Article

Topics: Reimbursement; Sureties

Note: To secure payment obligations in connection with a license agreement to operate the Milwaukee Mile motor speedway, J.P. Morgan Chase (Issuer) issued a standby letter of credit in favor of Wisconsin State Fair Park Board (Beneficiary) for the account of Milwaukee Mile Holdings, LLC (Applicant/Licensee). To induce Issuer to issue the standby, Frank J. Andrews, Jr. and David J. Stroud (Sureties) gave personal guarantees. The guarantees contained blanket waivers of all defenses and also granted "advance authorization" to alter the standby terms unilaterally:

"The [Sureties] authorize[] [Issuer], without notice or demand and without affecting [Sureties]'[] obligations hereunder, from time to time, to: (a) renew, modify, compromise, rearrange, restate, consolidate, extend, accelerate, postpone, grant any indulgence or otherwise change the time for payment of, or otherwise change the terms of the Liabilities or any part thereof . . ." (emphasis added by court)

Issuer's employees represented to Sureties that the standby was only payable on a demand stating that Applicant/Licensee breached its payment obligation and failed to cure the breach. Issuer's application required Applicant's approval to modify "applications and reimbursement agreements for letters of credit." After Issuer issued the standby, Issuer amended the standby without securing the requisite Applicant approval, permitting a drawing if Beneficiary received notice that the standby had not been renewed and Applicant had failed to secure alternative security. When Issuer elected not to renew the standby, Beneficiary drew on the basis of nonrenewal. Issuer paid after Sureties made a failed attempt to enjoin payment in state court.

Issuer, as a third party plaintiff, sued Sureties for reimbursement of the proceeds paid under the standby and moved for summary judgment. The United States District Court for the Eastern District of Wisconsin, Randa, J., denied Issuer's motion.

Sureties argued that "the guarantees are void because the Bank's material misrepresentation induced them to execute the guarantees". Sureties further argued that Issuer had failed to disclose that it relied solely on Sureties for repayment and that they were discharged by the authorized amendment. Issuer argued that: 1) Sureties must produce evidence of intent to defraud; 2) Sureties cannot raise a defense of fraudulent inducement because they waived defenses; and 3) the guarantees included a provision which granted the Issuer "advance authorization" to alter the terms of the standby.

The Judge rejected Issuer's arguments, noting: First that it is unnecessary to evidence intent to defraud and, even if it were, there is evidence that Issuer did act with intent. Second, since Issuer itself allegedly made the material misrepresentations, Issuer "cannot rely on a contractual waiver provision in a contract that is void." Third, the "advance authorization" clause is also void and cannot be relied upon by Issuer. At best, the language of the clause is "not clear enough to make this ruling as a matter of law."

The Judge ruled that there is also sufficient evidence to suggest that Issuer breached its duty of good faith and fair dealing by relying on the vague language of the "advance authorization" clause to materially alter the standby. The Judge stated:

"The alleged misrepresentations were material because the eventual inclusion of the Non- Renewal Draw Clause greatly increased the [Sureties'] exposure to liability. And the [Sureties'] reliance was justifiable since the [Issuer's] assurances conformed with the LC Application and Agreement they were shown at the December 19, 2005 meeting. This evidence is more than enough to create an issue of fact as to whether the guarantees are voidable."

[JEB/rs]

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