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Note: For developers to obtain final real estate plat1 approval, an ordinance of the Town of Woodfin required the installation of infrastructure improvements. The ordinance also required that the developer provide "a guarantee equivalent to 1.25 times the entire cost of installing all of the required improvements." In connection with a plat application, Versant Properties, LLC (Developer/Applicant) obtained a Standby Letter of Credit in the amount of US$ 3,950,000 in favor of Town of Woodfin (Town/Beneficiary).

After Developer/Applicant hired Huntley Construction (Contractor) to install the infrastructure, Developer/Applicant defaulted on payments to Contractor. Contractor then filed liens against Developer/Applicant for the amount owed. Pursuant to an ordinance which stated that Town/Beneficiary would hold in escrow and pay up to the amount needed to complete the improvements based on an estimate, Town/Beneficiary drew on the Letter of Credit for the full amount. Town/Beneficiary was paid, and Developer/Applicant filed for bankruptcy protection.

After the payment, it was discovered that only approximately $1,000,000 worth of improvements actually needed to be completed. Contractor sued Wells Fargo (successor to Wachovia) (Issuer) in Bankruptcy Court for declaratory relief on the residual funds.

In its complaint, Contractor stated that it was entitled to the residual funds left from the Standby Letter of Credit on the basis that the words "complete and completion... [are] comprehensive in nature, including not only the cost of physically finishing construction of the infrastructure... but also the cost of making payment to those creditors having unpaid bills for construction of the infrastructure..." The Bankruptcy Court rejected this argument and ruled in favor of Issuer.

On appeal the United States District Court, W.D. North Carolina, Asheville Division, under Reidinger, J., affirmed. The Judge said that the ordinances allow the Town/Beneficiary to pay expenses on a forward, ongoing basis, and are not to be used to pay for work previously completed prior to the date the Standby was drawn. The Judge said that the Town Ordinance:

...simply provides that it is the subdivider, as opposed to the town or some other government agency, which is to be responsible for payment for the infrastructure. This provision does not prescribe when such payment must be made, nor does it require that the project be free of any liens in order for final subdivision plat approval to be obtained. Even if the Ordinance could be read to include these items, such a requirement would be unenforceable because it is not permitted by the enabling statute...Because the enabling statute allows municipalities to enact ordinances permitting performance guarantee for the successful "completion" of the installation of infrastructure, and not the payment for such installation, the Court concludes that the Woodfin Ordinance does not allow in this case for the use of the Letter of Credit funds for payment of contractor invoices for work performed prior to the date that the Letter of Credit was drawn. Thus, the [Town/Beneficiary] has no authority to use the Letter of Credit funds to pay contractors for work already performed.

Text:

The opinion contained the following excerpt from the Standby Letter of Credit:

A dated statement issued on the letterhead of the beneficiary and purportedly signed by an authorized representative stating: [Developer/Applicant] has failed to perform its obligations in the completion of the infrastructure as set forth in that certain infrastructure memorandum of understanding dated 06/06/2007 ("MOU") and that certain engineer's written estimate of the amount needed for the completion of the infrastructure (which shall be the amount payable under this letter of credit). We therefore demand payment in the amount (insert amount) as same is due and owing.

[JEB/kae]

1. A simplified form of real property subdivision facilitating further transfer

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