Article

Note: As part of an agreement to purchase condominium units that were being constructed on the Gulf of Mexico in the US state of Alabama, seven purchasers including Richard Murray (Buyers/ Applicants) provided standby LCs totaling US$564,600 covering 20% of the purchase price in favor of Holiday Isle, LLC (Developer/Beneficiary). The agreement provided that Developer/Beneficiary could draw on the standbys when the units were completed within two years. If the unit was not completed, the contract provided that all monies would be refunded to Applicant. The contract also provided that Developer/Beneficiary was entitled to draw on the standbys if Buyers/Applicants failed to close on the purchase of the respective unit. It was provided that Buyers/Applicants were required to close on the units when a certificate of occupancy was issued by the applicable governmental unit, the Declaration of Condominium was recorded, and a substantial completion of the condominium evidenced by a certificate of occupancy.

When these steps were completed and prior to the two-year deadline, Developer/Buyer provided notice to Buyers/Applicants of a closing. Buyers/ Applicants did not respond until the date set for closing at which time they sent letters indicating that the units and the common areas were not complete but did not specify instances of incompletion. When they failed to close, Developer/Beneficiary drew on the standbys and was paid. Under the terms of the contract, this amount was to be treated as liquidated damages for their failure to close on the purchase.

Buyers/Applicants sued Developer/Beneficiary for damages under a US consumer protection statute, the Interstate Land Sales Full Disclosure Act, [US] 15 U.S.C. §§1701 et seq. (1996), which protects purchasers of condominiums through various disclosure requirements, refunds of payments drawn on LCs, and damages for conversion of the LC proceeds. Specifically, they sought a declaration that the drawing on the standby was improper, an interpretation of certain terms of the contract, and summary judgment on the question of whether the drawing on the standby was improper under the contract.

The U.S. District Court for the Southern District of Alabama, Steele, J., granted partial summary judgment with regards to Applicant's Interstate Land Sales Full Disclosure Act, claim, concluding that Developer/Beneficiary had violated the Act but denying judgment on the entire motion due to outstanding questions of fact as to whether the technical violations had caused damage to the Buyers/ Applicants.

The Judge interpreted the Contract term "unit" to mean the specific dwelling unit and not the common areas (which both parties agreed were not completed) and the term "completed" to mean fully and finally finished with nothing further to be done. However, the Judge denied motions of both Developer/Beneficiary and Buyer/Applicants for summary judgment on the question of whether the contract was cancelled due to non-completion of the units by the contractual deadline, observing that neither party had provided specific evidence on this question.

The Judge granted Developer/Beneficiary's motion for summary judgment on the question of whether it was entitled to draw on the standbys. The Judge concluded that the evidence revealed without contradiction that all of the prerequisites for a drawing set forth in the contract were satisfied.

The Judge denied both parties' motions for summary judgment on the claim that the proceeds of the standbys had been converted, noting that the issue was similar to the question of whether the contracts were void. He noted that Buyer/Applicants' claim that Developer/Beneficiary was required to escrow the LC proceeds under a parallel Alabama consumer protection statute was without merit. Interpreting the statute, the Judge noted that it applied only to cash deposits and not to situations where the parties agreed to substitute an LC for cash. The Judge stated that if the units were not completed, Developer/Beneficiary had no right to claim a default and was liable for damages. If they were completed, then the drawings were proper. In the meantime, the Developer/ Beneficiary was entitled to hold the LC proceeds under its unilateral control.

[JEB/mcb]

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