated less than 750 horsepower, are recorded under the UCC. Liens on the avionics (the electronic equipment) are recorded under the UCC. Financing statement (UCC-1) and description of all accessories in the aircraft (e.g., radio, instruments, etc.). Aircraft Bill(s) of Sale Information (AC form 8050-2). Registration Application Form (AC Form 8050-1). The form provides the information necessary to register the aircraft in the owner’s name. A copy is kept in the aircraft until the Certificate of Aircraft Registration is received. LIFE INSURANCE Perfection of collateral interests in life insurance is also not covered by the UCC. When life insurance is pledged as collateral, you hold the policy and forward a notice of the assignment to the insurance company for recording and acknowledgment. Only the owner of the policy can provide a pledge. NOTES: Dimension 6 // Identify Repayment Sources and Appropriately Structure and Document Credit Exposures for.. DOCUMENTATION REQUIREMENTS DIMENSION 6 - 120 NOTES: DOCUMENTATION REQUIREMENTS Life Insurance Assignment Questionnaire: This is used to verify information on a life insurance policy in which you intend to take a security interest. The insurance company completes most of the questionnaire. This must be done before the assignment is taken. Assignment of life insurance policy. Take three copies. Retain one and mail two to the insurance company, which will acknowledge one and return it to you. Life insurance policy (held by you). Release of Assignment of Life Insurance Policy (policy should be returned, also). This is sent to the insurance company after the loan has been repaid. ASSETS COVERED BY UCC BUT AFFECTED BY OTHER STATUTES Motor vehicles Government contracts Intellectual property/general intangibles MOTOR VEHICLES CRC US Body of Knowledge State certificate of title statutes will determine how a UCC security interest in motor vehicles is perfected. Follow the registration or notification procedures required by the state in which the motor vehicle has been registered. If vehicles are used by a business or held for sale or lease by a business, they are also equipment or inventory. For example, if a vehicle is used by a business, it is classified as equipment. However, if it is titled, it is not necessary to file a UCC1 Financing Statement and take a position against equipment. You would perfect your security interest by obtaining a signed security agreement and following the title laws in the state where the vehicle was registered, usually by having your security interest noted on the certificate of title. If the vehicle or vehicles comprise inventory of the debtor, you must file a UCC-1, rather than having your security interest noted on the certificate of title. DIMENSION 6 - 121 The Federal Assignment of Claims Act (Assignment of Claims Act of 1940) allows a federal contractor to assign payments to be earned under the contract to a lender. For the assignment to be effective, the lender is required to give written notice to the government and receive approval of the assignment from the government. Lenders must comply with both the Assignment of Claims Act (31 U.S.C. 203 and 41 U.S.C. 15) and the UCC when obtaining a security interest in a claim against the government. Where debtors pledge receivables due or to become due after the performance on a contract made with an agency of the U. S. government as collateral, the pledges must conform to the rules stated following. The lender will then become an assignee of the monies due under the terms of the contract. The procedure followed is similar to that of direct notification of an account-debtor. That procedure is used when a lender has taken a security interest in a customer’s accounts and, at some point, decides to collect directly from the parties who owe money on the accounts. PROCEDURES TO FOLLOW To take an assignment of government contracts the following procedures must be followed: You must obtain a promissory note, security agreement, notice of assignment, financing statement, and corporate resolution (if appropriate). The security agreement and financing statement should describe the collateral as generally as possible, namely, as accounts or general intangibles. It should further describe the rights involved as “including, but not limited to” followed by a description of the specific contract by number including the date of execution, the name of the debtor, and the name and address of the federal agency involved. You must file a financing statement with the central filing office of the state in which the debtor is located. You must send a signed copy of the notice of assignment, a duplicate original or certified true copy of the security agreement, and the resolution to each of the following: the contracting officer or the head of his or her department or agency; the surety upon the bond or bonds, if any, in connection with the assignment contracts; and the disbursing officer, if any, designated in the assigned contract to make payment. The contract itself should reveal the identity of these individuals. It is important that you receive return copies of these