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Note: To reimburse any funds required to be paid by the Federal National Mortgage Association or Fannie Mae (Beneficiary) under an agreement by which Beneficiary provided credit enhancement for housing revenue bonds that were used to finance the building of Lakeside Vista Apartments, Lakeside Vista Apartments, L.P., (Applicant) secured a standby LC from Compass Bank (Issuer) for US$ 1,974,700. The LC was initially valid for one year and subsequently renewed for a second year.

In the agreement, Applicant and Beneficiary agreed "that the [LC], and the proceeds of any draws on such [LC], shall not be returned until such time as the Property achieves a 1.20 debt service coverage for 90 days with an annual lookback ...." Failing such achievement, Applicant and Beneficiary agreed that Beneficiary "shall fully draw on the [LC] and, without [Applicant]'s consent, [Beneficiary] shall apply the proceeds of the [LC] to reduce the" amount owed by Beneficiary under the credit enhancement agreement.

When Applicant requested that Beneficiary determine whether it had met the conditions for return of the LC, Beneficiary determined that Applicant had failed to meet the conditions pursuant to the formula outlined in the agreement, which allowed Beneficiary to "use its discretion in making its determination as to any matters".

Claiming that it was entitled to have the LC returned and cancelled, Applicant sued Beneficiary for breach of contract and sought a Preliminary Injunction to prevent Beneficiary from drawing on the LC. In a prior order, the U.S. District Court for the Northern District of Georgia, denied Applicant's motion for an injunction.

Beneficiary subsequently drew on the LC and held the proceeds in a general corporate account.

Applicant then moved to amend its complaint to include claims alleging that Beneficiary wrongfully drew on the LC, failed to apply the proceeds to the Applicant's outstanding loan balance and for conversion of the LC funds. Beneficiary filed a motion for summary judgment, asserting that "[a]ll of the claims in [Applicant]'s Complaint center on [Beneficiary's] rightful refusal to release the [LC]." The U.S. District Court for the Northern District of Georgia, Story, J., granted Applicant's motion to amend and granted Beneficiary's motion for summary judgment in part and denied it in part.

The Judge granted Beneficiary's motion for summary judgment with regard to Applicant's claim for breach of contract based on failure to return the LC and wrongful draw because, reasserting the rationale for its refusal to grant a preliminary injunction, Beneficiary had acted reasonably in exercising its discretion in deciding that Applicant had failed to achieve the necessary debt service coverage.

The Judge denied Beneficiary's motion for summary judgment with regard to Applicant's claims for conversion and failure to apply the proceeds to Applicant's outstanding loan balance, stating "[e]ven assuming that [the agreement] does not require [Beneficiary] to fully apply the proceeds of the [LC] to reduce the loan amount ... there is still a large sum of money that should have been applied to pay down the loan."

The Judge observed that "[i]n calculating whether the Property achieved a 1.20 debt service coverage, [Beneficiary] discounted reported income in certain categories that was grossly higher than had been reported previously. ... [Beneficiary] provided sufficient justification for discounting the reported income figures. It is clear that such discounting was not arbitrary or capricious and fell within the discretion given to [Beneficiary] by [the agreement]. Based upon the discounted income figures, the Property did not meet the necessary debt service coverage for the return of the [LC]".

[JEB]

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