Article

Factual Summary: Buyer/Applicant contracted to purchase a condominium unit from Seller for US$299,000, placing in escrow US$29,900 as earnest money to indicate intent to purchase and an LC in favor of Seller/Beneficiary for an additional US$29,900. The contract included an arbitration clause applicable to any disputes that arose from the contract, as well as a liquidated damages clause US$600,000 standby LC issued by Merrill Lynch payable to Financial Lessor. When Lessee ceased payments on the lease, alleging that the equipment was defective, Financial Lessor drew on the LC and was paid. Lessee sued Manufacturer for breach of contract and sued Financial Lessor for fraud. The British Columbia Supreme Court, Balance, J., concluding that here was no fraud on the part of Manufacturer or Financial Lessor, allowed Financial Lessor to recover under the recourse agreement. [JEB] providing that the Seller/Beneficiary would be entitled to "all the monies held in the escrow account" on Buyer/Applicant default.

When Seller/Beneficiary substantially completed the condominium unit, it demanded that Buyer/ Applicant close on the unit. Buyer/Applicant refused, and, instead, sought declaratory judgment to rescind the contract under applicable local law, the Interstate Land Sale Full Disclosure Act, 15 U.S.C. § 1701, which provides that it is unlawful to sell any lot unless the seller files a "statement of record" with a government agency and a property report to the buyer before the purchase agreement is signed, the contract may be revoked within two years of the date of signing.

Buyer/Applicant also moved for a temporary restraining order, which would among other things enjoin Seller/Beneficiary from drawing on the LC. The Seller/Beneficiary cross-moved to compel arbitration and claimed that the court could not reach the question of preliminary relief due to the arbitration clause. Deciding that it was able to award injunction relief notwithstanding the arbitration agreement, the court considered the issue of whether to issue a temporary restraining order, but ruled in favor of Seller/Beneficiary, denying the motion.

Legal Analysis:

1. Whether District Court Can Consider Motion For Preliminary Injunctive Relief Regardless of the Arbitration Clause: Because the purchase agreement provided for binding arbitration, Seller/Beneficiary argued that the court may not consider the motion for emergency injunctive relief and must defer to the arbiter. The court noted that although a small minority of federal courts would rule in such a manner, the Seller/Beneficiary had produced no authority to support that proposition. On its own research the court stated that the majority position is that the federal courts have the equitable power to "grant injunctive relief to preserve the status quo pending arbitration" so long as the applicable standard for injunctive relief is met. It indicated that the majority position was more persuasive.

2. Injunction, Standard; Fed. R. Civ. P. 65: In weighing whether an injunction should be issued, the court looked to applicable rules of civil procedure, Federal Rules of Civil Procedure, Rule 65, noting that the standard for Issuance of a Temporary Restraining Order that the movant must show 1) substantial likelihood of success on the merits; 2) that irreparable injury will be suffered if the relief is not granted; 3) that the threatened injury outweighs the harm the relief would inflict on the non-movant; and 4) that entry of relief would serve the public interest. The Seller/ Beneficiary challenged the first two points, and Buyer/ Applicant's argument failed on the second point.

3. Substantial Likelihood of Success on the Merits: Under the Interstate Land Sale Full Disclosure Act, 15 U.S.C. § 1703 (ILSFDA), the buyer may rescind a contract for land sale unless seller discloses a property report before the signing of the purchase agreement. Buyer/Applicant relied on the undisputable fact that the Seller/Beneficiary did not provide a property report to the Buyer before the execution of the contract.

Seller/Beneficiary argued that this transaction is exempt from the ILSFDA under a clause exempting 'the sale or lease of land under a contract obligating the seller or lessor to erect [a condominium] thereon within a period of two years.' The Purchase Agreement stipulated that the contract would be void if the condominium unit was not completed within two years, but Seller/Beneficiary reserved the right not to build. Therefore the Seller/Beneficiary had no obligation to build, and could not claim the exemption to the ILSFDA.

The court found that Buyer/Applicant had established a substantial likelihood of success on the merits of the underlying cause of action for purposes of eligibility of for emergency injunctive relief.

4. Irreparable Injury: Seller/Beneficiary maintained that the Buyer/Applicant would not suffer irreparable harm because in the event of a favorable judgment in the underlying proceedings, money damages will be an adequate remedy. The court stated that the harm must be "neither remote nor speculative, but actual and imminent" and that there must be an indication that within the course of a normal trial there will be no adequate relief.

The Buyer/Applicant contended that his credit rating would be damaged if the Seller/Beneficiary drew on the LC, but provided no evidence and the court dismissed this argument as speculative.

The court also noted as speculative the Buyer/ Applicant's argument that the Seller/Beneficiary would be unable to pay the monetary damages because it was faced with multiple lawsuits and its financial status may be weakened.

The Buyer/Applicant further argued that irreparable injury could occur if it must bring its claim before an arbitration panel, because the panel may not correctly apply the ILFSDA. The court declined to hear argument on whether the underlying claim is subject to arbitration at this time, but suggested that arbitration would provide the agreed remedies noting that if Buyer has waived certain remedies in the arbitration agreement, he cannot now claim that the arbitration is inadequate.

Comments:

1. The court disposed of this motion for injunctive relief on the Rule 65 Standard, rather than turning to Rev. US UCC § 5-109, and does not treat the LC as a separate contract in the analysis. Under the Rev. US UCC § 5-109 standards, there is no material fraud and no irreparable injury. The court should have simply dismissed this motion using LC law grounds. While the result is the same, the analysis would have been more accurate.

2. As was the situation in Taylor v. Sanibel Development, LLC, 2007 U.S. Dist LEXIS 33219 (Ala. Dist. Ct.), abstracted at 2008 ANNUAL SURVEY 341, this case is another instance of the use of standbys in the overheated US real estate market.

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