Article

Factual Summary: Applicant/Borrower entered into two "Rate Lock Agreements" with Lender in connection with loans which were intended to lock interest rates on the loans. The "Rate Lock Agreements" each required Applicant/Borrower to provide a deposit equal to twice the "Potential Unwind Costs" which were the costs incurred by Lender in the event that the loans were not executed and the arrangements had to be unwound.

Applicant/Borrower provided the deposits in the form of standby LCs totaling US$2,076,181.64. After finalization of the Rate Lock Agreements, Beneficiary/Lender informed Borrower/Applicant that only one component of the interest rate was locked and that it would not honor the locked interest rates as stated in the Rate Lock Agreements due to changes in the capital market. Two additional LCs were also required by Beneficiary/Lender after informing Applicant/Borrower that it would not honor the locked interest rates. Finally, Applicant/Borrower informed Beneficiary/Lender that it would not be financially feasible to continue with the loan and terminated the transaction. Beneficiary/Lender sought to recover the "unwind costs" for both loans by presenting sight drafts in the amount of US$2,076,181.50 to Issuer in order to draw on the standby LCs.

Applicant/Borrower brought this action to enjoin Issuer from honoring Beneficiary's/Lender's sight drafts and Beneficiary/ Lender from presenting additional sight drafts. After a hearing, the trial court granted Borrower's/Applicant's motion for preliminary injunction.

Legal Analysis:

1. Material Fraud; Rev. UCC §5-109: Applicant/Borrower argued that "it had received nothing in return for the sums demanded by [Beneficiary/Lender] and because [Beneficiary/ Lender] 'repudiated the very essence of the Rate Lock Agreements when it refused to honor the Locked Loan Rates,' that the injunction should issue." The court agreed, stating "[Applicant/Borrower] conveyed to [Beneficiary/Lender] that the financial feasibility of the loans was largely dependent on interest rates, which is exactly why [Applicant/ Borrower] opted to enter into the 'Rate Lock Agreements,' as provided for in the loan applications' 'Early Rate Lock' provisions, and posted the rate lock deposits in the form of standby letters of credit. For [Beneficiary/Lender] to then claim the interest rate was not locked smacks of fraud."

2. Applicable Law: Although the Rate Lock Agreement provided that disputes arising from it "shall be governed by the substantive law of the State of New York" and provided for exclusive jurisdiction in a state or federal courts in New York County, New York, Applicant/Borrower argued that these provisions did not control an action on an injunction. The court agreed and applied the law of Kentucky.

3. Injunction; Factors: The court stated that "the purpose of a preliminary injunction is to preserve the status quo." It cited four factors to be considered in determining whether to issue an injunction, namely the likelihood of success on the merits of the claim, whether the party seeking the injunction will suffer irreparable harm without injunction, the probability that the injunction will cause substantial harm to other, and whether the public interest is served by issuance of the injunction.

4. Material Fraud; Likelihood of Success; Rev. UCC §5-109(2): In considering whether there was a likelihood of success on the merits, the court quoted Rev. UCC §5-109(2). Beneficiary/Lender argued that the materials set forth that the interest rates were subject to change. The court noted that Beneficiary/Lender had failed to address the effect of the Rate Lock and stated "By entering into the Rate Lock Agreements and providing the rate lock deposits, Applicant/Borrower believed, and logically so, that they were locking the interest rates on the loans. Applicant/Borrower was aware of the 'No Material Adverse Change' provisions in the loan applications, but considered the Rate Lock Agreements to remove any risk that adverse changes in the capital markets could affect the interest rates on the loans. This Court agrees." In light of the Beneficiary's/Lender's knowledge of the critical character of the interest rates to the project and the posting of the standbys to lock the rates, "for [Beneficiary/Lender] to then claim the interest rate was not locked smacks of fraud. When [Beneficiary/ Lender] communicated to [Applicant/Borrower] its intention to not honor the loans as contemplated by the loan applications and Rate Lock Agreements, the Rate Lock agreements were no longer viable; thus [Beneficiary/Lender] was not entitled to the Unwind Costs as defined in the Rate Lock Agreements."

5. Irreparable Harm: Applicant/Borrower argued that "payment on the standby LCs will cause irreparable harm to [Applicant's/Borrower's] business reputations and goodwill." The court observed that Applicant's/Borrower's "real estate development business requires that they maintain exemplary reputations with the lenders who agree to finance the multi-million dollar real estate projects into which they endeavor. Applicant/Borrower stands to suffer a loss of goodwill and reputation in the eyes of the lenders who are essential to Applicant's/Borrower's business if the standby letters of credit are called upon for payment." Accordingly, it concluded that there would be irreparable harm if the injunction was not granted.

[JEB/zrb]

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