Article

Factual Summary: To assure performance of Builder/Applicant's undertaking to purchase land in a residential housing subdivision, Builder obtained a standby LC totaling US$273,585 in favor of Developer/Beneficiary requiring a statement of default. Developer/Beneficiary was to convey good title to Builder/Applicant. By its terms, the LC was later reduced to US$136,792.50 following the thirtyfirst lot closing.

When Developer/Beneficiary failed to provide information to the Builder/Applicant's title insurer, Builder/Applicant gave notice of termination. However, the termination was subsequently rescinded after negotiations for a revised schedule and new term sheet, which was never signed. Subsequent filings of liens on the properties by a third party caused Builder/Applicant again to declare a default, giving Developer/Beneficiary 60 days to cure the lien.

Alleging default, Developer/Beneficiary drew on the LC and Builder/Applicant filed an adverse proceeding in the Bankruptcy Court, moving to enjoin honor of the LC. The Bankruptcy Court denied the motion.


Legal Analysis:

Injunction: Noting that the LC required a statement of default, Builder/Applicant had argued that it was not in default and that any termination was rendered ineffective by subsequent negotiations. The Beneficiary/Developer had argued that the termination without justification constituted a default. The Judge noted conflicting claims, namely of lack of a default and wrongful termination and anticipatory breach by the Developer/Beneficiary. Accordingly, the Judge concluded that the Builder/Applicant had failed "to show that the [Developer/Beneficiary] had no colorable right to an honoring of the presentment of the letter of credit."

Comment: The report of the Opinion does not mention Revised UCC Section 5-109 although the result of the case is consistent with the section.

[JEB/anf]

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