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Note: To guarantee the closing of real property purchases from Slack Alost Development Services of Alabama, LLC (Developer), Smith and Smith & Weems Investments, LLC, and Hazel (Applicants/ Buyers) caused standby letters of credit in the amounts of US$164,000 and $118,000, to be opened by AmSouth Bank (Issuer) in favor of White Sands, Inc. (Beneficiary), an escrow agent. The standbys provided for being drawn upon in the event that Applicants/Buyers failed to complete the purchases.

When Buyers failed to respond to the proposed closing schedule, Developer requested that Beneficiary/Escrow Agent draw on the standby and disburse the proceeds to it. Beneficiary/Escrow Agent responded that it would only draw if it had the written consent of all parties or according to court order.

Developer then sued Buyers/Applicants for breach of contract, naming Beneficiary as a codefendant. When Issuer notified Beneficiary that the standbys would not be renewed, presumably pursuant to an automatic extension provision, Developer moved for and was granted a mandatory injunction by Baldwin Circuit Court, Partin, J., requiring the Beneficiary draw on both standbys and deposit the proceeds with the court. Developer then moved for summary judgment against Applicants, which was granted.

On appeal, the Supreme Court of Alabama, Lyons, Woodall, Smith, Bolin, Parker, and Shaw, JJ., in an opinion by Stewart, J., dismissed the judgment against Hazel. Hazel had contended that he never received an offering statement from Developer pursuant to Alabama law. Developer submitted evidence that Hazel had received an offering statement dated July 1, 2005, but did not submit evidence indicating that the amended offering statement dated January 5, 2007 was received. Concluding that there was a genuine issue of material fact, the court remanded the case for further proceedings.

The Supreme Court of Alabama dismissed the appeal brought by Smith and Smith & Weems on a motion by Developer on a procedural ground, namely that it was not a final decision. A concurring opinion by Cobb and Murdock, JJ., noted that Smith & Weems Investments, LLC should have standing to appeal because it was the applicant for one of the letters of credit.

Comment: This case exemplifies a situation where the standbys failed to operate as the real estate developer intended. The problem was the escrow agent's unwillingness to draw. This problem could have been avoided by detailing situations when the escrow agent would be required to act and identifying what must be done with the proceeds, or naming Developer as the beneficiary.

[JEB/mwl]

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