documents acknowledged by the government agencies involved. NOTES: Dimension 6 // Identify Repayment Sources and Appropriately Structure and Document Credit Exposures for.. GOVERNMENT CONTRACTS DIMENSION 6 - 122 NOTES: PRIORITY First priority positions may have been established by: Previous assignments of the contract. The government will inform you of any. Liens by subcontractors who have worked on the project. A bonding company in case of default. INTELLECTUAL PROPERTY/GENERAL INTANGIBLES Article 9 of the UCC is intended to set forth the rules that must be followed to acquire all types of personal property as collateral (with some exceptions). Article 9 uses the term, general intangibles, as a catchall term to cover any type of asset that does not fit within any of Article 9’s other defined collateral types such as instruments, accounts, and chattel paper. Intellectual Property is a non-Article 9 term that has come into vogue in our increasingly technological society. Assets commonly grouped under intellectual property generally fall within Article 9’s collateral category of general intangibles. Both terms encompass a wide range of diverse assets. The most significant assets that fall within both terms are patents, copyrights, trade secrets, and trademarks. CRC US Body of Knowledge Acquiring such assets as collateral is complicated by federal statutes that to some extent govern the transfer of specific types of intellectual property and that in some instances supersede state laws such as the UCC. The federal statutes, themselves, are diverse with one statute, for example, covering patents and another statute covering copyrights. As a result a lender seeking intellectual property as collateral may be required to take appropriate steps under the applicable federal statute, or under Article 9, or, in some instances, under both a federal statute and Article 9. Where reliance on the value of intellectual property as collateral is critical to making a loan, a prudent lender should retain qualified patent counsel. A qualified patent attorney will verify both the nature of the debtor’s rights in the intellectual property as well as the transferability of those rights as collateral and assist the lender in documenting the collateral. DIMENSION 6 - 123 Frequently a credit cannot stand on its own. That is, a company’s ability to repay does not qualify it for the amount of credit requested. The lender may make the loan, but will require third party support to enhance chances of repayment. In the following paragraphs, we will review the following types of third party support: Guaranties Collateral agreements Comfort letters Documentary letters of credit Standby letters of credit/direct pay letters of credit Subordination agreements Intercreditor agreements GUARANTIES A guarantee is an unconditional promise of payment or performance by one party on behalf of another. It may be enforceable even if the person who borrowed the money has a legal reason not to pay. Guaranties may be: Unlimited in amount. Such a guarantee would cover all indebtedness of an entity to you. Limited as to amount. Such a guarantee would cover all indebtedness of an entity to you up to a maximum stated amount. General as to indebtedness covered. Such a guarantee would cover all indebtedness of an entity to you, however such indebtedness was incurred. Specific as to a particular loan. Such a guarantee would cover only that indebtedness of an entity to you that was specifically described in the guarantee. NOTES: Dimension 6 // Identify Repayment Sources and Appropriately Structure and Document Credit Exposures for.. DOCUMENTING THIRD PARTY SUPPORT DIMENSION 6 - 124 NOTES: Lenders ordinarily prefer the use of a general guarantee in an unlimited amount, the basic provisions of which include: Parties’ names: Your institution, the borrower and the guarantor(s) would be named. You must be certain that all names are complete and correct. Description of consideration for the guarantee” A guarantee is a contract. All contracts must be supported by consideration. Consideration is either something received by the party(ies) signing the guarantee or some other person or entity as desired by the signing party(ies). For example, the guarantee might provide the following: “For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and to induce (the Lender), at its option, at any time or from time to time to make loans or extend other accommodations to or for the account of (the Borrower)…” Description of obligations guaranteed: This provision would either state that all indebtedness of the borrower or specially named obligations were guaranteed. Default provisions: The guarantee would list covenant events that would cause a default under the guarantee. Waiver of defense provisions: The guarantee would list legal reasons why a guarantor might have not to pay on the guarantee and provide that they would not be used by the guarantor. Limitation of liability: The guarantor’s liability would be described as unlimited or a stated maximum. Description of security for the guarantee: It would be indicated either that the guarantee was