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Note: The lease between HQ Birmingham, Inc. (Lessee/Applicant) and Gateway Alabama Properties, Inc. (Lessor/Beneficiary) for rentable office space required Lessee/Applicant to obtain a Standby LC to secure its obligations and payments. At Lessee/Applicant's request, Bank of Alabama (Issuer) issued a US$200,000.00 Standby LC that was secured by a promissory note from Lessee/ Applicant, various assets of Lessee/Applicant, and also personally guaranteed by Richard A. Diamond, a Director (Director), and then-President O. William Evans (President) (collectively "Sureties") who signed various documents, namely a line of credit, a personal guarantee, a promissory note, and a security agreement. An excerpt of the Standby LC follows this Note. It provided for automatic extension in annual cycles.

The line of credit agreement expired on 1 August 2004. The promissory note gave Lessor/Beneficiary the right to extend the note without notice and the personal guarantee provided that it was in effect for the duration of the promissory note.

When Lessor/Beneficiary made two drawings on the Standby LC on 10 August 2004 in amounts of US$54,942.88 and US$145,057.12, it was paid, but Lessee/Applicant failed to reimburse Issuer. Issuer then demanded payment from Sureties, and when they were not forthcoming, sued Lessor/Beneficiary and Sureties for reimbursement. The Jefferson Circuit Court ruled in favor of Issuer, awarding Issuer US$200,000.00 plus US$132,601.67 in attorney fees, for a total of US$332,601.67. The Circuit Court also ruled that Lessee/Applicant, President, and Director were jointly and severally liable. On appeal by Director, the Supreme Court of Alabama in an opinion by Parker, J. in which the other justices concurred, affirmed as to Director's liability but remanded for a calculation of interest owed.

Director had claimed that since the loan documents expired on 1 August 2004 and no money was owed at that time, he was not liable with respect to a drawing that took place on 10 August 2004. The Supreme Court rejected this argument. While recognizing that the line of credit agreement had expired, the Supreme Court noted that neither the promissory note nor the personal guaranty had expired and that, although no funds had been loaned during this period, that the Issuer had properly extended the note and personal guaranty in accordance with its powers under the agreements. Moreover, the Supreme Court noted that Revised UCC Section 5- 108(i)(1) (Issuer's Rights and Obligations) entitles an issuer that honors to reimbursement.

The following excerpted text of the Standby LC appeared in the opinion:

"We [BOA] hereby establish our Clean Unconditional Irrevocable Transferable Letter of Credit No. (the 'Letter of Credit') in favor of Gateway Alabama Properties, Inc., a California corporation, and its successors and permitted assigns (collectively, the 'Beneficiary') for an aggregate amount not to exceed the amount indicated above [$ 200,000], expiring at office located at 2340 Woodcrest Place, Suite 200, Birmingham, AL 35209 ATTN: Lester O. Hamiter with our close of business on August 1, 2004 (the 'Expiry Date').

"Funds under this Letter of Credit are payable in immediately available funds of [BOA] ('Issuer') to Beneficiary upon presentation to [BOA] of Beneficiary's original of the Letter of Credit and a sight draft drawn on [BOA], in the form attached as Exhibit 'A' hereto, or upon presentation to Issuer of Beneficiary's original of the Letter of Credit and a demand for payment, not to exceed $ 200,00.00, stating that: '

Beneficiary hereby demands payment of $ [a sum not to exceed $ 200,000.00] under this Letter of Credit.'

"[BOA] shall honor the Letter of Credit against conforming documents without inquiry as to the incumbency or authority of the party executing the sight draft on behalf of Beneficiary, whether or not Applicant disputes the incumbency or authority of the party executing the sight draft on behalf of Beneficiary.

"Multiple demands for payment may be made hereunder.

"It is a condition of this Letter of Credit that it shall be automatically extended without amendment for an additional period of one (1) year from the present or each future Expiry Date, unless, at least ninety (90) days prior to such Expiry Date, we send you a notice in writing by certified mail, overnight courier or hand delivery at the above address, that we elect not to renew this Letter of Credit for such additional period."

[JEB/sal]

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