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Note: To support issuance of an LC in the amount of US$2,500,000 by HSBC Bank USA in favor of Beneficiaries, Patrick Henry Hotel Associates, L.P. and Patrick Henry Hotel Investment Associates, to finance the restoration of The Patrick Henry Hotel in Roanoke, Virginia, Charles Lawson, as Trustee of three Massachusetts Trusts, guaranteed reimbursement. The "Agreement of Guaranty" was executed by Affirmative Equities Co., L.P. (AEC) in favor of Guarantors. A "bewildering web of legal relationships" connected AEC, PHHA, PHHIA, as well as Affirmative Equities, Inc. (AEI), Andrew Jubelt and Lawrence Bishop as the owners of the hotel, whereby AEI, with Jubelt as its sole officer and shareholder and Jubelt and Bishop as its Board of Directors, owns or controls all of the other companies. It appears that with the exception of Bishop, all of the defendants were the applicants of the LC.

The LC was drawn down in full immediately after it was issued. Guarantors alleged that they had been promised the LC would only be in force for "a few months", that the LC secured by assets of the hotel and the assets of Owners, and that Owners would be able at all times to repay the amounts drawn. Moreover, Owners promised to pay various fees to Guarantors including a fee for each month in which refinancing was not obtained under a "Letter Agreement"

Unable to repay the LC obligation, Owners persuaded Issuer to extend the obligation and eventually to convert it into a demand note. When the Issuer finally demanded payment, Owners finally revealed that they were unable to repay Guarantors and that many of the promises made under the guarantee were not fulfilled.

Guarantors then brought an action against Owners in the Middlesex Superior Court of Massachusetts for:

breach of contract, fraud and deceit, breach of the covenant of good faith and fair dealing, unjust enrichment, negligent misrepresentation, promissory and equitable estoppel, violations of the Massachusetts Consumer Protection Act, and breach of fiduciary duty (as against defendant Lawrence Bishop)

Owners removed the action to federal court which, on Guarantors' motion, enjoined Owners from selling, conveying, or encumbering the hotel without court approval. Owners moved to dismiss the complaint as against all of them except AEC which, while insolvent, they alleged to be the only entity liable on the "Agreement of Guaranty". The motions were based on several grounds, principally the absence of personal jurisdiction.

The U.S. District Court for the District of Massachusetts, Stearns, J., denied the motions in part and granted them in part. The court denied motions to dismiss for lack of personal jurisdiction, for breach of contract as to the "Letter Agreement", fraud and deceit, and good faith and fair dealing, and granted the motions to dismiss for breach of contract as to the guarantee agreement, negligent misrepresentation, promissory estoppel, and equitable estoppel.

Owners argued that only the initial contacts took place in Massachusetts, but asserted that all other contacts, including those related to the LC guarantees took place outside Massachusetts. The court rejected this argument as to the contract claims, stating that "Bishop's solicitation of Lawson in Massachusetts on behalf of the Patrick Henry Hotel defendants was the precipitating event that led to the parties' contractual entanglements."

As to the tort claims, including false representation that the LC would be fully secured, the court concluded that there was sufficient connection with Massachusetts. It noted that since Bishop did not receive any LC proceeds, there was no basis for a claim of unjust enrichment.

The court also concluded that the allegations of fraud and deceit stated a cause of action in that "the failure of the Patrick Henry Hotel defendants to disclose the existence of the prior encumbrances on the Hotel (which made it impossible for them to keep their promise to secure the Letter of Credit by pledging the Hotel as collateral) could be found by a trier of fact to constitute a willful deceit."

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