Article

Note: The City of Brentwood, Missouri (City) entered into a redevelopment agreement with Eager Road Associates, LLC (Developer) for a commercial development project. To facilitate the issuance of bonds for the project, Compass Bank (Issuer) provided two standby letters of credit on behalf of City. Before providing the standbys, Issuer demanded that the terms of the agreement be amended, requiring the principals of Developer (Guarantors) to provide a reimbursement guaranty payable to the City and redeemable only in instance of a "Mandatory Tender Event". Guarantors "jointly and severally guaranteed to pay or cause to be paid to the City, the 'Reimbursement Amount'" as that term was defined in the agreement. Subsequent amendments to the agreement transferred the right to draw on the guaranty to third party Trustee and required "that the Trustee apply the funds 'solely' for the benefit of [Issuer]."

Following a Mandatory Tender Event, bondholders drew on the standby and were paid. The amendments to the redevelopment agreement required either Developer or Guarantors to reimburse City with the proceeds of the bonds. When they failed to do so, Issuer drew on Guarantors' reimbursement guaranty. Issuer then sued Developer and Guarantors for breach of the guaranty between Guarantors and City. Guarantors filed a motion to dismiss asserting that Issuer failed to state a valid claim because Issuer was not a directly intended beneficiary of the guaranty. The U.S. District Court for the Eastern District of Missouri, Shaw, J., denied Guarantors' motion to dismiss.

Guarantors argued that because Issuer is not expressly named as a beneficiary in the reimbursement guaranty between Guarantors and City, the Issuer is not privy to the guaranty and has no authority to draw on it. Issuer responded that the redevelopment agreement, LCs, and bonds were part of a larger bond transaction and that they must be considered as a whole in determining whether or not Issuer is an intended beneficiary of the reimbursement guaranty.

The Judge explained:

A general guaranty is addressed to persons generally and is assignable under the principles of contract law. On the other hand, a special guaranty is addressed to a particular person. As a general rule, a guaranty addressed to a particular person may only be acted upon and enforced by such party. Where, however, a guaranty is intended by both parties to be for the benefit of someone other than the addressee or named obligee, a guaranty is not special despite being addressed to a specific person.

The Judge noted that since the language of the reimbursement guarantee clearly indicates that it is part of a more complex bond transaction entered into by Guarantors, Developer, City, Trustee, and Issuer, the intent of the parties must be determined by considering the transaction as a whole. Under these circumstances, the Judge found that Issuer's claim for relief is plausible and that "issues of fact exist as to the parties' intent to benefit [Issuer] in executing the guaranty." Therefore, the Judge ruled that Guarantors failed to establish entitlement to dismissal as a matter of law.

[JEB/kmw]

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