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Note: Columbus Housing Authority (Developer/Applicant) requested that First National Bank of Columbus (Issuer) issue a letter of credit for US$100,000 in favor of United Nebraska Bank (Beneficiary) in connection with a Promissory Note and Continuing Letter of Credit Agreement (LC Agreement). Beneficiary drew on the letter of credit, and Issuer paid it. In response, Developer/Applicant executed a promissory note for US$100,000 to satisfy its obligations under the LC Agreement. However, Developer/Applicant defaulted on its repayment obligations to Issuer, resulting in Issuer executing a setoff of US$88,075.11 against Developer/ Applicant's funds on deposit. The setoff only partially satisfied Developer/Applicant's debts to Issuer.

Some of the funds on deposit that were setoff by Issuer were from a grant issued to Applicant by the United States Department of Housing and Urban Development (HUD). HUD provides local public housing agencies, such as Developer/Applicant, with grants using federal funds. As required by HUD, Developer/Applicant executed a General Depository Agreement with Issuer regarding all funds received by or held for Developer/Applicant by HUD. Developer/Applicant also entered into a Consolidated Annual Contributions Contract with HUD that precluded Developer/Applicant from pledging the assets of any project as collateral for a loan. Nevertheless, Developer/Applicant pledged HUD funds as collateral for two promissory notes executed to Issuer.

Based on HUD's grant to Developer/Applicant, HUD filed suit against Issuer and its parent company, First National of Nebraska, Inc., in an attempt to recover US$80,199.84 of the setoff funds. The parties filed cross motions for summary judgment. Issuer also filed for an affidavit on the grounds that discovery would be necessary if summary judgment was granted in favor of HUD or if HUD prevailed on the legal issue of the parties' priorities with respect to the Developer/Applicant's funds. HUD had no objections to this request. The United States District Court for the District of Nebraska, Kopf, J., denied motions and dismissed Issuer's parent.

HUD had asserted that Issuer breached a General Depository Agreement and converted federal funds when it exercised the setoff against Developer/ Applicant's accounts. HUD "'maintains that the federal HUD funds in the hands of the grantee, [Developer/Applicant], remained the property of the federal government and that under the Supremacy Clause [of the US Constitution] and absent a waiver of sovereign immunity, such funds were not subject to [Issuer's] setoff.'" Issuer had claimed that "it had a perfected security interest in the deposited funds, with priority over HUD."

The district court relied on U.S. Dept. of Housing and Urban Development v. K. Capolino Const. Corp, which stated that, "'[F]ederal funds in the hands of a grantee remain the property of the federal government unless and until expended in accordance with the terms of the grant and are not subject to attachment or garnishment.'" The district court ruled that Issuer could not have an interest in the funds because such security interest was prohibited by federal law. Because the parties had agreed under Issuer's affidavit that Issuer would be allowed to conduct discovery should the court find in HUD's favor, the court also denied HUD's motion for summary judgment.

[JEB/anf]

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