Office of Treasury and Fiscal Services
Standby letters of credit issued by a Federal Home Loan Bank do not meet the statutory criteria for collateral for deposits of public funds.
You have asked whether Federal Home Loan Bank letters of credit are acceptable collateral for public deposits under O.C.G.A. § 50-17-59. You have indicated that any such letter of credit would be issued by the Federal Home Loan Bank of Atlanta using the form attached as Appendix I hereto.
Federal Home Loan Banks are privately capitalized, cooperative, government-sponsored enterprises that were created by Congress in 1932. The Federal Home Loan Bank system consists of twelve regional Federal Home Loan Banks. The mission of the Federal Home Loan Banks is to support residential mortgage lending by their member-stockholders. Eligible members include commercial banks, savings institutions, credit unions, and insurance companies.
Code Section 50-17-59 governs the deposit of funds of the State of Georgia in financial institutions that have been named as depositories for such public funds by the State Depository Board. Under Subsection (a) of Code Section 50-17-59, the director of the Office of Treasury and Fiscal Services (the “Director”)
cannot have on deposit at any one time in any of the depositories for a time longer than ten days a sum of money belonging to the state under a contract with the depository providing for the payment of interest by a depository which has not given a bond to the state in the amount as determined by the [State Depository] board.
O.C.G.A. § 50-17-59(a). In lieu of the required bond, a depository may deposit with the Director certain enumerated securities to secure state funds on deposit at the depository. Among those enumerated as acceptable collateral are:
[b]onds, bills, certificates of indebtedness, notes, or other obligations of a subsidiary corporation of the United States government, which are fully guaranteed by the United States government both as to principal and interest, or debt obligations issued by or securities guaranteed by the Federal Land Bank, the Federal Home Loan Bank, the Federal Intermediate Credit Bank, the Central Bank for Cooperatives, the Farm Credit Banks, the Federal Home Loan Mortgage Corporation, or the Federal National Mortgage Association.
O.C.G.A. § 50-17-59(a)(5) (emphasis added).
Thus, framed in statutory terms, you have asked whether a letter of credit issued by the Federal Home Loan Bank is a “debt obligation” issued by or a “security guaranteed” by the Federal Home Loan Bank. The answer to your question has to do with the nature of a letter of credit.
Letters of credit, being contracts, are subject to the same general principles applicable to other written contracts. First Nat’l Bank v. Wynne, 149 Ga. App. 811 (1979). That is, letters of credit are contractual obligations. Under Georgia law, “[e]very debt is an obligation but not every obligation is a debt for the collection of which a suit may be maintained.” Chavala Cooperative, Inc. v. Hortman, 93 Ga. App. 505, 505 (1956).
A “debt” has been defined to be a sum of money due by a certain and express agreement. A debt in its general sense is a specific sum of money which is due or owing from one person to another, and denotes not only the obligation of one person to pay, but the right of the other party to receive and enforce payment by judicial action; it is that which one is bound to pay to or perform for another; that which one is obliged to do or suffer.
Dewey v. Denson, 31 Ga. App. 352, 355-56 (1923); Chavala Cooperative, Inc. v. Hortman, 93 Ga. App. 505 (1956).
It is a familiar rule of construction that the precise meaning of words may be derived from others with which they are associated and from which they cannot be separated without impairing or destroying the evident sense they were designed to convey in the connection used. Mott v. Central R.R., 70 Ga. 680 (1883). Thus, the phrase, “debt obligation” in Code Section 50-17-59(a)(5) should be read in the context of and with reference to the preceding phrase, “bonds, bills, certificates of indebtedness, notes, or other obligations.” In that regard, a troublesome aspect of the proposed letter of credit is its expiration. FHLB standby letters of credit are required to contain a specific expiration date or be for a specific term. Federal Home Loan Bank Standby Letters of Credit, 63 Fed. Reg. 65,693, 65,700 (1998) (to be codified at 12 C.F.R. § 938.5(a)(2)). The beneficiary of the letter of credit has no control over whether the issuing bank’s customer renews the letter of credit. If the letter of credit expires by its explicit terms, the issuing bank has no further obligation to the beneficiary. Usually, a “debt,” once incurred, remains due and owing until it is somehow discharged. “Bonds, bills, certificates of indebtedness, or notes” of a subsidiary corporation of the United States government usually remain due and owing until discharged, and their terms do not generally contain specific expiration dates, although they may, by their terms, have call dates after which they no longer bear interest. Applying the maxim of construction cited above, I view the “debt obligation” of a Federal Home Loan Bank as being of the same nature as the instruments set forth in the Code Section’s opening phrase. Thus, I have doubts as to whether the letter of credit in question constitutes a “debt” obligation.
