Article

Prior History: Associated Warehousing, Inc. v. Banterra Corp., No. 5:08-CV-00052-TBR, 2010 U.S. Dist. LEXIS 114182 (W.D. Ky. Oct. 26, 2010), abstracted in 2011 ANNUAL REVIEW OF INTERNATIONAL BANKING LAW & PRACTICE 393; No. 5:08-CV-00052-TBR, 2010 U.S. Dist. LEXIS 68605 (W.D. Ky. July 9, 2010); No. 5:08-CV-00052-TBR, 2009 WL 1856633 (W.D. Ky. June 25, 2009), noted in 2010 ANNUAL REVIEW OF INTERNATIONAL BANKING LAW & PRACTICE 434.

Note: Associated Warehousing, Inc. (Applicant) contracted with Banterra Corp. (Local Bank) to obtain a term real estate loan, a nonrevolving construction loan, and a standby letter of credit to secure a bond from AmSouth (Intended Beneficiary). Intended Beneficiary refused to accept a letter of credit from Local Bank because Local Bank was a "non-rated" bank which would have to support its letter of credit with a "wrap-around" letter of credit or a counter standby letter of credit from a rated bank or financial institution for its LC to be acceptable. Local Bank entered into negotiations with First Tennessee Bank (Counter Undertaking Issuer) to issue a supplementary letter of credit/counter undertaking. However after months of negotiations, Local Bank determined that the terms of issuing the counter undertaking were unacceptable and was never able to issue a letter of credit to Intended Beneficiary or obtain a counter standby.

Because Local Bank was unable to effectuate the issuance of a counter undertaking, Applicant was forced to accept a long term "conventional" loan from Local Bank. Applicant sued Local Bank claiming that Local Bank breached a contract by which it had agreed to issue a standby, represented that it could provide a satisfactory standby, breached the covenant of fair dealing, and claimed deceit, negligent misrepresentation, and promissory estoppel. The trial court granted Local Bank's motion for summary judgment and ruled that the parties did not enter into a valid contract for a letter of credit and that Applicant's other claims had no genuine issues of material fact. On appeal, the United States Court of Appeals for the Sixth Circuit in an opinion by Merritt, J., affirmed.

The appellate court stated that there was no agreement by the parties to be bound. In fact, it noted that Applicant avoided being bound by not specifying crucial terms of the final letter of credit and counter undertaking. Both Applicant and Local Bank knew of Local Bank's "non-rated" status and the problems it could cause in securing a letter of credit to Intended Beneficiary. The appellate court also ruled that Local Bank acted in good faith in attempting to negotiate a counter undertaking and that Applicant cannot claim to have relied on Local Bank's attempts to put in place the counter undertaking because of the sophistication of Applicant.

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