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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
2010 LC CASE SUMMARIES U.S. Bankruptcy Court Case Summaries: December 1, 2008, N.C. Law. Wkly, Dec. 1, 2008, at 6 [USA]
Topics: Injunction; Material Fraud; US Rev. UCC §5-109
Type of Lawsuit: Applicant sued Beneficiary to enjoin honor.
Parties: Plaintiff/Builder/Applicant-Eastwood Construction Co., Landcraft Properties, Inc., and Landcraft Management, LLC
Defendant/ Developer/ Seller/Beneficiary-Old Towne, LLC
Issuer-Branch Banking and Trust Co. (BB&T)
Underlying Transaction: Sale of subdivision lots.
LC: Standby LC for US$273,585, reduced to US$136,792.50. Silent as to governing rules.
Decision: The U.S. Bankruptcy Court of the Eastern District of North Carolina, Leonard, J, denied Builder/Applicant's motion for a preliminary injunction to enjoin presentation.
Rationale: An injunction is not available where the beneficiary has a colorable right to draw.
Article
Factual Summary: To assure performance of Builder/Applicant's undertaking to purchase land in a residential housing subdivision, Builder obtained a standby LC totaling US$273,585 in favor of Developer/Beneficiary requiring a statement of default. Developer/Beneficiary was to convey good title to Builder/Applicant. By its terms, the LC was later reduced to US$136,792.50 following the thirtyfirst lot closing.
When Developer/Beneficiary failed to provide information to the Builder/Applicant's title insurer, Builder/Applicant gave notice of termination. However, the termination was subsequently rescinded after negotiations for a revised schedule and new term sheet, which was never signed. Subsequent filings of liens on the properties by a third party caused Builder/Applicant again to declare a default, giving Developer/Beneficiary 60 days to cure the lien.
Alleging default, Developer/Beneficiary drew on the LC and Builder/Applicant filed an adverse proceeding in the Bankruptcy Court, moving to enjoin honor of the LC. The Bankruptcy Court denied the motion.
Legal Analysis:
Injunction: Noting that the LC required a statement of default, Builder/Applicant had argued that it was not in default and that any termination was rendered ineffective by subsequent negotiations. The Beneficiary/Developer had argued that the termination without justification constituted a default. The Judge noted conflicting claims, namely of lack of a default and wrongful termination and anticipatory breach by the Developer/Beneficiary. Accordingly, the Judge concluded that the Builder/Applicant had failed "to show that the [Developer/Beneficiary] had no colorable right to an honoring of the presentment of the letter of credit."
Comment: The report of the Opinion does not mention Revised UCC Section 5-109 although the result of the case is consistent with the section.
[JEB/anf]
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