Note: To assure reimbursement of sums that were paid under a standby letter of credit in the amount of US $250,000 in favor of an oil supplier, Viking Oil Co. (Buyer/Applicant) and Cobra Realty Trust (Guarantor) gave East Boston Savings Bank (Issuer) a second mortgage in certain real estate. The promissory notes accompanying the second mortgage contained a clause to the effect that a default by Guarantor on "any obligation or any other agreement" constitutes default under the second mortgage" ("Dragnet" clause). When Buyer/Applicant defaulted on the oil purchase contract, a drawing was made for the full standby amount and honored by issuer.

When Buyer/Applicant and Guarantor failed to reimburse Issuer, it foreclosed on the mortgage. Claiming that the "Dragnet" clause was unfair and deceptive conduct under Massachusetts law, Buyer/Applicant and Guarantor sued Issuer regarding the second mortgage and the other loans. Buyer/Applicant and Guarantor alleged that "the dragnet clauses contained in the three mortgage transactions and in the letter of credit are invalid because they attempt to connect inherently independent transactions." The trial court dismissed two counts and entered summary judgment in favor of Issuer on the remaining counts. On appeal, the Appeals Court of Massachusetts, Duffly, Sikora, & Milkey, J.J. in an opinion by the Court, affirmed.

The intermediate appellate court ruled that the dragnet clauses in the transactions operated validly under the circumstances. Buyer/Applicant and Guarantor had failed to repay the $250,000 the Issuer had paid under the standby letter of credit and therefore the Issuer was entitled to foreclose on the collateral mortgage. The appellate court further ruled that the foreclosure by the Issuer did not constitute unfair or deceptive conduct under Massachusetts law.



The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.