                                                                          [PUBLISH]

                IN THE UNITED STATES COURT OF APPEALS
                       FOR THE ELEVENTH CIRCUIT       FILED
                                                            U.S. COURT OF APPEALS
                          ________________________            ELEVENTH CIRCUIT
                                                                   09/15/98
                                 No. 96-7035                   THOMAS K. KAHN
                          ________________________                  CLERK
                      D. C. Docket Nos. CV-95-AR-329-W
                                        94-70883, 94-70537-BKC

IN RE: XYZ OPTIONS, INC.
                                                                               Debtor.

DONALD DIONNE, as Trustee of the Estate
of XYZ Options, Inc.,

                                                                    Plaintiff-Appellee,
                                     versus

WILLIAM MUSCARELLA; FIRST ALABAMA CAPITAL,

                                                        Defendants-Cross-defendants,

SCOTT M. SPANGLER; JEAN G. SPANGLER,

                                              Defendants-Cross-defendants-Appellants,

THE SCOTT M. SPANGLER CHARITABLE TRUST,
                                                                  Defendant-Appellant,

NORTHERN TRUST BANK OF ARIZONA, N.A.,
                                                           Defendant-Cross-claimant.

                          ________________________

                   Appeal from the United States District Court
                      for the Northern District of Alabama
                         _________________________
                              (September 15, 1998)

Before ANDERSON and BLACK, Circuit Judges, and MOORE*, Senior U.S. District
       Judge.

ANDERSON, Circuit Judge:

       The primary issue in this appeal is whether § 5-116(2) of the Uniform

Commercial Code (“UCC”) precludes a valid assignment of the proceeds of a letter of

credit when the assignment occurs at a time when the performance of the conditions of

the credit has already occurred, i.e., at a time when the right to payment under the letter of

credit has already been earned. This issue arises as part of a larger litigation between

Plaintiff-Appellee, Donald Dionne (“Trustee”), as Trustee for the bankruptcy estate of

XYZ Options, Inc. (“XYZ”), and Defendants-Appellants, Scott M. Spangler, Jean G.

Spangler, and the Scott M. Spangler Charitable Remainder Unitrust (“the Spangler

entities”).1 Having withdrawn the case from the bankruptcy court pursuant to 28 U.S.C. §

157(d), the district court granted summary in favor of the Trustee on this issue. The

Spangler entities appeal.



 I. BACKGROUND



       1
                This court is simultaneously addressing that larger litigation in Appeal Nos. 96-
6845 and 96-6846. There the district court entered final judgment rejecting the Trustee’s claim
that the proceeds of the BNL letter of credit were fraudulently transferred to the Spangler
entities. In an opinion published simultaneously with this opinion, we remand the fraudulent
transfer claim for trial. The issues resolved in this case (relating to the Spangler entities’ security
interest in the BNL proceeds) may be relevant on that remand.

____________________
* The Honorable John H. Moore, II, Senior United States District Judge for the Middle District
of Florida, sitting by designation

                                                   2
       The debtor, XYZ, entered into a contract with Machinery Trade Company

(“Machinery Trade”) whereby XYZ agreed to build a plant in Iraq to manufacture

carbide cutting tools. The total amount of the contract price was approximately

$14,000,000. The contract required Machinery Trade to post a letter of credit in favor

of XYZ in the full amount to be due XYZ under the contract. Machinery Trade

arranged for the issuance of this letter of credit through Banco Nazionale del Lavoro

(referred to as “the BNL letter of credit”).

       Performance on the construction project began in early 1989, and Machinery

Trade made regular progress payments through the BNL letter of credit. In November

1989, however, BNL stopped making payments to XYZ and filed a declaratory

judgment action in federal court in Atlanta stating that it was no longer liable under the

BNL letter of credit. XYZ counterclaimed, asserting that BNL had breached the terms

of the BNL letter of credit by refusing to honor XYZ’s draws. On July 21, 1993, the

district court in Atlanta entered a memorandum opinion finding in favor of XYZ against

BNL in an amount exceeding $2,000,000. In other words, the court concluded that

XYZ had performed construction work under the contract, had presented appropriate

documentation entitling it to draw on the BNL letter of credit, but BNL had erroneously

refused to honor XYZ’s draws.

