Article

Note: In connection with the purchase of Florida condominium apartments, Charles A. Graddick and others (Applicants) obtained three standby letters of credit in favor of an escrow agent (Beneficiary) that were issued by BankTrust and Regions Bank (Issuers). The Beneficiary was to hold the LCs, apparently draw on them, and disburse the proceeds to the real estate developer (Developer). Alleging that Developer failed to provide a statement of record and property report as required by the Interstate Land Sales Full Disclosure Act, 15 U.S.C. §§1701-1720 (1996), a federal statute, Applicants sued Developer in Florida state court.

Acting on behalf of the Developer, the Beneficiary drew on the LCs. Applicant then sought a temporary restraining order in the federal courts of Alabama against the Insurers, Beneficiaries, and Developer.

On its own motion, the United States District Court, Southern District of Alabama, William H. Steele, J., dismissed the action for want of jurisdiction. Applicants had claimed that the federal courts had jurisdiction because there was diversity of citizenship between the parties but the court noted the lack of such diversity on the face of the complaint, since the Applicants and both Issuers were from the same state, thereby leaving the court without power to hear the case.

Comment:

Looking past the jurisdiction issue, the violation of the Interstate Land Sales Full Disclosure Act is not a basis for injunction relief under US Rev. UCC Section 5-109 (Fraud and Forgery), unless failing to provide the statement constitutes letter of credit fraud, a most unlikely conclusion give that the rule is technical and hardly amounts to facilitating a fraud on the applicant much less the issuer.

The only basis for such relief would be on the basis of illegality, not an LC defense, and one that should only be available where positive law expressly compels such a result.

[JEB/mcb]

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