The form of the FHLB letter of credit set forth above explicitly states that the Federal Home Loan Bank Act, Rules and Regulations of the Federal Housing Finance Board (FHFB), and policies, guidelines and directives of the FHFB, and the Uniform Customs and Practice for Documentary Credits, International Chamber of Commerce Publication No. 500 (UCP 1993 Revision) govern the letter of credit. Assuming, without deciding, that federal law rather than Georgia commercial law would govern the FHLB letter of credit, I turn to an examination of the relevant federal regulations governing standby letters of credit issued by a Federal Home Loan Bank, in order to shed light on the appropriate use of such a letter of credit.
Under the rules and regulations of the Federal Housing Finance Board, a “standby letter of credit” is:
a definite undertaking by an issuer on behalf of an applicant that represents an obligation to the beneficiary, pursuant to a complying presentation: to repay money borrowed by, advanced to, or for the account of the applicant; to make payment on account of any indebtedness undertaken by the applicant; or to make payment on account of any default by the applicant in the performance of an obligation. The term standby letter of credit does not include a commercial letter of credit, or any short-term self-liquidating instrument used to finance the movement of goods.
Id. at 65,699 (to be codified at 12 C.F.R. § 938.1).
Federal Home Loan Banks are authorized to issue standby letters of credit on behalf of members and of nonmember mortgagees for the following purposes:
(1) to assist members or nonmember mortgagees in facilitating residential housing finance;
(2) to assist members or nonmember mortgagees in facilitating community lending that is eligible for any of the Banks’ CICA programs under part 970 of this chapter [C.F.R. Title 12, Chapter IX];
(3) to assist members or nonmember mortgagees with asset/liability management; or
(4) to provide members or nonmember mortgagees with liquidity or other funding.
Id. at 65,699, 65,700 (to be codified at 12 C.F.R. §§ 938.2, 938.3). Federal Home Loan Banks are also authorized to issue standby letters of credit on behalf of nonmember state housing finance agencies for the purpose of facilitating residential or commercial mortgage lending that benefits individuals or families meeting the income requirements in section 142(d) or 143(f) of the Internal Revenue Code. Id. at 65,700 (to be codified at 12 C.F.R. § 938.3(b)).
Under the limited set of facts you have presented, it is not clear that offering a FHLB-issued standby letter of credit in lieu of the surety bond in order to meet the requirements of O.C.G.A. § 50-17-59 is a purpose for which such a letter of credit is authorized to be issued under the federal regulations that govern their issuance. Asset or liquidity management may be a rationale for using such letters of credit as collateral, but such facts have not been explicitly stated and are not, therefore, assumed.
As to whether the letter of credit under consideration can be considered a “security” under Georgia law, a review of Georgia commercial and securities laws is helpful. The Uniform Commercial Code, as enacted in Georgia, contains separate definitions of “letter of credit” and a “security.” O.C.G.A. §§ 11-5-103(1)(a), 11-8-102(a)(15). The mere fact that two separate definitions are contained in two separate articles (Article 5—Letters of Credit and Article 8—Investment Securities) suggests a distinction. Under the Georgia UCC, a “letter of credit” is:
an engagement by a bank or other person made at the request of a customer and of a kind within the scope of this article (Code Section 11-5-102) that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit.
O.C.G.A. § 11-5-103(1)(a). Such an arrangement appears to be what the form letter of credit of the Federal Home Loan Bank of Atlanta contemplates.
Subject to certain exceptions that are not relevant to this discussion, the Georgia UCC defines a “security” as:
an obligation of an issuer or a share, participation, or other interest in an issuer or in property or an enterprise of an issuer: (i) Which is represented by a security certificate in bearer or registered form, or the transfer of which may be registered upon books maintained for that purpose by or on behalf of the issuer; (ii) Which is one of a class or series or by its terms is divisible into a class or series of shares, participations, interests, or obligations; and (iii) Which: (A) Is, or is of a type, dealt in or traded on securities exchanges or securities markets; or (B) Is a medium for investment and by its terms expressly provides that it is a security governed by this article.