       Thus, well before November 1993, it was established that XYZ had performed

the conditions of the letters of credit, i.e., had earned the right to payment under the

BNL letter of credit. In November 1993, the Spangler entities first acquired a perfected

                                               3
 security interest in the proceeds of the BNL letter of credit to secure obligations in favor

 of the Spangler entities which XYZ had incurred in connection with financing

 arrangements undertaken early in the construction project.2 The district court construed

 § 5-116(2) to permit the assignment of a security interest in the proceeds in the letter of

 credit only before performance of the conditions of the letter of credit. Thus, the district

 court construed the statute to preclude assignment of a security interest in the proceeds

 of the letter of credit if the right to payment under the letter of credit had already been

 earned. Because XYZ’s assignment of a security interest in the proceeds of the BNL

 letter of credit was not perfected until November 1993, at which time XYZ’s right to

 payment under the letter had already been earned, the district court held that the

 assignment was invalid. We disagree and reverse.



 II. DISCUSSION




       2
                 Our statement in text, that the Spangler entities first acquired a perfected security
interest in the proceeds of the BNL letter of credit in November 1993, reflects our agreement
with the district court’s holding that the Spangler entities failed to adduce evidence sufficient to
create a genuine issue of fact to support the Spanglers’ assertion that they received delivery and
possession of the BNL letter of credit earlier than November 1993. XYZ, acting through its
officer Muscarella, actually executed a document purporting to assign the BNL letter of credit to
the Spangler entities at an October 1988 closing of the financing arrangements. However, we
agree with the district court that the summary judgment record is clear that XYZ did not deliver
possession of the BNL letter of credit to the Spangler entities. Rather, the record is clear that
XYZ retained possession of the letter of credit until November 1993. Section 5-116(2)(a)
expressly provides that “the assignment is ineffective until the letter of credit or advice of credit
is delivered to the assignee which delivery constitutes perfection of the security interest under
Article 9.”

                                                   4
           UCC § 5-116(2)3 provides in relevant part:

           (2) Even though the credit specifically states that it is nontransferable or
           nonassignable the beneficiary may before performance of the conditions
           of the credit assign his right to proceeds. Such an assignment is an
           assignment of an account under Article 9 on Secured Transactions and is
           governed by that Article except that

                  (a) the assignment is ineffective until the letter of credit or
                  advice of credit is delivered to the assignee which delivery
                  constitutes perfection of the security interest under Article
                  9; . . . .

           For a number of reasons, we reject the holding of the district court that an

 assignment of the proceeds of the letter of credit is valid only if the assignment occurs

 before performance of the conditions of the credit, i.e., before the right to payment

 under the letter of credit has been earned. Contrary to the argument of the Trustee, the

 language of the statute does not say that there can be no valid assignment after the right

 to payment has been earned. Rather, the statute merely says that there may be an

 assignment before the right to payment has been earned. To construe the statute as the

 Trustee urges, and as the district court held, one would have to draw a negative

 inference. However, § 5-102(3) expressly disavows the drawing of such negative

 inferences. Section 5-102(3) states that “[t]he fact that this Article states a rule does not

 by itself require, imply or negate application of the same or a converse rule to a

       3
               The Spangler entities make a choice of law argument for the first time on appeal,
arguing that UCC § 5-116(2) is not the controlling law in this case. However, the Spangler
entities concede that the case was litigated in the district court on the understanding that § 5-
116(2) controls. The understanding was not unreasonable, as § 5-116(2) was applicable in one
or more of the states whose law was likely to govern. Accordingly, we decline to entertain this
new choice of law argument. On this issue, the law of this case is that § 5-116(2) controls.

