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Note: In September 2007, Joseph Kass (Borrower/Applicant) opened an investment account (Collateralized Account) with Wells Fargo Financial Advisors (Bank/Issuer) with USD 25,100. In October 2007, Borrower/Applicant increased his account balance by adding an additional USD 500,000. In November 2007, Borrower/Applicant received a loan from First Insurance Funding Corp. (Lender). As collateral for the loan, Borrower/Applicant applied for and received a USD 493,829 standby letter of credit from Bank/Issuer in favor of Lender/Beneficiary.

Even though the Collateralized Account was security for the LC, it was an investment account and was susceptible to losses. Under the client portfolio information Issuer had on file for the Collateralized Account, Applicant had designated the Collateralized Account for the purpose of "Growth and Income" with Applicant's risk tolerance as "moderate". However, Applicant testified that after he received LC he informed Issuer of his preference for only safe investments in order to preserve capital. Unfortunately, the Collateralized Account lost USD 100,000 over the course of a year forcing the balance in the Collateralized Account to fall below the amount of the LC.

Claiming that Borrower/Applicant defaulted on his loan, Lender/Beneficiary demanded payment on the Standby. Issuer honoured Beneficiary's demand, and pursuant to the Security Agreement transferred funds from Applicant's separate accounts with Issuer to make up for the deficiency. However, Applicant alleged the Security Agreement was not signed by him.

Applicant sued Issuer for 1) breach of contract; 2) negligent conversion; 3) conversion; and 4) wrongful honour of the LC demand. Issuer moved to dismiss all claims, or in the alternative, for summary judgment. United States District Court for the Southern District of New York, Griesa, J., denied Issuer's motion to dismiss the first three claims, which related to Issuer's drawing from Applicant's other accounts, because the facts surrounding the Security Agreement were unclear. The Judge, however, granted Issuer's motion to dismiss Applicant's wrongful honour claim, stating that it was "entirely without merit". The Judge noted that Beneficiary was entitled to draw on the LC funds and Issuer was obligated to satisfy the demand and had the right to fund the drawing from the Collateralized Account.

[JEB/cmh/rs]

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