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Note: Barclays Capital Real Estate Inc. (Lender/1st Beneficiary) lent USD 24 million to THI IV PBG LLC (Borrower/Applicant) for commercial mortgages on property, which was evidenced by a promissory note and secured by a standby letter of credit subject to ISP98 for USD 1.25 million issued by Bank of America (Issuer). Issuer was also servicer to the commercial mortgages. The LC expired on 1 May 2007 but provided that "it will be automatically extended without amendment for periods of one year from the present expiry date or from the then relevant expiry date unless at least 60 days prior to that then relevant expiry date [Issuer] notif[ies] the beneficiary by written notice via overnight courier service that [Issuer] elect[s] not to extend this letter of credit."

Lender/1st Beneficiary "transferred and assigned its rights, title and interest in the Loan" to LaSalle Bank NA (Trustee) which in turn "transferred and assigned" its rights to U.S. Bank (Trustee's Assignee).

On 11 February 2010, Issuer "delivered a Notice of Non-Extension (i.e., a termination notice) with respect to the Letter of Credit to [Lender/1st Beneficiary ], who was still the listed beneficiary on the Letter of Credit. . . . Neither [Issuer] nor [Lender/1st Beneficiary ] took any action to notify [Trustee's Assignee] . . . of the pending termination of the Letter of Credit." As a result, the standby expired without being drawn on which left the loan partially uncollateralized. When Borrower then defaulted on the loan, Trustee's assignee sued Lender/1st Beneficiary and Issuer for breach of contract.

The U.S. District Court for the Southern District of New York, McMahon, C. denied Lender/1st Beneficiary's motion to dismiss for failure to state a claim and dismissed the action against Issuer.

Lender/1st Beneficiary argued that the agreement did not require it to transfer the standby to Trustee's assignee. Noting that "there is a significant difference between assignment of proceeds and transfer of a letter of credit", the Judge stated that this contract "is quite clear that [Lender/1st Beneficiary's] obligation was to assign its right to the proceeds under the Letter of Credit to Plaintiff - not to transfer the letter to [Trustee's Assignee]." The Judge stated that "As the beneficiary of the Letter of Credit, [Lender/1st Beneficiary] was entitled to collect on the letter in the event of default."

Noting that Lender/1st Beneficiary "agreed to assign that right to [Trustee's Assignee]", the Judge concluded that the complaint alleged that Lender/1st Beneficiary "did not assign its rights as the beneficiary to [Trustee], through which it would have flowed to [Trustee's Assignee]. Only if [Lender/1st Beneficiary] assigned its right to the proceeds of the Letter of Credit to the new holder of the Loan would [Trustee's Assignee] have any claim to the proceeds of the Letter of Credit. Otherwise, notwithstanding the fact that the Loan was transferred to someone else, [Lender/1st Beneficiary] would get to keep the proceeds if the Letter of Credit was called."

Lender/1st Beneficiary argued that "its execution and delivery of the GAA [General Assignment Agreement] . . . constitutes irrefutable proof that the Letter of Credit was assigned to [Trustee's Assignee]." The Judge noted that this argument was not in evidence and that further discovery was needed to show whether Lender/1st Beneficiary had assigned its rights.

Trustee's Assignee also alleged that Issuer was obligated under a servicing agreement of which it was assignee "to (1) notify each provider of a letter of credit that it (Bank of America) should be substituted as beneficiary, (2) 'maintain' and 'execute' each letter of credit". Issuer argued that duty to advise Trustee of the need to transfer would arise only after Trustee became beneficiary. Since this claim was inconsistent with Trustee's Assignee claim against Lender/1st Beneficiary, the Judge dismissed the suit against Issuer.

The Judge observed that Trustee's Assignee alleged that Issuer had breached its duty to notify Assignee prior to expiration of the standby, namely that it "failed to 'maintain' and 'execute' the Letter of Credit (whatever that means), also in violation of Section 3.02(b)(ii) of the [Pooling and Service Agreement]". Trustee's Assignee alleged that Issuer violated the "Servicing Standard" of the Pooling and Service Agreement. The Judge ruled that since Lender/1st Beneficiary had never assigned to Trustee there was no obligation.

Comments:

This opinion leaves unanswered more questions than it answers. It may be hoped that further discovery will uncover the structure of this convoluted arrangement. It is hard to believe that a transaction of this magnitude would leave unanswered the question of to whom a notice of non-extension is to be sent.

As it appears from the opinion, the First Beneficiary assigned and transferred its contractual rights to the loan including presumably the right to collateral. What it apparently did not do was to transfer the right to draw on the standby or to assign the rights to proceeds under it. Since the standby is subject to ISP98, the rules regarding transfer and assignment are clear. There is no doubt that there was no transfer. Absent an acknowledgement by the issuer, there is no assignment of proceeds either.

Even if there had been an acknowledgement of an assignment of proceeds, the notice of non-extension would have been sent to the then-beneficiary and not to the assignee of proceeds. The assignment would be meaningless absent a drawing and the notice of non-extension relates to the drawing and not to any proceeds that might have come from it.

[JEB/rdp]

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