Article

Note: To assure completion of residential improvements, Greater Midwest Builders, Ltd. (Builder/Applicant) obtained three standby LCs issued by Premier Bank (Issuer) in favor of the City of Wildwood, Missouri (Local Municipality/Beneficiary). Subsequently, Issuer was placed in receivership and the U.S. Federal Deposit Insurance Corporation (Receiver) was appointed to administer its assets. Builder/Applicant defaulted on the repayment of loans made to it. Receiver then sent Builder/Applicant notices of repudiation of the three standbys and of default on the loans.

Subsequently, Builder/Applicant filed a claim with Receiver, alleging damages and setoff due to the repudiations. This claim was disallowed, and Receiver sold its rights against Builder/Applicant to a third party. Builder/Applicant sued Receiver for damages and setoff due to the repudiation, alleging that the repudiation of the standbys caused default of its obligations to Local Municipality/Beneficiary and rendered it impossible for it to meet its obligation to the Local Municipality/Beneficiary or to complete the project. Receiver moved for summary judgment. The U.S. District Court for the Western District of Missouri, Gaitan, J., granted the motion.

Builder/Applicant argued that the standbys and loans were "inextricably linked" giving rise to an unfulfilled funding obligation or, in the alternative, that it was a third party beneficiary of the standbys. Receiver argued that any right under the LCs accrued to Local Municipality/Beneficiary and not Borrower/Applicant and that "because no amount was due and owing under the Letters of Credit at the time of the [Receiver]'s appointment, [Builder/Applicant] has no claim to damages as a result of the repudiation."

The Judge denied the motion because under 12 U.S.C. §1821(e)(3)(A) of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) the obligations of the parties vested at the time of appointment of the Receiver, and did not turn on whether the Applicant had drawn on the LCs. At the time of appointment, no funds were owed to Builder/Applicant. Moreover, the Judge noted that the standbys were in favor of Local Municipality/Beneficiary so there was no obligation on the part of Issuer to pay any monies to Builder/Applicant. The Judge also rejected Builder/Applicant's claim of setoff, citing authority that where the receiver has sold the loans, no right of setoff exists.

[JEB/rdp/jdc]

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.