                                                 5
situation not provided for . . . .” Section 5-116(2) focuses only on the situation of an

assignment occurring before the right to payment has been earned. The situation

involving an assignment after the right to payment has been earned is simply “a

situation not provided for.” Pursuant to § 5-102(3), we feel no obligation to draw a

negative inference in this “situation not provided for.”

       Indeed, the most reasonable explanation for the fact that the statute focuses on

the situation of an assignment before the right to payment has been earned is found in

the law antedating the UCC. The common law predating the UCC recognized that the

proceeds of a letter of credit could be assigned after the right to payment had been

earned, while such prior law was unclear with respect to assignability before the right to

payment was earned. See Evansville Nat’l Bank v. Kaufmann, 93 N.Y. 273, 277-78

(1883) (stating that, when a letter of credit names a specific beneficiary, the beneficiary

may not assign the right to the proceeds until the beneficiary has complied with the

conditions of the letter of credit, thus giving rise to the right to payment). We believe

that § 5-116(2) serves only to clarify the law so that a beneficiary may assign its rights

to proceeds even before the right to payment has been earned. As thus clarified, under §

5-116(2), a beneficiary may always assign its right to proceeds, either before or after the

right to payment has been earned. See Clark, The Law of Secured Transactions, ¶

7.14[1] (rev. ed. 1993) (providing that “the beneficiary may always assign its right to

the proceeds” of a letter of credit, and that, “[u]nder § 5-116(2), the beneficiary of a

letter of credit may assign proceeds of the letter to a financing bank even before

                                             6
performance of the underlying contract”).

       Comment 3 to § 5-116 supports this explanation. Comment 3 reads: “Subsection

(2) makes clear that . . . the assignability of proceeds in advance of performance cannot

be prohibited. . . . In this respect the letter of credit is treated like any other contract

calling for money to be earned. See Section 9-318 generally and Section 2-210 as to

sales contracts.” Because both of the referenced sections reflect a strong policy of the

free transferability of a person’s right to receive payment, the Comment’s statement that

the letter of credit “is treated like any other contract calling for money to be earned”

provides a strong implication that § 5-116(2) intends for the proceeds of letters of credit

to be freely assignable, both before and after the right to payment has been earned, as is

the case in the situations addressed by the referenced sections. In light of prior law, and

in light of Comment 3, we believe that the statute’s focus on the situation involving an

assignment before the right to payment has been earned was simply meant to clarify the

law, making it clear that the law recognizes assignments not only after the right to

payment has been earned, but also before.

       The Trustee has cited no case holding that the beneficiary of the proceeds of a

letter of credit cannot validly assign same, creating a security interest in same, after the

right to payment has been earned. The Trustee has cited no such case, and our research

has uncovered none. Nor can we think of any policy reasons which would suggest that

the law should recognize such assignments before the right to payment has been earned,

but not after the right to payment has been earned. Indeed, as the pre-UCC law

                                                7
 suggests, it would seem that the viability of assignment is even clearer after the right to

 payment has been earned than it is before. Moreover, the UCC’s policy of free

 transferability of a person’s right to receive payment, see UCC § 9-318, comment 4,

 would suggest that policy reasons support free transferability at any time.



 III. CONCLUSION

           For the foregoing reasons, we hold that UCC § 5-116(2) permits the assignment

 of a security interest in the proceeds of a letter of credit either before or after the right to

 payment under the letter of credit has been earned.4 Accordingly, the judgment of the

 district court is reversed, and the case is remanded to the district court for further

 proceedings not inconsistent with this opinion.

           REVERSED and REMANDED.




       4
                The Trustee’s argument based on § 5-116(1) is without merit and warrants no
discussion. The Spangler entities do not claim an assignment of the right to draw upon the letter
of credit, and thus § 5-116(1) is inapplicable.

                                                 8