unsecured or was secured by certain named collateral. CRC US Body of Knowledge Guarantor’s covenants. If appropriate, covenants would be included if needed to protect the lender’s interest. It is important that you be able to explain the consequences of signing the guarantee. For help in evaluating the financial resources of an individual guarantor see Personal Statement Analysis in Dimension 3. DIMENSION 6 - 125 A third-party security agreement (sometimes called a hypothecation agreement), mortgage, or deed of trust is an agreement by someone other than the borrower or guarantor to provide the collateral for the loan. Example: Two companies exist under common ownership. Company A needs to borrow funds from you but does not have sufficient collateral to secure the loan. Company B has unencumbered assets consisting of accounts, equipment, and inventory. If Company B is willing, it could grant you security interests in its assets to secure your loan to Company A. COLLECTING FROM A THIRD-PARTY SECURITY INTEREST GRANTOR IN EVENT OF DEFAULT A third-party security interest grantor falls within the definition of debtor and has the right to: Receive statements of the account and collateral. The grantor may recover losses incurred because of failure by the lender to furnish statements. Receive notice of defaults, and have the right to cure. Object to the lender’s proposal to keep the collateral to satisfy the debt. Obtain relief if the lender is not proceeding in accordance with provisions of the UCC governing rights after default. A third-party mortgagor or grantor of a deed of trust has the same right to notice, right to cure, and right to redeem the real property after foreclosure that the borrower or guarantor would have under the applicable state law. NOTES: Dimension 6 // Identify Repayment Sources and Appropriately Structure and Document Credit Exposures for.. COLLATERAL AGREEMENTS DIMENSION 6 - 126 NOTES: COMFORT LETTERS Comfort letters are letters issued to lenders by companies to indicate support for another entity borrowing from the lender. They are sometimes offered and accepted in lieu of guaranties. They are most often issued by parent companies in connection with subsidiary borrowings. They generally fall short of an absolute promise to pay the borrowing entity’s debt. Companies that favor comfort letters are generally public companies that do not want to have to include contingent liabilities in their financials. Comfort letters are enforceable. They are an adequate substitute for guaranties only if they contain a solid commitment of the issuer to step up to repayment obligations incurred by its subsidiary. You should attempt to find out how the issuer has performed under similar previous arrangements. DOCUMENTARY LETTERS OF CREDIT A documentary letter of credit (sometimes called a commercial letter of credit) is issued on behalf of a customer in favor of a third party where the issuer is to make payment when the issuer is presented with a draft accompanied by documents specified in the letter of credit. This type of letter of credit most commonly originates in international trade situations. CRC US Body of Knowledge Example: An American buyer wants to purchase furniture from an Italian manufacturer (seller). The Italian manufacturer will not sell on credit, and the American buyer will not pay in advance. Under a letter of credit agreement, the seller puts the furniture on board a carrier and receives a negotiable bill of lading. The seller presents the bill of lading and other agreed-on documents to the buyer’s financial institution, the issuer of the letter of credit. The buyer’s institution pays “cash” on presentation of the documents, although the furniture is still en route. If the carrier should fail to deliver the goods, the carrier would be liable for non-delivery. DIMENSION 6 - 127 RELATIONSHIPS OF THE PARTIES IN A DOCUMENTARY LETTER OF CREDIT NOTES: The relationship is a contract usually embodied in the letter of credit application. The issuing bank must examine documents with care to ascertain if they comply with the letter of credit. Unless otherwise agreed, an issuing bank that has duly honored a draft is entitled to immediate reimbursement. If the account party does not pay after the issuing bank has honored a draft, the issuing bank owns the goods. Account party (buyer) and beneficiary (seller): The relationship is usually contractual in nature, underlying the letter of credit and independent of it. Issuing bank and beneficiary (seller): The relationship is a contract embodied in the letter of credit. An issuing bank must honor a draft that complies with the terms of the letter of credit regardless of whether the documents or goods conform to the contract between the account party (buyer) and the beneficiary (seller). Also, if the account party goes bankrupt after the letter has been issued, payment must still be made to the beneficiary if the beneficiary meets the requirements of the letter of credit. Dimension 6 // Identify Repayment Sources and Appropriately Structure and Document Credit Exposures for.. Account party (buyer) and issuing bank: