Okla. Stat. tit. 12A § 5-117
Okla. Stat. tit. 12A, § 5-117
Oklahoma Code Comment
1. Subrogation Under State Law. An issuer that has paid under a letter of credit has three possible methods of recovery. First is reimbursement from the applicant. Second is recovery from the beneficiary for breach of warranty, which only covers fraud and forgery. Third is asserting a right of subrogation.
Revised Section 5-117 removes the conceptual barrier to subrogation in the independence principle and balances the claimant's subrogation claim and the letter of credit independence principle by precluding any defenses or rights until after payment is made under the letter of credit. At equity, the right to subrogation requires that the payment satisfy a debt for which the co-debtor is not primarily liable. Because the issuer's payment under a letter of credit is a primary obligation and not a secondary obligation (that is, an LC is not a guarantee), a number of decisions, including Tudor Development Group, Inc. v. United States Fidelity & Guaranty Co., 968 F.2d 357 (3d Cir.1992), have denied the issuer the right of subrogation, relying on the independence principle. This section adopts the dissenting opinion of Judge Becker in the Tudor decision to the effect that: (i) whether the issuer was secondarily liable must be read in the sense that it paid the debt of another; (ii) Article 5's concerns about applying the law of guaranty to a letter of credit transaction were focused on the independence principle and not on subrogation; (iii) once the issuer has paid under a letter of credit, the independence principle has been served and should not be used to preclude subrogation; and (iv) the fact that the issuer could have protected itself by assignment of collateral security is not controlling as unduly restrictive because it would operate to eliminate the application of equitable subrogation in all cases.
Oklahoma recognizes the doctrine of subrogation. Upon payment of the principal's debt, a surety or accommodation party has the right to be substituted to the position of the creditor who received payment. This is known as the surety's right of subrogation. Conventional subrogation comes from the contract or agreement, whether it is express or implied. Legal subrogation is a creature of equity, not dependent upon contract but upon the equities of the parties. See Lawyers' Title Guar. Fund v. Sanders, 571 P.2d 454 (Okla.1977). If a surety pays the debt of the principal debtor, then the surety becomes subrogated to the creditor's rights and may proceed against the principal debtor and the collateral. See 15 Okla. Stat. § 383 (1910); 12A Okla. Stat. § 9-504(5) (1981); Moore v. White, 603 P.2d 1119 (Okla.1979); Smiley v. Wheeler, 602 P.2d 209 (Okla.1979).
When a surety or accommodation party pays in full an indebtedness it has guaranteed, and the mortgagee or secured creditor inadvertently files a release of a mortgage or security agreement, then so long as there are no intervening bona fide purchasers or encumbrancers of the collateral, the surety or accommodation party: (i) becomes subrogated to the rights of the mortgagee or secured creditor; (ii) is entitled to an assignment of the mortgage or security agreement; and (iii) may, in a proper case, compel such assignment. See K. & S. Inter'l, Inc. v. Howard, 249 Ark. 901, 462 S.W.2d 458 (1971); Home Owner's Loan Corp. v. Papara, 241 Wis. 112, 3 N.W.2d 730 (1942). However, a mere volunteer who voluntarily pays the debt of another and is not under a legal duty to pay the debt is not entitled to subrogation. Bollman v. Snell, 125 Okla. 110, 256 P. 737 (1927); Helms v. Jenkins, 118 Okla. 239, 247 P. 28 (1926). The Oklahoma authorities are compatible with and supplement revised Section 5-117 .
2. Subrogation Under Federal Law. Section 509(a) of the Bankruptcy Code provides an entity that is liable with the debtor on, or that has secured, a claim of a creditor against the debtor, and that pays such a claim, is subrogated to the rights of such creditor to the extent of such payment. In Sun Company v. Slamans, 148 B.R. 623 (Bankr. N.D.Okla.1992), aff'd, 17 B.R. 762 (N.D.Okla.1994), rev'd, CCF, Inc. v. First Nat'l Bank & Trust Co. (In re Slamans), 69 F.3d 468 (10th Cir.1995), the court found, in relation to former Article 5, that the issuer and the applicant/debtor were both primarily liable to the beneficiary: the debtor under the underlying contract and the issuer under the terms of the letter of credit. The issuer was clearly "liable with" the debtor. Thus, under Section 509(a) of the Bankruptcy Code, the court found the issuer was subrogated to the rights of the beneficiary to the extent of its payment. This result was reversed on appeal based on an interpretation of Bankruptcy Code Section 509 and the independence principle. The issue of consistency with former Section 5-117 was left for another day. See CCF, Inc. v. First Nat'l Bank & Trust Co. (In re Slamans), 69 F.3d 468 (10th Cir.1995).
3. Restitution. Once the issuer has established that it is a secondary obligor under federal or state law, the issuer may seek restitution. For a general discussion on restitution, see "Recovery of Payment by Mistake" in the Oklahoma Commentary to Revised UCC Article 3. Revised sub section 5-108(i)(4) specifically precludes restitution for money paid by mistake in those cases where the issuer paid despite apparent discrepancies in the presented documents.