O.C.G.A. § 11-8-102(a)(15). The proposed FHLB letter of credit is not “dealt in or traded on securities exchanges or securities markets” and does not, by its terms, provide that it will be governed by Georgia UCC Article 8. Thus, the letter of credit under consideration does not appear to be a “security” issued by a Federal Home Loan Bank. The letter of credit in question not being a “security,” there is no need to reach the question of whether it is “guaranteed” by the issuing Federal Home Loan Bank.
In summary, although the matter is not free from doubt, it is my official opinion that a standby letter of credit issued by a Federal Home Loan Bank is not a “debt obligation” issued by or a “security” guaranteed by a Federal Home Loan Bank within the meaning of O.C.G.A. § 50-17-59(a)(5). Therefore, such letters of credit may not be deposited to secure state funds in lieu of a surety bond under that Code Section. This response is based entirely upon the facts you have presented. Any change in those facts could alter the result of this opinion. My conclusion also principally addresses a provision of Georgia statutory law that, of course, may be amended. However, note also that I have raised an issue as to whether the federal law intends for these standby letters of credit to be used in the manner proposed. That issue will also need clarification with the help of Federal Home Loan Bank officials before you should accept such letters even in the event of a change in Georgia law.
SHIRLEY R. KINSEY
Assistant Attorney General
Appendix I Form of Letter of Credit of the Federal Home Loan Bank of Atlanta
Member or Beneficiary Name Address City, State Zip Attn.
Re: Irrevocable Standby Letter of Credit #____-______-____
We hereby establish our irrevocable letter of credit (“letter of credit”) in your favor for account of ________________________ (the “Member”), available by your multiple drafts drawn on us payable upon presentation of a sight draft for any sum of money not to exceed a total of $______.__ (______________ U.S. dollars) (the “Maximum Credit Amount”).
Any draft presented for payment must be accompanied by this letter of credit, must be noted as to its number, date, and amount, and must state:
Drawn under Federal Home Loan Bank of Atlanta Irrevocable Standby Letter of Credit #____-______-____, dated ____________, 1999. Amount previously drawn Amount being drawn
This letter of credit is governed by the Federal Home Loan Bank Act, Rules and Regulations of the Federal Housing Finance Board (FHFB), and policies, guidelines and directives of the FHFB. In addition, this letter of credit shall be governed by and be subject to the Uniform Customs and Practice for Documentary Credits, International Chamber of Commerce Publication No. 500 (UCP 1993 Revision).
Any payment made under this letter of credit to the beneficiary shall be made without set-off or counterclaim against such beneficiary; provided, however, any such payment without set-off or counterclaim shall in no way affect, impair, release or discharge any claim, cause of action, debt, liability, or obligation held by or owed to the undersigned Bank (the “Bank”) by such beneficiary on the date of such payment.
Any drawing under this letter of credit will be paid from funds of the Bank rather than funds of the Member and the Bank will seek reimbursement for payment made pursuant to a drawing under this letter of credit independently from making such payment hereunder; provided, however, the Bank reserves and retains all rights and remedies against the Member.
We agree to honor and pay all drafts presented in compliance with the terms of this letter of credit to our office in Atlanta, Georgia on or before _____________, 1999 (the “Date of Expiry”) and delivered during our normal business hours at our offices, currently located at 1475 Peachtree Street, N.E., Atlanta Georgia 30309, Attn: Credit Services. Such documents must be delivered to us no later than our close of business or 5:00 p.m., Atlanta time, on the Date of Expiry.
This letter of credit shall expire on the earliest of (i) the first business day on which we are open for business after the date of cancellation or termination of the letter of credit in accordance with its terms; (ii) the payment to the Beneficiary of the Maximum Credit Amount; or (iii) our close of business to be no later than 5:00 p.m., Atlanta time, on ___________________, ____, the Date of Expiry of this letter of credit.
FEDERAL HOME LOAN BANK OF ATLANTA
By: ______________________________________ William C. Buss Title: Group Vice President
By: ______________________________________ Marsha D. Kaplan Title: Credit Services Officer
COUNTY OF _____________________) STATE OF _______________________)
I, __________________________, a notary public in and for said county and state, do hereby certify that ________________ and ______________ personally appeared before me this day and acknowledged that they signed, delivered and executed the foregoing instrument. Witness my hand and notarial seal this the _____ day of _______________, 19___.
_____________________________________ Notary Public My Commission Expires: ________________”